Late Payment and Nonpayment Encountered by Contracting Firms in a Fast-Developing Economy

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.