Faculty of Engineering

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1 Faculty of Engineering QUALITY PROVISIONS IN STANDARD FORMS OF LOCAL AND INTERNATIONAL CONSTRUCTION CONTRACT Quay Wei Kwang Bachelor of Engineering with Honours (Civil Engineering) 2008

2 QUALITY PROVISIONS IN STANDARD FORMS OF LOCAL AND INTERNATIONAL CONSTRUCTION CONTRACT QUAY WEI KWANG This project is submitted in partial fulfillment of the requirements for the Degree of Bachelor of Engineering with Honours (Civil Engineering)

3 UNIVERSITI MALAYSIA SARAWAK BORANG PENGESAHAN STATUS TESIS Judul: QUALTIY ASPECTS OF LOCAL AND INTERNATIONAL STANDARD FORMS OF CONSTRUCTION CONTRACT SESI PENGAJIAN: Saya QUAY WEI KWANG (HURUF BESAR) mengaku membenarkan tesis * ini disimpan di Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dengan syarat-syarat kegunaan seperti berikut: 1. Tesis adalah hakmilik Universiti Malaysia Sarawak. 2. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat salinan untuk tujuan pengajian sahaja. 3. Membuat pendigitan untuk membangunkan Pangkalan Data Kandungan Tempatan. 4. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat salinan tesis ini sebagai bahan pertukaran antara institusi pengajian tinggi. 5. ** Sila tandakan ( a ) di kotak yang berkenaan SULIT TERHAD (Mengandungi maklumat yang berdarjah keselamatan atau kepentingan Malaysia seperti yang termaktub di dalam AKTA RAHSIA RASMI 1972). (Mengandungi maklumat TERHAD yang telah ditentukan oleh organisasi/ badan di mana penyelidikan dijalankan). a TIDAK TERHAD Disahkan oleh (TANDATANGAN PENULIS) (TANDATANGAN PENYELIA) Alamat tetap: 31, JALAN GAMBUS 13, TAMAN DESAWAN KLANG, SELANGOR IR. TING SIM NEE (Nama Penyelia) Tarikh: 16 April 2009 Tarikh: CATATAN * Tesis dimaksudkan sebagai tesis bagi Ijazah Doktor Falsafah, Sarjana dan Sarjana Muda. ** Jika tesis ini SULIT atau TERHAD, sila lampirkan surat daripada pihak berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan tempoh tesis ini perlu dikelaskan sebagai SULIT dan TERHAD.

4 Final Year Project Report below: Title Author : Quality Provisions in Standard Forms of Local and International Construction Contract : Quay Wei Kwang Matric. No. : Has been read and certified by: Ir. Ting Sim Nee Supervisor Date

5 QUALITY PROVISIONS IN STANDARD FORMS OF LOCAL AND INTERNATIONAL CONSTRUCTION CONTRACT QUAY WEI KWANG This thesis is submitted in partial fulfilment of the requirements for the degree of Bachelor of Engineering with Honours (Civil Engineering) Faculty of Engineering UNIVERSITI MALAYSIA SARAWAK 2009

6 For the One and the ones who have been there from where it all began ii

7 ACKNOWLEDGEMENT I take this opportunity to express appreciation to all that have physically and morally contributed towards this thesis, primarily to my supervisor, Ir. Ting Sim Nee for her guidance even using up point of using up her own personal time and space. Also to the following correspondence (in no specific order): 1. Mr. Kamraj Nagayam, a partner from Skrine, one of the largest law firms in Malaysia. 2. Miss Tan Swee Im, a lawyer of a firm of hers who have been closely involved in the CIDB Standard Form of Contract drafting. 3. Mr. Lim Chong Fong, an experienced lawyer from Azman, Davidson & Co 4. Ir. Oon Chee Kheng, a lawyer of his own firm and Vice President of IEM; who has also been closely involved in the CIDB Standard Form of Contract drafting. 5. Sr. Bong Siak Khiun, a seasoned quantity surveyor from KTA (Sarawak) Sdn Bhd 6. Ir. Kueh Kim Meow, an resourceful engineer from Hock Seng Lee Berhad where I utmostly value their time out of their busy schedule and also literature shared, in particular Ir Oon and Mr. Nagayam. Not forgetting the fellow course mates who were there with me throughout this dissertation. You are the best! iii

8 ABSTRACT Standard forms of contracts have been in use in the Malaysian construction industry as a means to expedite contractual and legal duties where clients often seek a quick approach to arrive at an agreement with their contractors. Various forms have been drafted by various professional bodies and organisations, both locally and internationally, to closely meet the demands of the market where quality is one its objectives. Experts within this field are sought together with the comparison of clauses made to provide a robust study. This dissertation investigates the adequacy of the provision of these forms and suggests suitable changes to the current standard forms within this study. Evidently, the standard of quality in the Malaysian construction industry remains at a low and becomes an evergreen issue. Whether these forms sufficiently cater for quality, remains disputable. However it is an undeniable fact that quality provisions can be further enhanced. Since, the one-size fits all postulate may not hold any grounds especially when it comes to ensuring quality on site, the question of validity and effectiveness of standard forms becomes a pertinent one. v

9 ABSTRAK Borang kontrak digunapakai di Malaysia sebagai satu langkah mempercepat proses penyediaan kontrak dan guaman di mana klien sering kali ingin mencari jalan mudah bagi mencapai kata sepakat dengan kontrakor. Borang-borang kontrak ini telah disediakan oleh pebagai badan dan organisasi professional tempatan mahupun antarabangsa, bagi memenuhi kehendak pasaran di mana kualiti menjadi salah satu matlamatnya. Pakar-pakar dalam bidang ini ditemuduga selari dengan perbandingan klausa bagi mewujudkan kajian yang mampan. Tesis ini menkaji kepadatan provisi borang-borang ini dan menyarankan perubahan yang sewajarnya. Ternyata, peringkat kualiti di Malaysia masih rendah dan senantiasa menjadi isu. Sama ada borang-borang ini menanggung kualiti secara mencukupi, masih menjadi pertikaian. Walau bagaimanapun, hakikat yang tidak boleh dinafikan adalah provisi kualiti masih boleh dipertingkatkan. Oleh sebab, teori satu saiz bagi semua tidak dapat direalisasikan, terutama bagi memastikan kualiti di lapangan, maka soal kesahihan dan keberkesanan borang kontrak menjadi persoalan penting. v

10 TABLE OF CONTENTS CONTENT PAGE TITLE PAGE DEDICATION ACKNOWLEDGEMENT ABSTRAK ABSTRACT TABLE OF CONTENT LIST OF TABLES LIST OF FIGURES TABLE OF CASES i ii iii iv v vi xi xii xiii CHAPTER 1 INTRODUCTION 1.1 General The Standard Forms of Conditions of Contract 2T 1.3 Quality with respect to Standard Forms Problem Statement Hypothesis Aim and Objectives 9 vi

11 1.7 Scope of Study Structure of Thesis 11 CHAPTER 2 LITERATURE REVIEW 2.1 General Quality The Reality Middle Ring Road II Immigration Department, Putrajaya Jalan Duta Court Complex Quality The Lacuna in a Contract Quality in Dispute Resolution Quality Control as a Stick The NEC as a New Benchmark of Quality Summary 27 CHAPTER 3 METHODOLOGY 3.1 General Literature Review Case Study Interviews Structured Questionnaire Quantitative and Qualitative Analysis 34 vii

12 3.1.6 Results Summary/Inference Discussion and Recommendation Conclusion The Parameters Adequacy Clarity Versatility 37 CHAPTER 4 ANALYSIS 4.1 Introduction Salient Quality Driving Aspects Material and Workmanship PWD Form PAM Form CIDB Form FIDIC Form Testing and Inspection PWD Form PAM Form CIDB Form FIDIC Form Performance Bond 55 viii

13 PWD Form PAM Form CIDB Form FIDIC Form Dispute Resolution PWD Form PAM Form CIDB Form FIDIC Form Comparison in Adequacy Comparison in Clarity Comparison in Versatility Pugh Analysis Summary 93 CHAPTER 5 DISCUSSION AND RECOMMENDATION 5.1 Material and Workmanship Discussion Recommendation Testing and Inspection Discussion Recommendation 103 ix

14 5.3 Performance Bond Discussion Recommendation Dispute Resolution Discussion Recommendation Others Summary 113 CHAPTER 6 CONCLUSION 6.1 Introduction Research Overview Methodology Accomplished Research Findings Recommendation Constraints and Future Research Conclusion 122 REFERENCES 123 APPENDIX 126 x

15 LIST OF TABLE TABLE PAGE 4.1T Comparison of Material and Workmanship Tprovisions amongst forms 70 T4.2 Comparison of Testing and Inspection Tprovisions amongst forms 73 T4.3 Comparison of Performance Bond Tprovisions amongst forms 76 T4.4 Pugh Analysis for adequacy 91 T T4.5 Pugh Analysis for clarity 92 T4.6 Pugh Analysis for versatility 92 xi

16 Flowchart T LIST OF FIGURE FIGURE PAGE 3.1 T of Methodology 30 xii

17 TABLE OF CASES CONTENT PAGE Holland Hannen &Cubitts(Northern) Ltd v Welsh Health Technical Services Organisation (1981) 18 BLR JM Hill & Sons Ltd v London Borough of Camden (1981) 18 BLR Renard Constructions Ltd v Minister of Public Works (1992) 26 NSWLR Swartz &Son (Pty) Ltd v Wolmaransstad Town Council 1960 (2) SALR Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC xiii

18 CHAPTER 1 INTRODUCTION 1.1 GENERAL Ashworth (1998) defines a contract as a legally binding agreement made between two or more parties, by which rights are acquired by one or more to acts or forbearances on the part of the other or others. The essential elements of this definition are as follows: legally binding: Not all agreements are legally binding. In particular there are social or domestic arrangements which are made without any intention of creating legal arrangements. two or more parties: In order to have an agreement there must be at least two parties. In law one cannot make bargains with oneself. According to Hinze (2001) a contract is an agreement, usually between two parties, that is enforceable by law. Construction agreements are drawn up between two parties for their mutual benefit. While Totterdill (2001) defines a contract as any construction Contract is a legally binding agreement between two Parties the Owner, who is generally referred to as the Employer, and the Contractor. 1

19 Standard forms of contract are a type of contract most commonly employed in the construction industry. As its name suggest, it is a model contract which makes contractual agreements convenient. (Singh, 2002) 1.2 THE STANDARD FORMS OF CONDITIONS OF CONTRACT Fundamentally, the Standard Forms of Conditions of Contract or the General Conditions Document (hereinafter referred to as Standard Forms) are the rules governing the execution of the contract. Specifically, they define the powers and rights, responsibilities and obligations of the parties involved in the contract. Additionally, they detail the rights of the parties to the contract in that they specify the various courses of action which are open to either party in the event of the other party s failure to discharge his contractual obligations (Williams, 1992). In addition, the standard form of general conditions has been widely adopted as experience has shown that they facilitate the conduct of trade and have addressed the common pitfalls and shortcomings in most civil engineering contracts. The standard form also satisfies the equitable principle requiring that similar projects demand similar contracts. Moreover, the standard form of general conditions allocates risks relatively fairly between the parties. Such equitable apportionment of risk hinders contractors from adding risk premiums and allowances and thereby leads to a fairer commercial transaction between the parties involved in a contract (Singh, 2002). 2

20 Standard forms are prepared having the nature of work to be undertaken. Practitioners in the industry are more comfortable using a standard form of contract with which they are familiar and which is usually capable of interpretation by reference to readily available text books and case laws. (Thomas, 2001) It is said that familiarity should make compliance with the form easier and that previous court cases may aid in their interpretation. (Chan, 2006) This familiarity leads to administrative and cost efficiency, and minimises possible claims and disputes (Singh, 2002). They are often drafted and agreed by recognised bodies representing all sides of the industry which will be affected by them. This last point is to some extent a disadvantage in that a form of contract, by committee, is often a compromise containing some defective aspects of one form or another. (Thomas 2001) Standard forms of contract have been in used both locally and internationally, namely the Pertubuhan Arkitek Malaysia (PAM) standard forms of building contracts and Public Works Department (PWD) Form of Construction Contract which is used locally and Fédération Internationale des Ingénieurs-Conseils (FIDIC), the International Federation of Consulting Engineers and which is used internationally. There are more standard forms of contract in existence; however, this study will gravitate on the aforementioned so as to give a better focus. Another local contract which is to be looked upon is the Construction Industry Development Board (CIDB) Standard Form of Contract which is rarely used. Although less popular, this form is of a different standard in terms of drafting and would provide a more insightful research. 3

21 The Pertubuhan Arkitek Malaysia (PAM) standard forms of building contracts are the staples of the Malaysian construction industry, with an estimate of 90% of building contracts in the private sector are based on a PAM form. The antecedent of the PAM contracts, The Malaysian 1969 Standard Form of Building Contract, or more commonly referred to as the PAM/ISM 1969 Form, was issued with the consent of PAM and Institute of Surveyors of Malaysia ISM in As with other building contracts, it spells out the roles, obligation and consequences involved, with the intention to mitigate conflicts and to achieve a common end. (Rajoo 1999) The PAM Contract 2006 (PAM06) was officially launched on 05 April 2007 and is said to be a redraft of it predecessor, the PAM Building Contract, Edition 1998 (PAM98). The drafting of PAM06 was done by the PAM Contract Review Committee, with many rounds of the construction industry consultative reviews and feedback. The PWD forms of contract are the de facto standard forms of construction contract used by the Malaysian public sector. To streamline this study, the PWD 203 and 203A forms will be focus since it involves the relationship between the client i.e. the Government and the Contractor. To make mention, the PWD 203N form caters for nominated subcontractors, PWD 203P for nominated supplier and PWD DB/T form for cases of design and build or turnkey system of procurement. The CIDB Standard Form of Contract for Building Works is still in its first revision (2000). The CIDB form is significantly thicker than the other forms. Aside from the more lengthy clauses, the CIDB form also contains a separate section of appendix where 4

22 optional modules are available for different situations and requirements of a particular contract. It is interesting to note that a Guide to the standard form is also published to aid users. The most commonly used Conditions of Contract for international construction projects are published by the Fédération Internationale des Ingénieurs-Conseils (FIDIC), the International Federation of Consulting Engineers. The traditional FIDIC Conditions of Contract Works of Civil Engineering Construction, commonly referred to as The Red Book is the one which will carry weight. In 1999, this was superseded by the FIDIC Conditions of Contract for Construction which comprise of: The General Conditions; and The Particular Conditions However, to make mention, there are other sets of contracts for specific conditions which include; but are not limited to the Conditions of Contract for Design Build and Turnkey (The Orange Book) and the Conditions of Contract for Electrical and Mechanical Works (The Yellow Book). These standard contracts function to simplify agreements when it comes to engineering construction contracts by reducing the dependence on legal drafting. Ironically, they have been drafted with the help of legal advisers and will consequently lead to the need of their services to interpret clauses due to the incomprehensible jargon associated contracts. For instance, a study by Bunni (as quoted by Broome, 1997), revealed that 86% of the sentences in the FIDIC contract could be understood by only 4% 5

23 of the population, equivalent to those with an IQ of 130 or more. Nonetheless, standard forms of contract still play a vital role within the construction industry. 1.3 QUALITY WITH RESPECT TO STANDARD FORMS With respect to cost and time, quality unfortunately, becomes inferior and an often times is compromised for the former two, especially when these resources are limited. It is neglected factor in project management. (Barnes, 1988) However when analysed, the general mindset that quality will inevitably translate to higher cost can be eliminated. According to Juran (1998), Quality means those features of products which meet customer needs and thereby provide customer satisfaction. In this sense, the meaning of quality is oriented to income. The purpose of such higher quality is to provide greater customer satisfaction and, one hopes, to increase income. However, providing more and/or better quality features usually requires an investment and hence usually involves increases in costs. Higher quality in this sense usually costs more. Quality can also mean freedom from deficiencies i.e. freedom from errors that require doing work over again (rework) or that result in field failures, customer dissatisfaction and claims. In this sense, the meaning of quality is oriented to costs, and higher quality usually costs less. For this reason, quality is not a luxury that only parties with large capitals can take pleasure in but rather a means of curtailing loses and also increasing productivity. Therefore, the only apparent grounds to not integrate quality into a work are most likely 6

24 due to misconception and the myopic view of quality, which hinders the foresight of the benefits of quality. With respect to the effect on quality on general conditions, Bubshait (1994) defines quality as the degree to which the general conditions promote the meeting of the project s established requirements of materials and workmanship. In general, quality aspects are addressed in the: General Section, where a brief description or the overview are provided. Materials Section, where a specified quality of materials is to be used. Workmanship Section, where performance and methods of work are spelt. Testing and Inspection Section, where the procedures and obligations of testing are spelt out. Specifications, an additional attached set of itinerary specifying the actual work quality. 1.4 PROBLEM STATEMENT Malaysia has been somewhat a contractual backwater. Her standard forms have been operating based upon JCT conditions of contract save for the new CIDB Contract released in year (Chan, 2006) 7