Process and procedure for payment is it necessary for contractor to apply for certificate of

payment can payment be made without certificate deduction/set-off

Process and procedure for payment
Payment
Payment is a sum of money paid to someone or in the construction industry payment
means the amount of money paid by an employer for the estimated value of work properly
executed and materials and goods delivered to site by the contractor which it is the sum of
money paid to Contractors after their works or certain projects has been successfully
complete.
In an engineering and construction contract, the Contractor has to fulfill his
obligations to carry out all the works stated under the Contract. On the other hand, the
Employer must keep his promise of giving necessary consideration which in most cases
comes in monetary form.
Types of Payment
In practice, the payment to the Contractor for works done under the building contract has
a variety of forms but in Malaysia however, the types of reimbursing the contractor are as
follow:
1

Interim Payment

During contract period, interim payment is the most common method used or it is so
called cost progress payments. In Standard Forms, the interim or cost progress payments are
affected by the issuance of Interim Certificate.
Interim Certificate is a certificate issued by the supervising officer binding the client to
pay the fitting-out contractor an agreed amount for work that has been completed. The failure
of the certifier to issue the relevant interim certificates in line with the stipulation of the
contract can expose his employer to a possible claim of breach of contract by the contractor.
The frequency of periodic payment could be varied from fortnightly to monthly because the
actual duration would be as agreed in the contract conditions signed.

B
Brief Description of Relevant
Contract Clauses

PAM
2006

JKR
203A

Contract Clauses
IEM
CIDB
1989
2000

The Contractor shall submit a

30.1
47 (a)
payment application at
The Interim Claim Interval stated
in the Appendix.
The Architect / Engineer /
30.2
14 days after
Superintending Officer
within
Valuation
shall within the stipulated period
21
after the Contractor
days
submitted Interim Payment
Claims issues the Interim
Certificate.
The Employer has to make the
30.2
47 (d)
payment to the
Contractor within stipulated
period after the
Architect / Engineer /
Superintending Officer issued
The Interim Payment Certificate.
Interest imposed on Employer for
30.17
late payment.
Table 1: Contract Clauses

FIDIC 4th
Edition

42.1

50.2

42.2(a)
within
21 days

50.3 (a)
14 days after
application

42.9 (a)

50.3 (c)

42.9 (b)

Description of Relevant
Contract Cla
2

Stage Payment

It is defined as the payment of an agreed amount when an agreed stage of the project has
been completed. The term stage payment is used when the payments are made at specific
stages of work. This mode of payment is often used in small lump sum contract without
quantities where a proportion of the total sum is agreed to be paid over in a number of stages.
These proportions are fixed and do not depend upon any re-measurement of work.
Nevertheless, the application of this mode of payments is more common in Turnkey, Design
& Build as well as contracts involving repetitive works.
3

Payment Before Commencement

This is the sum of money paid to the Contractor by the Employer well before the work
involved is executed. This practice is usually done in public work contracts. Some
construction industry consultants focused on the residential projects suggest collecting a 50
percent payment before work even starts. The main purpose of implementing this type of
payment is to help the Contractor to start up and finance the Contract without resorting
unnecessary external borrowings.
4

Payment After Completion

This is the method of payment to Contractor triggered by the achievement of the Contract
milestone of practical of substantial completion and or the so called handing over of the
Works to the Employer. Hence, unless such stage is reached and certified by the contract
administrator, the contractor is not entitled to any payment whatsoever.
In using this method, the Contractor is basically financing the works to a large degree,
which costs would eventually build into the contract sum. The Employer must also be
prepared to shoulder this burden as well as be in a position to source and effect payment
ultimately of a sizeable lump sum amount upon the taking over of the works.

Figure 1 : Construction Payment Flow Chart

Interpretation of Express Payment Provisions in PAM Contract 2006 (With Quantities)

In PAM Contract 2006 (With Quantities) contain specially drafted clauses which
govern all aspects of the subject of payment under the contract.
The schedule of payment is usually agreed at initial phase of contracting. Unlike
public works contract, the most common payment is progress payments. A regular
disbursement of payment should be paid by the Employer to the Contractor based on work
done on site.
The express contractual provisions in PAM Contract 2006 (With Quantities) are
discussed:
Procedures for Payment
Clause 30 of the PAM Contract 2006 (With Quantities) deals with all certificates and
payment. In the same time regulates the entire subject of payment under the contract.
There are three main types of certificates in relation to payment which are Interim
Certificates, Penultimate Certificate and Final Certificate. Before practical completion, the
Contractor is entitled to Interim Certificates at intervals of one month unless otherwise stated
in the Appendix. The Interim Certificates state the amount due to the Contractor from the
Employer. Final Certificate is a statement as to the amount of money finally due between the
Employer and Contractor.
In general, an interim valuation is carried out by submission of claim by the
Contractor for the agreed period, usually end of the month. The amount will comprise value
of work properly executed on site to be certified by the Architect after received the payment
valuation from the Quantity Surveyor.
Payment will be made by Employer on the issuance of Interim Certificate until
Practical Completion, the following certificate may be issued is to release one-half of the
retentions held by the Employer.

Thereafter the Contractor will submit a Final Account to the Architect and a
reconciliation of the contract sum will be made. Penultimate Certificate is issued for release
of Retention Sum and outstanding payment to Nominated Sub Contractor and Nominated
Supplier within fourteen days of Certificate of Making Good Defects. Final payment of
outstanding monies will be released after Defect Liability Period and a Final Certificate will
be issued.
The Employer is required to pay the sum stated in the certificate as being due to the
Contractor so he fulfils his contractual obligations.
Clause 30.1 requires the Contractor to submit his claim with details and particulars for
payment for the Architect to certify interim payments. However, the condition of this clause
is most often being amended, therefore the legal effect of the application of payment always
become an issue of dispute. Decisions made shall based on the precise wording employed the
circumstances and the intention of both parties.
Under PAM Contract 2006 (With Quantities), non-compliance to clause 30.1 is not
fatal to the Contractors entitlement, since the Employer is obliged to pay the Contractor for
discharging his obligations.
Timing of Payment
In the construction industry, it is common practice for the payment of the contract
sum to be made by installments. Under PAM Contract 2006 (With Quantities), Contractor is
reimbursed for work done at regular intervals, usually monthly during the currency of the
Contract. Interim payments are affected by the issuance of Interim Certificates, a term
referring to the periodic certification of money due to the Contractor.
Once the Contractor commences with the works and executes sufficient work in the
interval leading up to the agreed period for certification, the Quantity Surveyor is obliged to
undertake the necessary valuation. Failure of Quantity Surveyor in undertaking valuation and
causes the Architect unable to issue Interim Certificate within twenty-one days upon receipt
of Contractors claim, is a breach of contract for which the Employer is liable.
The issue of Interim Certificates is a condition precedent to payment. Clause 30.1
stated that the Architect will issue all certificates to the Contractor with a copy to the

Employer. After that, the Employer has to pay the payment due to the Contractor within the
Period of Honoring Certificates. Failure to pay within the set period is a breach of contract.
The Contractor has become entitled to payment thereafter within the Period of
Honoring Certificates stated in the Appendix, which will be 21 days from the issue unless a
different period is specified in Contract.
The English Court of Appeal held that The Contractor shall be entitled to payment of
the sum stated in the Interim Certificate to be due to the Contractor from the Employer.
Therefore the Employer has to act on the copy sent to him by the Architect and make
payment promptly on or before the due date.
When the Quantity Surveyor carry out valuation and what is the period taken by the
Quantity Surveyor to carry out valuation does not stated clearly in the conditions. Therefore,
in practice, it is common for the Contractor to follow up closely with the Quantity Surveyor
to ensure that the claim is being valued as soon as possible.
The Period of Honoring Certificate shall commence upon the receipt of the Interim
Certificate by the Employer, not the issuance of Interim Certificate by the Architect. In
practice, the Contractor gets the Interim Certificate from the Architect and sends to Employer
by hand to ensure the payment is released as soon as possible.

Quantum of Payment
In terms of progress payments, the amount to be paid by Contractors are usually based
on the certified Interim Certificate but there are certain clauses provide for situations where
the Employer is entitled to deduct amounts from that certified in interim payment certificates.
The process of computing the quantum or amount due to the Contractor at the periodic
payment involves a process so called valuation
Clause 30.2 lays down the components that are to be covered by an Interim Certificate
which are:

Total value of work properly executed. This includes, of course, work executed by

Sub-Contractors.
Total value of materials and goods delivered to site and off site. The materials and
goods must be adequately protected against the weather or other casualties such as
theft and various insurance risks. Besides that, the materials and goods must have

been reasonably, properly and not prematurely bought to the site.

The total value of work properly executed is reflected in the amount due in the
Interim Certificate. However, an Interim Certificate is an approximate indication of
the value of work executed and the corresponding amount due to the Contractor.
Clause 30.3 states that if there is any over certifications or under certifications, there
can be a commensurate revision in the subsequent certificate.

Interim Certificate is allowed to be corrected by the Architect but limited to genuine

errors and discrepancies in preparing the certificates. The Architect is entitled to take a fresh
view of the state of the works each time he issues an Interim Certificate.
This means the Contractor is entitled to payment of the sum actually stated in the
Architects Interim Certificate even if the certificate contains a latent or patent error. It is
clear that Architects Certificate may be challenged but its immediate effect is equivalent to
that of a binding certificate. The certificates may be challenged only through proper
contractual channels, usually by arbitrations.
In certifying payments, the Architect is placed in position of impartiality and is required
to act in a professional manner while exercising independent judgments. The determination of
the amount due to the Contractor has to be undertaken professionally and with due skill and
case as any default, omission and deficiency may render the Employer in breach of his
contractual obligations.
Although corrections can be made, but the Architect must be wary not to breach his duty
of care to the Employer in the certification process he can be liable for breach of contract or
in tort of negligence since he does not enjoy any immunity in discharging that role.

Deductions of Payment/Set-off
Under PAM Contract 2006 (With Quantities), the Employer is entitled to set-off the
amounts previously stated as due in Interim Certificates and retention sum from the total
value of work done up-to-date. It is clear that the Employer has no right to set-off the amount
stated as payment due to the contractor under Architects Certificate unless otherwise
expressly stated in the contract.
The Employer is allowed to make deductions in the following situations:
Clause 2.4 - Where the Employer employs and pays others to carry out work after failure by
the Contractor to comply with an instruction of the Architect.
Clause 4.4 Where the Employer suffers losses on Contractors non compliance of statutory
obligations, notices, fees and charges.
Clause 5.1 - Where the Employer suffers on Contractors wrong setting out.
Clause 6.5(e) - Where the Employer pays for the lower valued, non-defective works with
Architects issuance of Variation Order for reduction in value and payment to Contractor.
Clause 6.7 - Where the Employer employs and pays others to carry out work after failure by
the Contractor to comply with an instruction of the Architect.
Clause 14.4 - Where the Employer suffer losses on Contractors false warranty on the
materials.
Clause 15.3(b) - Where the Employer employs and pays others to rectify minor defects when
the Contractor does not comply own undertaking to rectify.
Clause 15.3(c) - Where the Employer leave the minor defects unrectified and cost deducted
from Contractor.
Clause 15.4 - Where the Employer employs and pays others to carry out rectification work
after failure of Contractor to attend the defects in schedule of defects.

Clause 15.5 - Where the Employer employs and pays others to carry out rectification work
after failure by the Contractor to rectify during Defects Liability Period.
Clause 19.5 - Where the Employer takes out third party insurance after default by the
Contractor to take out such insurance.
Clause 20.a.3 - Where the Employer takes out insurance of the Works after default by the
Contractor to take out such insurance.
These deductions are not reflected by the Architect or Superintending Officer (S.O) in
the interim certificates themselves, but are instead deducted by the Employer from the
amount stated as due in the interim certificates when making payment.
Compare with PAM Contract 1998 (With Quantities), PAM Contract 2006 (With
Quantities) provide more conditions for the Employer to set-off Contractor. This increases the
Contractors liabilities while ensuring the Contractor is responsible and careful while
executing the Works.

The certificate of payment is necessary to ensure that the interest between contractor
and employer is guaranteed. Certificate of payment can be a proof in payment process and all
the payment is follow the process that have been told or stated in Contract Document. It is
also make sure that the contractor has been paid in an appropriate ways. This certificate also
contains all information about the payment process.
Payments cannot be made without a certificate because if there is no certificates of
payments, then there is no proof that the contractor already be paid by the employers and
another problem can be arise.