FP Malon

PM World Today – September 2010 (Vol XII, Issue IX)
PM WORLD TODAY – FEATURED PAPER – SEPTEMBER 2010
Project Management, Earned Value and Prompt Payment

Practices Observed from the View of Islamic Syariah Law
By Farid Maloni, BEng. MEng
ABSTRACT
The flow of funds from Muslim countries is estimated to be growing at a rate of some
15% annually in a form of Sukuk’ which is an investment instrument that relies on
Islamic Syariah law. This phenomenon gives a sign that an investor/project owner,
especially Middle Eastern investors, which has a specific demand to invest their money
through a way that is aligned with their beliefs.
The fundamental or core elements of Syariah Law which apply to this paper are
prohibition on Riba’ (charging interest) and payment of the worker’s salary.
This paper will observe another potential area in the Project Execution Process
regarding to application of Syariah law. Some areas in the Project Execution Process
which is attractive from Syariah point of view is project progress measurement and
payment timeline. A sacred text of Islam (an Al-Quran) and Prophet Muhammad
traditions, a Hadits, reveals on how Muslims believe on proceeding payment to workers
and prohibition of Riba’ or charging interest in their living aspect.
A simulation model will show how the money supply chains flows in a project; and its
correlation to the selection of payment method, Long versus Prompt payment duration,
and how its measured will drive the amount of interest charging to the cost of project.
The Syariah belief in prohibition riba’ or interest charging, and its synergy with prompt
payment is proved, and then it will bring a beneficial impact to the CAPEX cost
efficiency. By utilizing Earned Value (EV) to measure project progress real-time, agree
on the prompt payment (shortened duration), and possibly cut the supply chains, it will
have reduced the interest charging about 1.5 to 4% embedded in a project’s cost.
Keywords: Syariah, Riba’, Project management, Earned value management, prompt

payment term, trade credit, pay when paid term, owner company, Main Contractor, Sub
Contractor
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1. INTRODUCTION
This paper was prepared as one of the prerequisites required to earn AACE’s highly
respected Certified Cost Engineer (CCE) credential, in a 6 month long, graduate level
course developed by PT. Mitratata Citragraha, www.build-project-management-
competency.com, mentored and facilitated by Dr. Paul D. Giammalvo, CDT, CCE,
MScPM, MRICS.
The reason this topic was selected by me is because, being a Muslim, and practitioner
in project management, and having knowledge in how EVM measure and control the
project, I have a strong feeling that earned value management is an appropriate tool for
use in Islamic cultures.
The flow of funds from Muslim countries is estimated to be somewhere around $300 –
$400 billion annually, growing at a rate of some 15% annually. With the oil price
currently at about $70 a barrel, this global flow of funds seems set to continue1.
Due to the above conditions, the incoming trend of investment in Syariah financing
instruments is growing even from countries without a dominant Muslim population. The
ABN Amro, Citibank, Deutsche Bank, Hong Kong & Shanghai Banking Corp, Union
Bank of Switzerland are each undertaking Islamic Banking for profit and market
advantage, and not necessarily for religious reasons. Profit during the 1980’s was on
average of 15%-20% p.a. and in the 1990’s onwards was on average of 10%-15% p.a.
return2
Based on the above facts, we can see a huge potential future in project financing using
Syariah instruments, reflecting the enthusiasm of investors, especially from the Middle
East, to Syariah compliance. Research on Syariah compliance financing practices and
the growth of financial and banking has indicated an important opportunity for those
companies and organizations who are Syariah compliant.
The specific focus is the money supply chain flowing down from the owner company (as
work initiator) to the contractor and/or supplier as a work executor. Projects are usually
initiated by Owner Company to the main contractor, and most likely, depending on the
project size and complexity, some of the scope of work will tendered (by main
contractor) to sub-contractor, or material supply to supplier. When the tender process is
completed, and the winner announced, the final details are then negotiated between the
owner and contractor prior to signing the contract.
Specifically to the Contract Term of Payment, owner company commonly applies 30/60
Net payment terms which is a trade credit, the credit from supplier or seller, which
extended to the owner company as a buyer when contract is awarded. By having a
1
Current trends in Syariah property investment,page.1-2,RICS research ,October 2006
2
Presentation slide from Amer Khalil ur Rehman, Introduction to Islamic finance, Security and Sukuk, page.2.

trade credit from the seller, the buyer has the obligation to buy now and pay later. By
definition the Net 30 Day Pricing means that payment must be received within day 1
through day 30, and The Net 60 Day Pricing means that payment must be received within
day 31 through day 603.
Then, the main contractor will continue to cascade some of their scope of work to the
sub contractor and main supplier. Also the subcontractor will make their binding with
their supplier/vendor to support the work with “paid when paid” term. Pay when paid
term such as “all progress payments of the subcontract sum shall be made within 10
days after payment is received by general contractor from owner”4. The same pay when
paid term could continuously follow down the supply chains, from subcontractor of the
subcontractor, or supplier of the subcontractor etc. The longer the supply chains the
more delays in the payment term.
In the following sections through the conclusion, the Author will discuss his perspective
about:
1. How the above payment term will negatively impact the project cost in the owner
side.
2. How the payment term is building an interest accumulation then passes it back to the
owner company as risk compensation.
3. How this situation observed from a Syariah law perspective which prohibits interest
(riba’or usury) and urges to pay the work done immediately after it is accomplished
4. How the application of Earned Value Management method will cure this problem and
bring positive implication
2. SYARIAH LAW AND ITS FINANCIAL ASPECTS
Syariah is part Islamic which teach about Muslim practices and activities. Syariah or
Sharia is set of principles and guidelines derived from the primary and secondary
sources of Islam. Sharia not only governs faith and worship, but also economics, social
political and cultural aspects5. The primary sources of Islam are the sacred text of Al
Qur-an and the secondary sources are the traditions gathered from the life of Prophet
Muhammad, a Hadits.
Figure 1 shows the relation between Islam and Syariah. Islam has 3 foundations, which
are aqidah, syariah and akhlaq. One of Syariah branches is the teaching related to the
practices and activity of human in relation to God “hablum minnallah” and human
3
http://www.riekerinc.com/Terms%20&%20Conditions.htm, last accesses April 18, 2010
4
Business Credit Bulletin, National Association of Credit Management, “When must A Subcontractor Be paid under
A” Pay-When-Paid” clauses?, Patrick Devine, Esq, July/Aug 2006
5
Presentation slide from Mufti Barkatulla, UK Based Sharia Advisor, Title: Sharia Standards, page 2.

related to other human “hablum minnannas”. Muammalat is part of Syariah which

teaches about Muslim practices and activities related to Human- human relations which
include political, economic, and social activity.
Islam
Aqidah Syariah Akhlaq

(Faith and Belief) (Practices & Activities) (Morality & Ethics)
Ibadah Muammalat
(Man to God Worship) (Man to Man
Activities)
Political Economic Social

Activities Activities Activities
Banking and
Financial Activities
Figure-1 Islam and Syariah6
A practice in Syariah “muammalat” is the most explored area during the last decade,
especially the syariah financial practices. A growing amount of studies related to
Syariah finance and the rapid growth of Syariah banking shows a good sign of Syariah
compliance practice.
If we try to capture the belief system of Syariah finance paradigm, it is based to the
following sets of prohibitions, as per following:7
 Transactions in unethical goods and services;

 Earning returns from a loan contract (Riba/Interest);
 Compensation-based restructuring of debts;
 Excessive uncertainty in contracts (Gharar);
 Gambling and chance-based games (Qimar);
 Trading in debt contracts at discount, and;
 Forward foreign exchange transactions.
6
Presentation slide from Amer Khalil ur Rehman Introduction to Islamic finance, Security and Sukuk,page.2.
7
Managing Financial Risks of Sukuk Structure,page.9, - A dissertation, MSc, International Banking, Ali Arsalan
Tariq,Loughborough University UK, 2004

Prohibition to Interest (Riba’) is the most popular on Islamic financial where signed on.
Most of Islamic banking/ Finance law finds Interest/Riba is prohibited; and some is
extended to the remaining areas.
The question is then why does Islam prohibit interest (riba)? What are the Islamic
beliefs on riba’ or charging an interest? Riba’ is any return/reward or compensation
charged on a loan/contract as well as charged on debt rescheduling. Riba is strongly
prohibited in Islam. The economic implication is that money is considered as a medium
of exchange effectively created to be sought for other commodities. Thus, charging
interest on loans is considered unjust since money is considered to be simply an
intermediary between goods8. Those are described above explain why Islam prohibit
riba’ or charging an interest.
Regarding how the investments are made, Sukuk is the latest and most well known
investment instrument in the Syariah financial section. Sukuk are securitized assets and
therefore belong to the category of Asset Backed Securities (ABS). Unlike conventional
ABS structures, Sukuk needs to have an underlying tangible asset transaction either in
ownership or in a master lease. The securitization of pure cash flow streams from credit
portfolios as undertaken in the mortgage market; for instance, it can’t be structured in
the same way. A properly made Sukuk limits the debt to the value of the underlying
assets9.
There are a number of different types of sukuk which differ based on how they are
diversified. Sukuk can be of many types depending on the type of Islamic modes of
financing and trades used in its structuring. The common types of sukuk are:
1. Sukuk Ijarah:
2. Sukuk Mudharabah:
3. Sukuk Musharakah:
4. Sukuk Istisna’:
In this paper, the author will not further discuss financial instruments and how they are
used to fund projects. The author will address whether there is another side of projects
that could synergy with Syariah practices which apply during the implementation or
execution phase of the project.
The above phenomenon gives a sign that an investor/owner currently, especially Middle
Eastern investors, has a specific need to invest their money through a way aligned with
their beliefs. The belief system becomes one part of the many decisions aspects from
the investor before deciding their investment.
8
Managing Financial Risks of Sukuk Structure,page.10, - A dissertation, MSc, International Banking, Ali Arsalan
Tariq,Loughborough University UK, 2004
9
Reasons to issue Sukuk and the structures behind them, Banker Middle East 2005. Banker Middle East 2005

If a project is invested, and when the money put on the table, the owner needs to give a
mandate on the project execution to a person who has competency, both technical and
managerial, to transfer the capital investment to become an asset as per agreed scope,
schedule, and cost.
The appointed project manager which has agreed to accept the project charter then
needs to initiate, plan, execute, control, and hand over the project to the owner. During
the work, the project initiating, planning, and execution will involve tremendous effort,
money, and resources. The specific knowledge and practice in project management is
required by the project manager to achieve his objectives.
The specific practice and knowledge in project management has brought interest to
observe and explore the correlation to Islamic Syariah practice; specifically in the
Project Execution Stage. The sukuk type investment described above, has shown how
the Muslim investors deal with the financing and funding of their projects, but the author
still cannot find any Syariah practice applied in the lower chains on how the invested
money through the project execution area, especially on how the work is to be
measured and how a payment is made to a project’s worker, contractor, subcontractor,
supplier etc
3. SYARIAH PRACTICES RELATED TO SALARY PAYMENT AND RIBA
There are 2 main sources of Syariah law in Islam, the sacred text of Al-Quran and
traditions gathered from the life of Prophet Muhammad, a Hadits.
The Syariah law touches even the very basic of living aspect of humankind. There are
Hadits and Quran texts, which the author thinks related to riba’ and payment in Islam.
Riba in Quran is revealed several times. One of a revelation is “ That which you give as
interest to increase the people’s wealth increases not with God; but that which you give
in charity, seeking the goodwill of God, multiples manifold” (Surah Al-Rumm 30:39)10 .
Also a hadist from prophet Muhammad saw utterance, “the receiver and the payer of
interest, the one who records it and the two witnesses to the transaction and said: “they
are all alike (in guilt)” (Hadits from Jabir ibn Abdullah, Muslim, Tirmidhi, Musnad
Ahmed)11 .
There is one hadits which teaches us on prompt payment of the worker. Utterance from
the prophet of Muhammad, “Promptly pay your labor/employee worker salary before his
10
Presentation from Amer Khalil ur Rehman,Introduction to Islamic finance, Security and Sukuk,page.12.
11
Presentation from Amer Khalil ur Rehman,Introduction to Islamic finance, Security and Sukuk,page.21.

sweat is getting dry, and told them how much their will paid while they are working”
(Hadist from Baihaqi & Ibnu Majah)12.
4. PROJECT MANAGEMENT- EARNED VALUE
Before we begin the next section, we need to answer what is project management and
what is Earned Value Management (EVM).
There are several definitions on project management. Project management is the art of
directing and coordinating human and material resources throughout the life of a project
by using modern management techniques to achieve predetermined objectives of
scope, quality, time, cost, and participant satisfaction13.
Earned value management, it is the process of defining and controlling the project so
that project objectives are met. The controlling aspect includes scope control, schedule
control, and budget control. An Earned Value Management system is a tool used to
facilitate the management of project14.
As mentioned earlier, we can see that the superiority of Project Management–Earned

Value (PM EV) compared to the conventional project management it is the ability to
control the progress and health of the project with their applied indicators (e.g. CPI,
SPI). This ability could provide real-time measurement to the project status and help the
project manager responding fast to the project status and earned work.
The benefits of PM EV, possibly have correlation and synergy with several Syariah
practices.
In this short paper, the author tries to observe those PM EV benefits described above
and how they could support Syariah belief in prohibition of riba/interest and in prompt
payment.
12 Translated from: Buku Pintar Hadits, page.1009, Upah (Gajih) ,Syamsul Rijal Hamid, Gramedia, August 2008.
13 Max-Widemann Project Management Dictionary English-Indonesia, page. 516, PT Mitratata CitraGraha, ISBN
979-25-5682-6, April 2006.
14 Handbook : “Project Management Earned Value”, Chapter 1, page.6, Humphrey Associate , 2006

5. DISCUSSION: THE PROJECT MANAGEMENT EARNED VALUE BENEFICIAL

TO PROMPT PAYMENT AND POTENTIAL TO ELIMINATE INTEREST/RIBA’.
PM EV has superiority in progress control and monitoring the health of the project using
specific indicators (e.g. CPI, SPI).
In the context of construction project execution, by using the EV tools the owner could
read “Earned” of the contractor work justified in real-time, as soon as the work
progresses. These advantages will provide the owner the ability to respond to the
identified earned work on the ongoing project as soon as they know. With EV tools the
time span required to know the progress status and the health of our project now is just
a matter of the reporting time duration.
On the other side, the earned work will be subject to the amount paid to the contractor
as a seller. As soon as the owner is confident he knows how much value he got, there is
no reason for the owner company, as a buyer, to delay the payment to the contractor;
which means money continues flowing down through the supply chain to the sub-
contractor and supplier.
By making prompt payment to the contractor for work completed in substantial
conformance to the specified quality standards and fulfilling the contractual terms and
condition, also known as shall clauses, which will prevent or avoid contractor raising the
interest rate (riba’) in their tender proposal because they haven’t taken some risk of
losing their money due to “time value of money”. Also by having prompt payment of the
work, the contractor has opportunity to re-invest their capital for their business activity.
As mentioned earlier, we often find Net 30/60 payments term applied by owner
company to the main contractor. Owner company as a buyer will be using the obligation
of trade credit from the seller, which is the main contractor, and will pay the contractors
in full on or before the 30 calendar days (including weekends and holidays) when the
goods or services were delivered by the seller is fully complete as per agreed in the
contract scope of work.
The trade credit is the credit extended to you by suppliers who let you to buy now and
pay later. Any time you take delivery of materials, equipment, or other valuables without
paying cash on the spot, you're using trade credit. Most of Suppliers likely aren't going
to offer you trade credit. They're going to want to make every order c.o.d., cash or check
on delivery or paid by credit card in advance until you've established that you can pay
your bills on time15. The trade credit is the credit extended to delay the long term
payments of the earned value of the work.
Following the supply chains, the main contractor will apply “a pay when paid” term to its
subcontractor; then respectively follow down to the subcontractor will apply the same
term to its supplier/vendor. As mentioned earlier, “Pay-When-Paid” term such as “All
15 http://www.entrepreneur.com/encyclopedia/term/82538.html, last access April 18, 2010

progress payments of the subcontract sum shall be made within 10 days after payment
is received by general contractor from owner”16 .
The Figure 2 will show typical supply chains in the project execution stage. An owner
company has a major project with several contract packages to construct, install, and
procure. The buyer, owner company precedes tender and awards the packages to
several main contractors. The main contractors divide their work packages to
subcontractors through separate contracts. Then the work package continues to
cascade to several suppliers in the lower level of the supply chains. This supply chain
will reflect how money flows down from the owner company through to the
supplier/vendor, and in the opposite way the interest applied passes back to the buyer
in the higher level.
16 Business Credit Bulletin, National Association of Credit Management, “When must A Subcontractor Be paid under
A” Pay-When-Paid” clauses?, Patrick Devine, Esq, July/Aug 2006

Level-1 Level-2 Level-3 Level-4
Seller
Seller level 2
Buyer level-1 Seller level 1 / buyer-3
/ buyer-2 Vendor/Supplier
Subcontractor
Main contractor
Vendor/Supplier
Owner company Subcontractor
Main contractor
Subcontractor
Vendor/Supplier
Subcontractor
Vendor/Supplier
Total value of Owner contract,

$x OWR = $x MC1+$x MC2+ …+$x MC k
Number of main contractors,

1, 2, 3…MCk
Sum of main contractor’s contract,
$x MCk = $x SCm1+$x SCm2+ …+ $x SCmk
Number of subcontractors,
1, 2, 3…SCm
Sum of Subcontractor’s contract,
$x SCm = $x Sm1+$x Sm2+ …+ $x Smn Number of supplier/Vendor,
$x S1, $x S2, $x S3, …$x Sn
30/60 Net Pay when Paid Pay when Paid

Payment Term Payment Term Payment Term
MARR % INCREASE
RISK INCREASE
Here,
MARR & = i % = interest rates
$x Sn = Sum value of contract Suppliers at n
$x SCm = Sum value of contract Subcontractors at m
$x MCk = Sum value of Main contractor at k
$x OWNER = Total contract value owner
n = number or suppliers/vendors
m = number of subcontractors
k = number of main contractors
Assumption,
 Look in to Construction, Installation and Procurement (CIP) Procedure
 Description of 4 level CIP Supply chains
 The same trade credit applied (Nett 30/60)
 The same payment term applied overall supply chains
 The payment term part of GTC of contract ITB
 Owner and mostly
Figure 2 Supply Chains Model - construction, installation and procurement

If we follow on how the transaction is made and regulated, at the level 1, the owner
(buyer) applies 30/60 net payment term to his contract term and condition to the main
contractors at level 2. The main contractor then continues cascade some of the scopes
of work to the subcontractors with the pay when paid term binding, at level 3, and then it
will consistently follow down to supplier, at level 4 by the subcontractor.
The supplier is usually a small to medium size company compared to the owner. The
smaller the company is the higher the MARR (minimum attractive rate of return), and
consequently the higher the risk of business. Suppliers with a high MARR will include
high interest to their contract in order to offset the risk; that’s because higher the interest
rates, the MARR itself, then further into the future a cash flow occurs, the lower the PW.
The effective interest rate build up at individual supplier (S) contract value, in the level 4,
will sum up to the individual subcontractor cost as reflected as follow:
$x SCm = $x Sm1+$x Sm2+ …+ $x Smn …..(See Figure - 2)
Analyzed by, PW (i %) SCm= $xSm1 (A/P, i%, N) + $xSm2 (A/P, i%, N);
Where N is 10 days calculated in nominal daily interest rate. The pay when paidterm
contributes 10 days delay which reflects the interest, N.
The subcontractor’s (SC), because of the pay when paid term applied by main
contractor (MC); then put amount of interests to the sum of main contractor (MC)
contract value:
$x MCmk = $x SCm1+$x SCm2+ …+ $x SCmk…..(See Figure - 2)
Analyzed by, PW (i %) MCmk= $xSCm1 (A/P, i%, N) + $xSCm2 (A/P, i%, N);
Where N = 20 days calculated in nominal daily interest rate due to total 20 days from
supplier and subcontractor (which i% should be higher or equal to MARR %).
At the higher hierarchy is the owner company which will be the ultimate accumulation of
interest from the supply chain due to applied Net 30/60 payment term. The sum will
follow the below equation:
$x OWR = $x MC1+$x MC2+ …+$x MCk …..(See Figure - 2)
Analyzed by, PW (i %) MCmk= $xSCm1 (A/P, i%, N) + $xSCm2 (A/P, i%, N);
The MARR% value from every company will vary depending on the size of the
company. A multinational owner company has MARR about 9%. The well established
main contractor’s MARR is around 15 to 18%; the subcontractor or small

supplier/vendor will be about 30% a year. Based on its MARR, regardless of the size of
the company, interest will be applied at about the same or above the MARR in order to
justify the economical feasibility of their business decisions that keeps them in the
business.
Figure 3 is a scheme of typical project execution that simulates several parties which
are: the owner company, 4 main contractors, 2 direct services/good suppliers, 5
subcontractors, and 5 subcontractor’s suppliers. Below is replaced with a simple
simulation to figure out how much money in percentage will accumulate to the owner
contract value because of long payment term involved in contract supply chains. The
owner company as a higher level in the supply chain has a contribution in interest
accumulation reflects to apply 30/60 days of delay payment. The interest which is
implicitly charged back to the owner company is included in the commercial proposal of
the contract of the main contractor. At the second level, the main contractor applies the
pay when paid term, normally 10 days to its subcontractor, and the subcontractor
consistently applies the term to its supplier. The accumulated payment delays with the
pay-when-paid clause will be passed back to the owner indirectly as the work initiator.
Based on the simulation in figure 3, shows the interest accumulation in level 1 is around
0.8% to 2% from the total contract value of owner to main contractors in level 2, caused
by 30/60 days net delay payment.
About 2.1% to 4.1% from the value of the scope of work cascades from main
contractors to subcontractors whish is passed in the form of interest accumulated by
the subcontractors pricing to the main contractors which is caused by 10 days delay of
pay when paid term. In level 3, it is about 4% to 7% from the value of the scope of work
cascading from sub contractor to subcontractor’s supplier with interest passed in the
form of supplier pricing to the subcontractors as implication of 10 days delay of pay
when paid term.
The important point here is all those accumulated interest values will finally end up to
the owner’s budget. The simulation shows the chains of this supply will increase owner
company capital budget about 2.2% to 4.9% from their owner estimate.
The owner usually does not realize this because it is not in their control horizon. Owners
can probably calculate the risk of interest by their own 30/60 net payment term to main
contractors because owner and main contractor has direct binding. But it is difficult for
the owner company to control the risk of interest that potentially comes from the
subcontractors and subcontractor’s suppliers because the owner company does not
have information on how many subcontractors and suppliers are in the supply chains at
level-3 and level-4 and how they are legally binding. It is beyond the owner’s control.


Net 30/60 +10 days +10 days
Payment term Pay when paid term Pay when paid term
50/80 days long payment
0.8% - 2.3 % 2.1% - 4.1 % 3.8% - 6.8%

Interest applied by main Interest applied by Interest applied by
contractor to the owner subcontractors to main subcontract’s suppliers
company contractor to the subcontractors
Risk in form of Interest pass

back to owner 2.2% - 4.9 % of
total contract value
Owner company Total Owner

Estimate
$150,000,000
FEED Execution
1- Package FEED Contractor
$16,500,000 Contract value
$16,170,000
Direct Material & Matrl’s supplier-1

Services Contract value
$7,500,000 $3,150,000
Services supplier-2
Contract value
$4,050,000
EPCI Installation
1- Package Main contractor -1 Subcontractor -1.1 Vendor/Supplier -1.1.1
$45,500,000
Contract value Contract value Contract value
$44,590,000 $17,836,000 $4,459,000
Vendor/Supplier- 1.1.2
Contract value
$2,675,400
Main contractor -2 Subcontractor -2.1 Vendor/Supplier- 2.1.1

EPCI Fabrication
2-Packages Contract value Contract value Contract value
$80,500,000 $37,030,000 $12,960,500 $648,025
Main contractor -3 Subcontractor -3.1 Vendor/Supplier -3.1.1
Contract value Contract value Contract value

$42,665,000 $8,533,000 $2,133,250
Subcontractor -3.2 Vendor/Supplier- 3.2.1
Contract value Contract value

$6,399,750 $3,711,855
Vendor/Supplier- 3.3
Contract value
$2,133,250
Figure – 3 Supply Chain - Case: Long term payment

Also, the owner company, who should have good in-house estimation capability, will
normally check the bid estimate from main contractor by using a class-1 cost estimate
method with expected accuracy range L: - 3% to - 10% and H: +3% to +15%[17]. We can
clearly see here the accumulated interest of 2.2% to 4.9% in the supply chains in figure
- 3 is within the class-1 cost estimate range. This can be an indication that the owner
company will consider it is a normal business. The interest accumulations will not be
detected since they fall within the range.
This is the area of potential cost efficiency where the owner company could strive to
achieve.
Figure 4 will demonstrate the same project execution scheme with reduced days of
delay in payment, which we will call (prompt payment). The reduction scheme is
conditioned if the owner company could reduce the delay payment to net 5/20 days
payment, and the contractors (and their subcontractors apply pay when paid term by
reduction to 2 days delays.
The simulation shows that the interest accumulation in level 1 is around 0.27% to
1.08%, main contractor to owner caused by net 5/20 days, 0.49% to 1.55% at level 2
accumulated by the subcontractors pricing to the main contractors caused by 2 days
delay of pay when paid term; then about 0.86% to 2.3%, from supplier pricing to the
subcontractors. The overall accumulation through supply chains of shortened duration
at the owner side is 0.5% to 1.86%.

Net 5/20 days +2 days +2 days
Payment Pay when paid term Pay when paid term
9/24 days - shortened duration
0.27% - 1.08 % 0.5% - 1.6 % 0.86% - 2.3%

Interest applied by main Interest applied by Interest applied by
contractor to the owner subcontractors to main subcontractor’s suppliers
company contractor to the subcontractors
Risk in form of Interest pass

back to Owner 0.5% - 1.86 %
of total contract value
Figure – 4 Supply Chain - Case: Short term payment

The simulations above reflect the impact of delayed payment conditioned on payment
term on accumulated interest. The interest could balloon the value more than the
original value of the asset itself. The actual cost to build an asset contains a significant
percentage of interest accumulation. As per Syariah perspective, money is only an
effective medium of exchange or an intermediary between goods, but not for taking
advantage charging an interest.
Also the simulation tells us that the pay when paid and net 30/60 term is not consistent
with Syariah since having both clauses in the contract will facilitate owner or contractors
to delay payment on earned work. Syariah urges to make any payment soon after the
work that is earned is completed. Regarding to prohibition of riba/interest, we also see
that both clauses create a business practices which potentially build or accumulate an
interest. As described in figure 3, it reflects on how both clauses could directly
accumulate interest. Figure 4 also simulates how the interest is reduced if we can make
the payment earlier.
In order to facilitate prompt payment process, the long process in payment of earned
work needs to be cut down. The reduced interest will be significantly reduced in the
number of days. The next question is what factors are involved in owner company and
main contractor.
Based on the author’s observation in some multinational companies, the internal

verification and validation process is one of the processes in payment which requires
extended time before payment besides the progress measurement. To expedite a better
process, information technology (IT) will have significant impact in the improvement of
validation and verification in the internal business process. The company validation and
verification can be expedited quicker through e-procurement applications available out
there. By having an e-procurement the contractor’s payment, verification, and validation
improves from 30-45 days into 20 days. The contractor can directly submit their
progress report to the screen of approver. Once it’s approved then it goes for financial
check prior to payment.
The important part prior to verification is how to measure the physical progress itself.
Progress measurement deals with how the physical completion, or earned work can be
weighed relative to the value of the work. Earned Value (EV) measurement method is
one of available methods which could make a measurement of project real-time
weighed against to the planned progress.
Having EV in the project while performing progress measurement will facilitate better
and faster progress identification through the project execution. The fundamental
process of EV will consistently align with Syariah law because EV will support faster
measurement of earned work which is eligible for prompt payment.

6. CONCLUSION
The above simulations show a cost implication to the owner company and to the
contractor when they’re applying prompt payment or long term payment. The longer the
duration of payment of earned work; the higher interest value applied to the bid
proposal. The above simulation shows a long payment term the pay when paid 10 days
and the net 30/60 payment term will accumulate interest in range of 2.2% to 4.9% from
total Owner Estimate (OE) end to end. A shortened duration of payment of some level
will reduce interest value embedded in the contract to 0.5% -2% from the owner
estimate (OE).
Syariah urges every Muslim to promptly pay any earned work as per agreed completion
milestone. Any delivered work by the employee or contractors need to be rewarded as
soon as it is accomplished with the reason of fairness and prosperity.
That is in accordance with the prohibition of riba’ (interest) another Syariah practice. By
promptly paying the contractor for any earned work they will avoid or minimize portions
of an interest charging in their bid proposal value, once it is awarded it will become a
contract value. This is accepted by the contractors since they do not have to
compensate any risks of lack of capital due to long duration payment for their works or
tasks; then they could continue their business as usual.
This is a clear indication that the pay when paid and the net 30/60 payment term is not
consistent with Syariah Law.
On the other side, EVM as a progress measurement tools is applicable to support the
Syariah practices. The EVM is a proven method of measurement of earned work which
complies to substantial standards and per contract agreements. Implementing EV
measurements in the project will help owners to understand the earned work status
earlier; which indirectly will expedite a prompt payment term.
For any Islamic company or any company working in predominant Islamic culture from
the owner company perspective, applying both sets of:
1. Urge for effective progress earned measurement with EVM’s applicable set of
tools; and
2. Urge for prompt payment for any agreed accomplished work, reduced duration or
even eliminate the pay when paid and the net 30/60 term.
It will bring significant cost benefit and cost effectiveness with reduced capital
expenditure cost. For the contractor companies, the initiative of prompt payment
started by owner company will deliver better cash flow and business continuity;
especially for small contractors.

7. REFERENCES
1. Humphrey & Associates, Inc. Project Management Using-Earned Value. 2006, CA
2. AACE International. Skills & Knowledge of Cost Engineering. 5th Edition Revised”,
2007. Morgantown, WV.
3. Sullivan William. Wicks M, Elin. Koelling C, Patrick. Engineering Economic,
Fourteenth edition. Pearson International Edition, 2009.
4. RICS Research, Current trends in Shariah property investment. October 2006.
Corporate Professional Local.
5. Rehman Ur, Amer Khalil; Introduction to Islamic Finance, Securitization and Sukuk,
AIMS-Academy for International Modern Studies.
6. Devine, Patrick, Esq. When Must A Subcontractor Be Paid Under A” Pay-When-
Paid” clauses?. July/August 2006. The Publication for credit & finance professionals,
National Association of Credit Management-Business Credit.
7. Aguilar, Jenifer. A Reprieve for Pay-If-Paid Clauses. March 9, 2009. Vol.35, No.10,
Connecticut Law Tribune.
8. Koprince J, Steven. Is Your Pay-When-Paid Clause Worthless?. Jan/Feb 2008.Legal
Commentary Constructor.
9. Jenkins Marzban Logan LLP-Lawyers. Pay-When-Paid Clauses, Construction Law,
Suite 900, Nelson Square Box 12144,808 Nelson Street Vancouver, Canada.
10. Tariq, Ali Arsalan, MSc. International Banking : Managing Financial Risks Of Sukuk
Structures, A dissertation submitted in partial fulfillment f the requirement for the
degree of Master of Science at Loughborough University. September 2004. UK.
11. Banker Middle East 2005. Reason to Issue Sukuk and the structures behind them.
October 2009. Copyright 2009 ABQ Zawya Ltd.
Appendices
Table- 1 Model Simulation– Case: Long Term Payment

Table- 2 Model Simulation – Case: Prompt Term Payment

Table-1 Simulation Model – Long Payment Term – Detail Calculation
Table-2 Simulation Model – Shortened Payment Term – Detail Calculation

Table 2 – Simulation Model – Case: Prompt Term Payment

About the Author:
A Farid Maloni, BEng, MEng
Author
Farid Maloni is a project management practitioner with

10 years working experiences in multinational Mining-Mineral and Oil-Gas
industries. Farid started his career as a Mechanical Engineer, Project
Engineer, and Project Manager in a Mining and nickel processing company,
Vale Inco Indonesia Corp. Currently he is working for Chevron Corp in the
Indonesia Deepwater Development Project, Major Capital Project, Assurance,
Interfaces and Risks as a Coordinator. Farid is based in Jakarta, Indonesia
and can be reached at farid.maloni@gmail.com

FP Malon

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PM World Today – September 2010 (Vol XII, Issue IX)

PM WORLD TODAY – FEATURED PAPER – SEPTEMBER 2010

Project Management, Earned Value and Prompt Payment

By Farid Maloni, BEng. MEng

Keywords: Syariah, Riba’, Project management, Earned value management, prompt

PM World Today is a free monthly eJournal - Subscriptions available at http://www.pmworldtoday.net Page 1

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2. SYARIAH LAW AND ITS FINANCIAL ASPECTS

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related to other human “hablum minnannas”. Muammalat is part of Syariah which

Aqidah Syariah Akhlaq

Political Economic Social

Figure-1 Islam and Syariah6

 Transactions in unethical goods and services;

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3. SYARIAH PRACTICES RELATED TO SALARY PAYMENT AND RIBA

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4. PROJECT MANAGEMENT- EARNED VALUE

As mentioned earlier, we can see that the superiority of Project Management–Earned

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5. DISCUSSION: THE PROJECT MANAGEMENT EARNED VALUE BENEFICIAL

15 http://www.entrepreneur.com/encyclopedia/term/82538.html, last access April 18, 2010

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Total value of Owner contract,

Number of main contractors,

30/60 Net Pay when Paid Pay when Paid

Figure 2 Supply Chains Model - construction, installation and procurement

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$x SCm = $x Sm1+$x Sm2+ …+ $x Smn …..(See Figure - 2)

$x MCmk = $x SCm1+$x SCm2+ …+ $x SCmk…..(See Figure - 2)

$x OWR = $x MC1+$x MC2+ …+$x MCk …..(See Figure - 2)

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Level-1 Level-2 Level-3 Level-4

50/80 days long payment

40/70 days long payment

0.8% - 2.3 % 2.1% - 4.1 % 3.8% - 6.8%

Risk in form of Interest pass

Owner company Total Owner

Direct Material & Matrl’s supplier-1

Main contractor -2 Subcontractor -2.1 Vendor/Supplier- 2.1.1

Contract value Contract value Contract value

Subcontractor -3.2 Vendor/Supplier- 3.2.1

Contract value Contract value

Figure – 3 Supply Chain - Case: Long term payment

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Level-1 Level-2 Level-3 Level-4

9/24 days - shortened duration

7/22 days long payment

0.27% - 1.08 % 0.5% - 1.6 % 0.86% - 2.3%

Risk in form of Interest pass

Figure – 4 Supply Chain - Case: Short term payment

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Based on the author’s observation in some multinational companies, the internal

PM World Today is a free monthly eJournal - Subscriptions available at http://www.pmworldtoday.net Page 15

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Table- 1 Model Simulation– Case: Long Term Payment

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Table-1 Simulation Model – Long Payment Term – Detail Calculation

Table-2 Simulation Model – Shortened Payment Term – Detail Calculation