Construction Comparative Guide

• Published date: 24 January 2022
• Subject Matter: Real Estate and Construction, Construction & Planning
• Law Firm: Bodipalar Ponnudurai De Silva
• Author: Ms Brenda Rangithan and Lim Jun Rui

1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

Construction projects in West Malaysia are primarily governed by the Town and Country Planning Act 1976 and the Street, Drainage and Building Act 1974, which set out the guidelines and standards for development plans and the proper control of buildings in Peninsular Malaysia. The other relevant regulations include:

• the Architects Act 1967;
• the Contracts Act 1950;
• the Federal Roads Act 1959;
• the Quantity Surveyors Act 1967;
• the Registration of Engineers Act 1967;
• the Malaysian Highway Authority Act 1980;
• the Construction Industry Development Board Act 1994;
• the Federal Roads (Private Management) Act 1984;
• the Road Transport Act; and
• the Town Planners Act 1995.

In East Malaysia, the main laws governing construction projects include the following:

• Sarawak
• • the Sarawak Land Code;
  • the Building Ordinance 1994; and
  • the Housing Developers (Control and Licensing) Act 1966.
• Sabah
• • the Sabah Land Ordinance;
  • the Local Government Ordinance 1961;
  • the Housing (Control and Licensing Developers) Rules 1980; and
  • the Town and Country Planning Ordinance (Cap 141).

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

The Construction Industry Payment and Adjudication Act 2012 governs payment claims within the construction industry. The aim was to establish a cheaper and swifter system of dispute resolution for work done and services rendered under construction contracts. The Asian International Arbitration Centre (Malaysia) is the adjudication authority which is primarily responsible for the administration and conduct of adjudication proceedings.

The Arbitration Act 2005 is also applicable to disputes in the construction industry and arbitration is often the preferred method of alternative dispute resolution, as it allows the parties to choose the arbitrators, who may be construction professionals. Also, arbitration proceedings are private and confidential, which can be a major consideration in complex construction disputes.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The Ministry of Works is responsible for the development plan for federal road networks nationwide.

The Construction Industry Development Board (CIDB), established under the Construction Industry Development Board Act, is a statutory body under the Ministry of Works which:

• regulates, develops and facilitates construction activities;
• promotes the construction services sector; and
• monitors the implementation of regulations in the construction industry.

The CIDB's powers include the power to:

• carry out activities relating to the construction industry;
• issue formal recognition and written assurances, including certificates for the purpose of certification; and
• impose fees and charges.

1.4 What is the general approach in regulating the construction sector?

The CIDB continually produces recommendations, guidelines and training in order to improve the regulation of the construction sector. It works together with other relevant bodies, such as local authorities, to ensure compliance with the specific regulations and/or laws under each party's jurisdiction.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

Several procurement methods are adopted for construction projects in Malaysia. The most common is the traditional/conventional procurement method, whereby works are divided into two parts: the architect is responsible for the design work, while the contractor is responsible for the construction work. This is a preferred option for government contracts and private sector projects.

The other procurement method that is popular in Malaysia is the design and build method. In this case, the contractor is responsible for both the design work and the construction work. The client deals directly with the contractor for completion of the building. This procurement method is suitable for large, complex and specialised projects.

The project delivery partner (PDP) model is also used in Malaysia. The PDP is responsible for the delivery of the full project within a specific timeframe. The PDP will also recommend the implementation and construction of all aspects of the work, and will ensure the performance of all other contractors. The PDP model is normally used in a large government projects, although in recent years the preference has been for turnkey contracts.

The type of procurement method is often chosen based on the client's preference and the complexity of the project. This is also the case where international parties are involved.

2.2 What are the advantages and disadvantages of these different methods?

• Traditional/conventional procurement:

• Advantages: The client has full influence and control over the overall process of the project. The client also has more time to review and correct the design before construction starts. This can increase the quality and functionality of the project.
• Disadvantages: As the design phase must be completed before construction can begin, the project may take a longer period of time to complete. If a conflict over defects arises, it can often be difficult to identify whether the defects have resulted from the design or from the materials and labour.
• Design and build
• • Advantages: The duration of the project is shorter, which can reduce the project costs. As one party has sole responsibility, the project is easier for the client to manage and the client will know the total financial commitments of the project in the early stages.
  • Disadvantages: If there is any change to the original design during the project, this may incur additional costs. The contractor has more control over the design; hence, the client has less of a say in this regard.
• PDP
• • Advantages: The PDP assumes complete risk ownership and accountability for delivery of the project within the agreed timeframe.
  • Disadvantages: The client has less control over the project and must rely on the management capability of the PDP. There may be changes to the project from time to time.

2.3 What other factors may influence the choice of procurement method?

The other factors that may influence the choice of procurement method include:

• costs;
• time;
• complexity;
• experience;
• quality; and
• flexibility to make changes and variations.

For example:

• the traditional/conventional procurement model presents advantages in terms of costs and quality, but at the expense of time;
• the design and build procurement presents advantages in terms of costs and time, but at the expense of quality; and
• the PDP model presents advantages in terms of time and quality, but at the expense of costs.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

The structure of construction projects will typically depend on the type of project. The various standard forms address the specifications of different types of projects (eg, design and build, public works, engineering works). The choice of structure may vary if international parties are involved, to ensure that all parties are sufficiently represented.

3.2 What are the advantages and disadvantages of these different structures?

The advantage is that the parties can choose between several different types of contracts which address the specifications of their particular project. The disadvantages are that sometimes the terms of these structures may be too rigid or stringent, and may favour one party more than the other.

3.3 What other factors may influence the choice of project structure?

Other factors that may influence the choice of project structure include:

• whether it is public or private;
• the source of funding; and
• the complexity or size of the project.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

Different financial facilities are available for construction projects in Malaysia, such as::

• Bridging loan: This is a short-term funding loan for developers which aims to help bridge gaps in cash flow during construction, pending the receipt of sales proceeds from end purchasers and/or end financiers. The proceeds from the end financing will be used to pay off the bridging loan.
• Syndicated loan: This is a financing facility jointly financed by a consortium of financial institutions to provide financing for large projects.
• Term loan: This is a commercial loan with a fixed interest rate and a monthly repayment schedule.
• Overdraft facilities: Deposit funds are available for reborrowing, with interest charged only on the daily overdraft balance.

Of these financial facilities, the bridging loan is the most common in construction projects in Malaysia.

The choice of financing facilities varies depending on the size and complexity of the project and parties involved. If international parties are involved, currency risk should also be considered.

4.2 What are the advantages and disadvantages of these different structures?

The advantages of a bridging loan are as follows:

• It is a short-term loan.
• The funds are available whenever required.
• The process is faster and the developer can obtain funds within a short period of time.

The disadvantages of a bridging loan are as follows:

• As it is a short-term loan, lenders may charge a higher interest rate.
• The loan is repaid from the proceeds of the end financing, so if the payment falls through, the borrower may be stuck with a large unexpected sum, which could lead to debt.

The advantages of a syndicated loan are as follows:

• It allows the borrower to access funds...