Basic of Construction Contracts.

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Basic of Construction Contracts.indd 2 18/3/2019 10:43:59 AM
 Nor Ainah Abdullah

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 © UiTM Press, UiTM 2019

All rights reserved. No part of this publication may be reproduced, copied, stored
in any retrieval system or transmitted in any form or by any means;
electronic, mechanical, photocopying, recording or otherwise; without
prior permis s ion in w riting from the D irector of U iTM P res s ,
Universiti Teknologi MARA, 40450 Shah Alam, Selangor Darul Ehsan, Malaysia.
E-mail: [email protected]

UiTM Press is a member of

MALAYSIAN SCHOLARLY PUBLISHING COUNCIL

Perpustakaan Negara Malaysia Cataloguing-in-Publication Data

Nor Ainah Abdullah

Basic of Construction Contracts: PAM, PWD, CIDB and Fidic Standard
Forms / Nor Ainah Abdullah.
ISBN 978-967-363-516-0
1. Construction contracts--Standards--Malaysia.
2. Government publications--Malaysia. I. Title.
657.86909595

Printed in Malaysia by: UiTM Printing Centre

Faculty of Art & Design
Universiti Teknologi MARA
40450, Shah Alam
Selangor

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 Contents

List of Figures xi
List of Tables xiii
List of Abbreviations xv
Lists of Statutes xvii
List of Cases xix
Preface xxi
Acknowledgements xxiii

INTRODUCTION TO CONSTRUCTION CONTRACTS 1

Standard Forms of Contract 1
Features of a Traditional Construction Contract 2
General Obligations of Parties 4
Persons Connected with the Contract 7
Lump Sum Contracts 10

CHAPTER 1: CONTRACT DOCUMENTS 13

Introduction 13
Priority of Documents 14
Dealing with Conflicts between Documents 15
and Statutory Requirements
The Standard Form of Contract 17
Bills of Quantities 20
Supply of Contract Documents 24
Service of Notices and Other Documents 27

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CHAPTER 2: CONTRACT SUM 29

Introduction 29
Sufficiency of the Contract Sum 31
Adjustments to Contract Sum 32
Items Included in Adjustments – Financial Claims 33

CHAPTER 3: VARIATIONS 37
Introduction 37
CA’s Instructions 38
What Amounts to a Variation? 47
Variations Must be Genuine 49
Works outside the Contemplation of the Contract 51
Power to Order Variations 51
Contractor’s Compliance and Right to Query 55
Valuation of Variations 57
Valuations – Addition to or Subtraction from Contract Sum 61
Loss and Expense Arising from Variations 62
Billing Variations 63

CHAPTER 4: TIME AND MONEY EXTENSIONS 65

FOR DELAY
Liquidated Damages (LD), Extension of Time (EOT) 65
and, Loss and Expense
Causes of Delay and Remedies 67
Prevention Principle 68

CHAPTER 5: EXTENSION OF TIME 69

FOR COMPLETION
Introduction 69
Benefits of the EOT Provisions 71
The Grounds for Extension (Relevant Events) 72
Conditions Precedent to a Claim for Extension 75
General Procedure for Applying EOT 80
Fixing New Completion Date (Adjustment 83
of Completion Date)
Concurrent Delay – Employer Delays when Contractor 88
Already in Delay
Proviso 90
Contractor’s Work Programme 91
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CHAPTER 6: MONEY CLAIMS – LOSS AND EXPENSE 99

Introduction 99
Loss and Expense (to the Contractor) Caused by Matters 9
Materially Affecting the Regular Progress of the Works
The Matters Affecting Regular Progress of the Works 100
Procedure for Claims and the Ascertainment 103
of Loss and Expense
What May Be Included in a Claim? 106
Payment of Claims – Additions to Contract Sum 109
Contractual Claims and Common Law Damages 109

CHAPTER 7: PAYMENT TO THE CONTRACTOR 111

Payments and Certificates 111
CA as Certifier 116
Application by Contractor 118
Interim Valuations 119
Valuation of the Work – Items Included 122
Amounts to be Included in Interim Certificates 128
Interim Certificates 130
Retention Money 132
Set-off – Withholding Payment 133
Payment within the Period of Honouring Certificate 134
Remedies for Non-payment by the Employer 135
Final Account – Final Adjustment to the Contract Sum 137
The Final Certificate 142
Construction Industry Payment and Adjudication Act 2012 145
– Entitlement to Payment

CHAPTER 8: COMMENCEMENT, PROGRESS 147

AND COMPLETION
Introduction 147
Commencement Date and Possession of Site 148
Regular Progress 153
Completion Date 154
Practical Completion 155
Consequences of the Certificate of Practical Completion 160
Certificate of Non-completion 161
Defects Liability Period 162
Rectifying Defects – General Procedure 164
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Final Completion 167

Partial Possession and Sectional Completion 167
Maintaining Quality 170

CHAPTER 9: DAMAGES FOR DELAY IN COMPLETION 177

Delay, LD and EOT 177
Liquidated Damages 179
Precondition to Employer's Right to Deduct LD 180
Deduction of LD 181
Completion Date Changed to a Later Date 182
Calculation of LD – Pre-Estimate of Loss That Employer Suffers 183
Proof of Actual Loss and Agreed Amount 184
LD and Payment Certificates 185
LD for Partial and Sectional Completions 186
Loss of Right to LD – Delay Partly Employer’s Fault 186
LD of the Subcontractor 187

CHAPTER 10: SUSPENSION OF WORK 189

Introduction 189
PAM 189
CIDB 191
PWD 192
FIDIC 193
CIPAA 2012 – Suspension for Non-payment (S.29) 194

CHAPTER 11: TERMINATION OF THE 197

CONTRACTOR’S EMPLOYMENT BEFORE
COMPLETION
Introduction 197
Termination by the Employer (default by Contractor) 200
Procedure for Termination by the Employer 200
Consequences of Termination by the Employer 205
Termination by Contractor (default by Employer) 208
Procedure for Termination by the Contractor 210
Consequences of Termination by the Contractor 211
Termination Due to a Force Majeure Event 213
Termination Due to Bankruptcy or Insolvency 215
Termination on Corruption 217
Termination without Default 217
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CHAPTER 12: SUBCONTRACTING 219

Introduction 219
Domestic Subcontractor 221
Nominated Subcontractor 222
Contractor’s Responsibilities for NSC 225
Payment of NSC 230
Contractor’s Reasonable Objections and Re-nomination of NSC 232
Repudiation and Re-nomination of NSC 233
General Attendance Upon Subcontractor 234
Nominated Supplier 236
Assignment and Subcontracting 237

CHAPTER 13: INDEMNITIES, INSURANCES 241

AND BONDS
Introduction 241
Some Basics 242
Indemnities – Injury to Person and Damage to Property 251
Insurance against Injury to Persons and Damage to Property 253
Insurance of the Works 256
Insurance of New Building/Works by the Contractor 260
Insurance of New Building/Works by the Employer 265
Insurance of Existing Building or Extension – by the Employer 266
Complying with SOCSO and Insurance for Protection 267
of Workmen
Performance Bonds and Guarantees 269
Payment Bond 274

CHAPTER 14: SETTLEMENT OF DISPUTES 277

Introduction 277
Mediation 278
Adjudication 279
Dispute Adjudication Board (DAB) 280
Arbitration 281

Appendixes 289
References 325
Index 327

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 List of Figures

Figure A.1: Components of a Traditional Arrangement 10

Figure A.2: Contractual Relationships in the Traditional 10
Construction Contract
Figure A.3: Components of Design and Build Arrangement 10
Figure A.4: Contractual Relationships in Design and Build 10
Contract
Figure A.5: Contractual Arrangement and the Standard Forms 12
in Use
Figure 1.1: Contract Interpretation Guidelines 14
Figure 2.1: Basis of Fixed Price Lump Sum Contract 31
Figure 2.2: Contract Sum Adjustment 35
Figure 3.1: Architect’s Instructions (after PAM) 40
Figure 3.2: S.O.’s Instructions (after FIDIC) 40
Figure 3.3: Engineer’s Instructions (after FIDIC) 40
Figure 3.4: Mode of CA’s Instructions 43
Figure 3.5: Effect of AI If Not Queried by Contractor 55
(after PAM)
Figure 3.6: Contractor’s Compliance and Right to Query AI 56
(after PAM Clause 2)
Figure 4.1: Illustration of Delay in Completion, Extension 66
of Time and Liquidated Damages
Figure 5.1: Procedure for Application and Response 81
to EOT (after PAM 2006)
Figure 5.2: Application and Response to EOT 86
(after FIDIC 1999)

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Figure 5.3: Application and Response to EOT 86

(after PAM 2006)
Figure 5.4: Chestermount Case: Gross and Net Delay 87
(PAM 23.9, CIDB 26.4)
Figure 5.5: Model for Deciding on EOT 89
Figure 7.1: Payment Schedule (after PAM) 135
Figure 7.2: Payment Schedule (after FIDIC) 135
Figure 7.3: Preparation of Final Account 141
(after PAM Clause 30.10)
Figure 7.4: Preparation of Statement at Completion 141
(after CIDB Clause 42.5-42.6)
Figure 7.5: Preparation of Final Account (after CIDB Clause 142
42.7-42.8)
Figure 7.6: Preparation of Statement at Completion (after 142
FIDIC Clause 14.10)
Figure 7.7: Preparation of Final Statement (after FIDIC 142
Clause 14.11-14.13)
Figure 8.1: Procedures at Practical Completion of Works 159
(after PAM Clause 15)
Figure 8.2: Procedures at Practical Completion of Works 160
(after FIDIC Clause 10.1)
Figure 8.3: Certificate of Non-Completion and LD (after PAM) 162
Figure 8.4: Defect Rectification after Completion 169
(after PAM 2006)
Figure 8.5: Defect Rectification after Completion 169
(after FIDIC 1999)
Figure 8.6: Stages of Completion and Certification 169
(after PAM 2006)
Figure 8.7: Stages of Completion and Certification 170
(after FIDIC 1999)
Figure 9.1: Impact of EOT on LD 178
Figure 11.1: Procedure for Termination by the Employer – 203
(PAM Clause 25.2, CIDB Clause 44.1 (a-b))
[Parallel Procedure for Terminating Contractor’s
Own Employment (PAM Clause 26)]

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Figure 11.2: Procedure for Termination by the Employer – 204

PWD Clause 51 [Parallel Procedure for Terminating
Contractor’s Own Employment (PWD Clause 55)
but Employer to Remedy Default within
a Specified Period]
Figure 11.3: Procedure for Termination by the Employer – 204
FIDIC Clause 15 [Parallel Procedure for
Terminating Contractor’s Own Employment
(FIDIC Clause 16)]
Figure 11.4: Procedure for Termination by the Employer – 205
CIDB Clause 44
Figure 11.5: Procedure for Termination by the Contractor – 213
CIDB Clause 45
Figure 12.1: Types of Subcontracts 221
Figure 12.2: Contractual Arrangements in Nominated 225
Subcontracting (after PAM 2006)
Figure 13.1: The Insurance Scheme in Construction 242
Figure 13.2: Bonds 270
Figure 14.1: Timetable for CIPAA 2012: Process and Time 284
Overview (after KLRCA)
Figure 14.2: Settlement of Disputes – PAM Clauses 34 and 35 284
Figure 14.3: Settlement of Disputes – CIDB Clause 47 285
Figure 14.4: Settlement of Disputes – PWD Clause 66 285
Figure 14.5: Settlement of Disputes – FIDIC 1999 Clause 20 285

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 List of Tables

Table 1.1: The Contract Documents and Their Priority 15

Under the Standard Forms
Table 3.1: Definitions of Variations in the Standard Forms 49
Table 3.2: Valuation Rules for Varied Works (after PAM 59
Clause 11.6)
Table 3.3: Example of Billing of Variations 63
Table 5.1: Some Common Grounds for EOT 72
in the Standard Forms
Table 6.1: Common Heads of Claim for Loss and Expense 106
Table 6.2: Common Law and Contractual Claims 110
Table 7.1: Example of Breakdown of Preliminaries Items 124
Table 7.2: Computations of the Interim Amount 129
Table 7.3: Interim Payment Certificates – Timings 136
for Payments
Table 7.4: Provisions for Addressing Late Payments 137
Table 7.5: Computations of the Final Account (after PAM 138
Clause 30.11)
Table 11.1: Termination Under Common 200
Law and Under Table the Contract
Table 11.2: Grounds for Termination by the Employer 201
Table 11.3: Grounds for Contractor’s Own Termination 208
Table 13.1: Summary of Insurances and Bond 275
Table 14.1: Comparison: Arbitration, Adjudication 286
and Mediation

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 List of Abbreviations

CIDB Construction Industry Development Board Malaysia

FIDIC International Federation of Consulting Engineers
PAM Pertubuhan Arkitek Malaysia
PWD Public Works Department
AI Architect’s Instructions
ADR Alternative Dispute Resolution
BQ Bills of Quantities
CA Contract Administrator
CCGMD Certificate of Completion of Making Good Defects
CESMM Civil Engineering Standard Method of Measurement
CGMD Certificate of Making Good Defects
CIPAA Construction Industry Payment and Adjudication Act
CPA Critical Path Analysis
CPC Certificate of Practical Completion
CPM Critical Path Method
DAB Dispute Adjudication Board
DLP Defects Liability Period
DSC Domestic Subcontractor
EOT Extension of Time
ICE Institution of Consultant Engineers
KLRCA Kuala Lumpur Regional Centre for Arbitration
LD Liquidated Damages
NS Nominated Supplier
NSC Nominated Subcontractor
PAM 69 Pertubuhan Arkitek Malaysia 1969

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PC Sum Prime Cost Sum

QS Quantity Surveyor
RE Relevant Event
SD Schedule of Defects
SMM Standard Method of Measurement
SOCSO Social Security Organisation
VO Variation Order

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 List of Statutes

Arbitration Act 2005

Construction Industry Payment and Adjudication Act 2012
Employees’ Social Security Act 1969
JCT Standard Form of Building Contract, 1963
JCT Standard Form of Building Contract, 1980
Limitation Act 1953 (Amendment 1981)
Mediation Act 2012
Stamp Act 1949
Workmen’s Compensation (Foreign Worker’s Compensation Scheme)
(Insurance) Order 1998
Workmen’s Compensation Act 1952

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 List of Cases

Alghussein Establishment v Eton College (1988) 1 WLR 587

AMEC Building v Cadmus (1997) 13 Const LJ 50
Balfour Beatty v Chestermount (1993) 62 BLR 1
Bickerton v NWRHB (1969) 1 All ER 977, CA
Blue Circle Industries v Holland Dredging (1987), 37 BLR 40
City Inn v Shepherd Construction (2010), SCOH 190
Comm. for Main Roads v Reed (1974), 12 BLR 55
Davis Contractors v Fareham UDC (1956) AC 696
Dhamija V Sunningdale Joineries & Ors (2010) EWHC 2396 (TCC)
English Industrial Estates v Wimpey (1973) 7 BLR 122
Fairclough Building v Rhuddlan BC (1987) 30 BLR 25
FG Minter v WHTO (1980) 13 BLR 1
Gaymark v Walter Construction (1999), NTSC 143
GLC v Cleveland Bridge Engineering (1984), 34 BLR 50
Glenlion Construction v The Guinness Trust (1987)
Goldman v Patman (1958), 2 All ER 497
Hadley v Baxendale (1854), 9 Ex. Ch 341
Henry Boot Construction v Malmaison Hotel (1999) 70 Con LR 32
Henry Boots v Alstom (1999), BLR 123
Hickman v Roberts (1913), AC 229
Hounslow v Twickenham Gardens (1970) BLR 81
JF Finnegan v Sheffield CC (1988) 43 BLR 124
Jarvis & Sons v Westminster Corp (1970) 1 WLR 673
John Barker v Portman Hotel (1996) 83 BLR 31; 50 ConLR 43,
John Jarvis v Rockdale Housing (1986) 10 Con LR 51
John Mowlem v Crown Estates (1994), 3 Con LR 64

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Lubenham Fidelities v South Pembrokeshire, (1986) 33 BLR 39, 6 Con

LR 85
Mitsui Construction v AG of Hong Kong (1986), 33 BLR 1
Multiplex v Honeywell (2007), BLR 195
Nevill (Sunblest) v William Press (1981), 20 BLR 78
Peak Construction v McKinney (1970), 1 BLR 111
Pembinaan Leow Tuck Choy v Dr. Leela Medical Centre [1995] 2 MLJ 57
Percy Bilton v GLC (1982) 20 BLR 1
Rapid Building v Ealing Family Housing Association (1984) 29 BLR 5
RB Burden Ltd v Swansea Corporation (1957) 1 WLR 1167
Rees & Kirby v Swansea (1985)5 Con LR 34
Selva Kumar v Thiagarajah [1995] 1 MLJ 817
Sharpe v Sao Paolo (1873), L.R. 8 Ch. App.597 (Wallace 1995)
Sir Lindsay Parkinson v Comm. of Public Works (1950) 1 All ER 208
Sinclair v Woods of Winchester (No. 2) (2006) 109 Con LR 14
Sutcliffe v Chippendale & Edmonson (1971) 18 BLR 149
Sutcliffe v Thackarah [1974] AC 727; (1974) 4 BLR 16
Tate & Lyle Food and Distribution Co. Ltd v GLC [1981] 3 All ER 716
Temloc v Errill (1987), 39 BLR 30
Townsend v Stone Toms & Partner (1985), 27 BLR 26
Victoria Laundry v Newman (1949) 2 KB 528.
Walter Lawrence v Commercial Union (1984), 4 Con LR 37
Wates Construction v Bredero Fleet (1993), 63 BLR 128
Wells v Army and Navy (1902), 86 LT 764
West Faulkner v Newham (1995), 11 Con LJ 157
Williams v Fitzmaurice (1858), 3 H&N 844 (Wallace, 1995)

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 Preface

There are many standard forms of contract in use in the construction industry.
For students studying towards careers in the industry, to understand all
the standard forms can be a daunting prospect. This book is intended as a
helpful guide to the basics of construction contracts and the context of the
standard forms.

The standard forms under discussion are the local building forms
(PAM, CIDB and PWD standard forms for buildings) and the international
civil engineering form (FIDIC Red Book, 1999). While the building standard
forms contain closely similar provisions, the engineering form has a different
approach and content but there are some surprisingly common provisions
with that of the building forms.

The material is arranged under topic headings, for example, contract

documents, variations, commencement and completion, time and money
extensions etc., where the effect of the clauses can be gathered together. It
tries to explain, as simply as possible, the rights and duties of the contracting
parties and others named in the contract, and the procedures and tasks
expected of them to get through a project successfully. Usually, it falls to the
contract administrator to settle time, money and quality matters under the
contract, and this means he (and everybody else) must know the practical
effects of the terms in the contract and the relevant law.

Any contract or project will be affected by the requirements of the law

in many ways. This book is not intended as a review of the legal aspects
of the standard forms, but it attempts to state the relevant law relating to

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construction in simple terms. Although the decisions of the English cases

are not binding on the courts here, those decisions are helpful in unravelling
some of the more technically complex provisions of the standard forms.
Where the clauses have been reproduced, they are simplified to make for
easy reading.

Although written with students in mind, much of the material applies

to professionals involved in administering and managing a construction
contract.

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 Acknowledgement

We are grateful to the following organisations for permission to reproduce,

quote extracts from the respective conditions of contract

• Construction Industry Development Board Malaysia for the CIDB

2000, Standard Form of Contract for Building Works 2000, published
by Construction Industry Development Board Malaysia
• Pertubuhan Akitek Malaysia for the PAM 2006, Agreement and
Conditions of PAM 2006 published by Pertubuhan Arkitek Malaysia
• Public Works Department, Malaysia for PWD 203A 2010, Standard
Form of Contract to be Used Where Bills of Quantities Form Part of
the Contract, PWD Form 203A (Rev. 1/2010)
• International Federation of Consulting Engineers (FIDIC), Geneva
for FIDIC® Conditions of Contract for Construction for Building
and Engineering Works Designed by The Employer, First Edition.
Copyright© 1999 by FIDIC. Reprinted by permission of FIDIC.

We are also grateful to the following publishers for permission to

reproduce, quote extracts materials from their publication:

• John Wiley & Sons Singapore Pte. Ltd.

• Sweet and Maxwell, Asia Ltd.

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 For Abdul Karim, Atiqah, Amanina and Sakinah
and to my husband, Fauzi, for his support
during the writing of this book.

Students and teachers of construction related courses.

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 INTRODUCTION
TO CONSTRUCTION
CONTRACTS

STANDARD FORMS OF CONTRACT

It is a common practice in the construction industry to use the standard forms

of contract. A standard form is a pre-printed form of contract with prescribed
terms of contract specially drafted by professional and public bodies for
general use in construction projects. It contains the terms of agreement
between the employer and contractor, their rights and obligations, and
the work to be done. Many of the clauses in the contract have been court-
tested, so their legal interpretation is known and is familiar to construction
professionals. By using the standard forms, the parties can save cost and
time in negotiating and redrafting new clauses for every job.

Some standard forms adopt the ‘traditional’ procurement arrangement,

where the employer appoints the consultant designers to produce the design,
and then separately appoints the contractor to build the building as designed.
These forms are usually contracts for lump sum which means that the
contract sum is agreed at the time the contract is formed.

The traditional lump sum procurement standard forms commonly used

in construction, and referred to in this book are:

1. Agreement and Conditions of PAM Contract 2006 (with Quantities),

issued by Pertubuhan Akitek Malaysia, after this referred to as PAM.

2. CIDB Standard Form of Contract for Building Works 2000 Edition,

issued by Construction Industry Development Board Malaysia, after
this referred to as CIDB.

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3. Government of Malaysia, Standard form of Contract to be used where

Bills of Quantities Form Part of the Contract, P.W.D. Form 203A (Rev.
2010)after this referred to as PWD.

4. Conditions of Contract for Construction for Building and Engineering

Works Designed by the Employer, First Edition 1999, issued by the
International Federation of Consulting Engineers; the FIDIC Red
Book, after this referred to as FIDIC.

The PAM and CIDB forms are mainly for building works for private
sector projects, while the PWD form is for public sector. The FIDIC form
is widely used internationally for civil engineering works and for projects
that are funded or being under the purview of an international agency like
the World Bank, Asian Development Bank, etc. Although these forms differ
in structure and approach, they contain many common provisions and their
terminologies vary slightly.

FEATURES OF A TRADITIONAL CONSTRUCTION

CONTRACT

The key parties to a construction contract are the employer and the
contractor, and the contract between them is referred to as the ‘main’
contract. It contains the basic promise by the contractor to complete the
work and by the employer to pay the contract price.

Once the design by the consultants is complete, contractors are

invited to tender a price for its construction. After reviewing their tenders,
the employer contracts with the most suitable contractor to complete the
construction. Thus, the functions of design and construction are kept
separate. The practical consequence of this is that, if there is a design defect,
the employer may sue the consultants for breach of contract to recover his
damages, and if there is a construction defect, the employer may sue the
contractor.

In contrast, under a ‘design and build’ contract, the contractor is

responsible for the whole of the design and construction of the project. The
contractor is appointed based on a design brief prepared by the employer’s

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