Late Payment and Nonpayment Encountered by Contracting Firms in a Fast-Developing Economy
Publication: Journal of Professional Issues in Engineering Education and Practice
Volume 140, Issue 2
Abstract
Late payment and nonpayment is explicitly recognized as a widespread problem in the construction sector and recurs in project after project. Although the Construction Industry Payment and Adjudication Act was enacted in 2012 by the Parliament of Malaysia to ease timely and regular payment, it does not apply to a construction contract entered into by a natural person for any construction work involving a building which is less than four stories high and which is wholly intended for his or her occupation. Further, the majority of resident buildings in Malaysia are mostly low-rise buildings that are less than four stories high. Also, CIPA Act 2012 does not address the underlying causes of late payment. This study aims to identify the underlying causes of late payment in the construction sector in a fast-developing economy—Malaysia—and to develop effective solutions to mitigate this kind of risk. A structured questionnaire survey was conducted for contractors registered as Grade 3 to Grade 7 under Malaysian Construction Industry Development Board (CIDB). A sample of 1,000 contractors was selected, approximately 5.3% of the population. Findings reveal that the “cash flow problems due to deficiencies in client’s management capacity” is the most significant underlying cause for late payment. In mitigation of late payment risks, “investigating the owner’s ability to pay” was analyzed as the most effective solution. Indicators for late payment and nonpayment identified in this study enable contractors to forecast payment risks in both the current project and future projects.
Get full access to this article
View all available purchase options and get full access to this article.
References
Abdul Kadir, M. R., Lee, W. P., Jaafar, M. S., Sapuan, S. M., and Ali, A. A. A. (2005). “Factors affecting construction labour productivity for Malaysian residential projects.” Struct. Surv., 23(1), 42–54.
Adams, F. K. (2008). “Risk perception and Bayesian analysis of international construction contract risks: the case of payment delays in a developing economy.” Int. J. Proj. Manage., 26(2), 138–148.
Arain, F. M., and Low, S. P. (2005). “The potential effects of variation orders on institutional building projects.” Facilities, 23(11–12), 496–510.
Arditi, D., and Chotibhongs, R. (2005). “Issues in subcontracting practice.” J. Constr. Eng. Manage., 866–876.
Baloi, D., and Price, A. D. F. (2003). “Modeling global risk factors affecting construction cost performance.” Int. J. Proj. Manage., 21(4), 261–269.
Barbosa, P., and Pimentel, P. (2001). “A linear programming model for cash flow management in the Brazilian construction industry.” Constr. Manage. Econ., 19(5), 469–479.
Battisti, P. (2004). “All in agreement deadlocked.” Walls & Ceilings, New York.
Blaikie, N. (2004). Analyzing quantitative data, Sage Publications, London.
Chong, S. C., Sia, B. K., Cheong, W. W., and Hng, S. S. (2011). “House purchasing decisions: A case study of residents of Klang Valley, Malaysia.” Int. J. Soc. Sci. Econ. Art, 1(2), 88–95.
Chung, K. (2013). “The EOQ model with defective items and partially permissible delay in payments linked to order quantity derived analytically in the supply chain management.” Appl. Math. Modell., 37(4), 2317–2326.
Coakes, S. J., and Steed, L. G. (2003). SPSS analysis without anguish, version 11.0 for Windows, John Wiley, Chicago.
Davis, R. (1999). Construction insolvency, 2nd Ed., Palladian Law, U.K.
Drew, D. S., and Skitmore, R. M. (1993). “Prequalification and C-competitiveness.” OMEGA Int. J. Manage. Sci., 21(3), 363–376.
Gould, N. (2012). “Adjudication in Malaysia.” Int. Q., 4, 1–2.
Heron, R., and Lie, E. (2002). “Operating performance and the method of payment in takeovers.” J. Finance Quant. Anal., 37(1), 137–155.
Hwee, N. G., and Tiong, R. L. K. (2002). “Model of cash flow forecasting and risk analysis for contracting firms.” Int. J. Proj. Manage., 20, 351–363.
Hyung, K. P., Seung, H. H., and Jeffrey, S. R. (2005). “Cash flow forecasting model for general contractors using moving weights of cost categories.” J. Manage. Eng., 164–172.
Indah Water Konsortium (IWK). (2013). “FAQ.” 〈http://www.iwk.com.my/v/developer/faq〉 (Aug. 20, 2013).
Jackson, I. J., and Gilliam, M. H. (1999). Financial management for contractors, 3rd Ed., FMI Corporation, New York.
Kaka, A. P., and Price, A. D. F. (1991). “Net cash flow models: Are they reliable?” Constr. Manage. Econ., 9(3), 291–308.
Kaming, P. F., Olomolaiye, P. O., Holt, G. D., and Harris, F. C. (1997). “Factors influencing construction time and cost overruns on high-rise projects in Indonesia.” Constr. Manage. Econ., 15(1), 83–94.
Kapila, P., and Hendrickson, C. (2001). “Exchange rate risk management in international construction ventures.” J. Manage. Eng., 186–191.
Lee, G., et al. (2012). “The impact of non-payment for preventable complications on infection rates in U.S. hospitals.” Am. J. Infect. Control, 40(5), 190–197.
Lim, B. K. (1999). “Risk management of cash flow in construction projects.” Final Year Project, School of Civil and Structural Engineering, Nanyang Technological Univ., Singapore.
Ling, F., and Hwee, L. L. (2007). “Foreign firms’ financial and economic risk in China.” Eng. Construct. Architect. Manage., 14(4), 346–362.
Lip, E. (2006). “Curing the ills of non-payment in the construction industry—The Singapore experience.” 8th Surveyors’ Congress, Institute of Surveyors Malaysia, Kuala Lumpur, Malaysia.
Lou, K., and Wang, W. (2013). “A comprehensive extension of an integrated inventory model with ordering cost reduction and permissible delay in payments.” Appl. Math. Modell., 37(7), 4709–4716.
Low, S. P., and Goi, W. M. (2003). “Causes of unethical practices leading to insolvency of sub-contractors.” CRICM 2003 Int. Research Symp. on Advancement of Construction Management and Real Estate, Chinese Research Institute of Construction Management, Hong Kong.
Maeda, Y., and Sakai, Y. (2007). “Risk financing through captive insurer: Economic Influences of captives on corporations and the First Domicile in Japan.” J. Risk Res., 10(6), 793–803.
Massoud, N., Saunders, A., and Scholnick, B. (2011). “The cost of being late? The case of credit card penalty fees.” J. Finance Stab., 7(2), 49–59.
McCoy, W. (2006). DOD payments to small businesses: Implementation and effective utilization of electronic invoicing could further reduce late payments, Report to Congressional Committees, Government Accountability Office, Washington, DC.
Meng, X. (2002). “Guarantees for contractor’s performance and owner’s payment in China.” J. Constr. Eng. Manage., 232–237.
Mochtar, K., and Arditi, D. (2001). “Pricing strategy in the us construction industry.” Constr. Manage. Econ., 19(4), 405–415.
Odeh, A. M., and Battaineh, H. T. (2002). “Causes of construction delay: Traditional contracts.” Int. J. Proj. Manage., 20(1), 67–73.
Omar, E. O., Endut, E., and Saruwono, M. (2012). “Before and after: Comparative analysis of modified terrace house.” Procedia–Soc. Behav. Sci., 36, 158–165.
Palmer, W. J., Coombs, W. E., and Smith, M. A. (1999). Construction accounting & financial management, 5th Ed., McGraw-Hill, New York.
Park, H. K., Han, S. H., and Russell, J. S. (2005). “Cash flow forecasting model for general contractors using moving weights of cost categories.” J. Manage. Eng., 164–172.
Parliment of Malaysia. (2012). Construction industry payment and adjudication act, Parliment of Malaysia, Kuala Lumpur, Malaysia.
Paul, S. Y., Devi, S. S., and Teh, C. G. (2012). “Impact of late payment on firms’ profitability: Empirical evidence from Malaysia.” Pac. Basin Finance J., 20(5), 777–792.
Pettigrew, R. (2003). The need for payment controls in the construction industry—An overview, Thomas Telford, London.
Prashant, T. (2007). The essential aspects of fire safety management in high rise buildings, Univ. Technology Malaysia, Johor, Malaysia.
Ranyard, R., and McHugh, S. (2012). “Bounded rationality in credit consumers’ payment protection insurance decisions: the effect of relative cost and level of cover.” J. Risk Res., 15(8), 937–950.
Scheffler, M. A. (2003). “Protecting owners in private construction projects from unfavorable provisions in state prompt payment acts.” Real Estate Finance, 20(4), 21–25.
Scholnick, B., Massoud, N., and Saunders, A. (2013). “The impact of wealth on financial mistakes: Evidence from credit card non-payment.” J. Finance Stab., 9(1), 26–37.
Shanmuganayagam, V. (1988). Factors influencing the cash flow pattern of a construction site, South East-Asia Building, Singapore.
Smith, G. R., and Bohn, G. M. (1999). “Small to medium contractor contingency and assumption risk of risk.” J. Const. Eng. Manage., 101–108.
Strischek, D. (1995). “Cash flow projections for contractors revisited.” J. Commer. Lend., 77(10), 17–37.
Taleizadeh, A. A., Pentico, D. W., Jabalameli, M. S., and Aryanezhad, M. (2013). “An EOQ model with partial delayed payment and partial backordering.” Omega, 41(2), 354–368.
Tarek, H. (2006). “Simplified project management for construction practitioners.” Cost Eng., 48(11), 20–28.
Thevendran, V., and Mawdesley, M. J. (2004). “Perception of human risk factors in construction projects: An exploratory study.” Int. J. Proj. Manage., 22(2), 131–137.
Turkoglu, Y., and Egemen, E. (1980). Court decisions on public works litigation, Olgac Malbaasi, Ankara, Turkey.
Wang, D., Hadavi, A., and Krizek, R. J. (2006). “Chinese construction firms in reform.” Constr. Manage. Econ., 24(5), 509–519.
Wilder, J. (2007). “Guard yourself against construction risk.” Hotel Hotel Manage., 222(21), 12–13.
Wong, J. T. Y., and Hui, E. C. M. (2006). “Construction project risks: Further considerations for constructor’s pricing in Hong Kong.” Constr. Manage. Econ., 28(3), 215–216.
Xenidis, Y., and Angelides, D. (2005). “The financial risks in build-operate-transfer projects.” Constr. Manage. Econ., 23(4), 431–441.
Yang, H., and Chang, C. (2013). “A two-warehouse partial backlogging inventory model for deteriorating items with permissible delay in payment under inflation.” Appl. Math. Modell., 37(5), 2717–2726.
Yiu, C. Y., and Tam, C. S. (2006). “Rational under-pricing in bidding strategy: A real options model.” Constr. Manage. Econ., 24(5), 475–484.
Zhou, Y., Zhong, Y., and Wahab, M. I. M. (2013). “How to make the replenishment and payment strategy under flexible two-part trade credit.” Comput. Oper. Res., 40(5), 1328–1338.
Zou, P. X. W., Zhang, G., and Wang, J. (2007). “Understanding the key risk in construction projects in China.” Int. J. Proj. Manage., 25(6), 601–614.
Information & Authors
Information
Published In
Journal of Professional Issues in Engineering Education and Practice
Volume 140 • Issue 2 • April 2014
Copyright
© 2013 American Society of Civil Engineers.
History
Received: Jun 24, 2013
Accepted: Oct 17, 2013
Published online: Dec 2, 2013
Published in print: Apr 1, 2014
Discussion open until: May 2, 2014
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.