CHAPTER 1 INTRODUCTION

1.1 Research Background

Construction has been part of our life since the beginning of human existence. Nowadays,

Construction section plays an important roles in the development of any nations. Thus, the

industry represents one of the most dynamic and complicated industry developments across the

globe. All modern civilization development will involve construction in varies form such as

building or roadway.

Construction industry is unique and complex. The complexity of the construction industry is

largely due to many parties involved including the owner or developer, the consultants, the

contractors, the subcontractors and many others. Each parties have their own role and

responsibility in order to complete a particular project. A client is the owner of the land who

engage a main contractor to oversee the construction site. A subcontractor, on the other hand, is

the contractor who deals with the main contractor to construct a specific aspect of the main

contractor’s work (Lew at al., 2012).

In majority of construction projects, subcontractors often play an extremely important role.

Generally, the main contractor will sublet part of their work to subcontractor due to their lack of

knowledge in some specialized work such as plumbing works and electrical works. Main

contractor depends heavily on the expert services provided by subcontractors to improve

construction efficiency on construction projects. As a result of their expert services,

subcontractors can carry out specific works more effectively than main contractor (Markowitz,

2007).
The practice of subletting work to another contractor is not the sole privilege of the main

contractor. Due to the complexity of the modern construction industry, the subcontractor also

sublet their work to another lower-tier subcontractor. The phenomenon is known as the

multilayer subcontracting. For example, a main contractor can sublet his work to a concreting

subcontractor, formwork subcontractor or tiling subcontractor. The concrete subcontractor can

then further sublet part or entire of their work to another third party and so on as presented in

Figure 1.1 (Tam, Shen and Kong, 2010).

Figure 1: Multilayer subcontracting system (Tam, Shen and Kong, 2010)

In a typical project, subcontractors often performed 80% - 90% of the total project’s work.

Subcontracting is practiced more broadly in building construction project than in engineering and
industrial project. Malaysia, as a developing country, are having construction projects in every

urban area. The practice of subcontracting are widely practiced across every construction

projects including commercial, residential and civil engineering projects.

Although subcontracting practices is generally beneficial to the main contractor and the

completion of the project, many problem also arises from the subcontracting practices.

Nonetheless, the issues regarding subcontracting are rarely recognized and dealt with. As a

consequence, some projects are not finished on time or on assigned budget due to subcontracting

issues. In the worst case, the project will fail or unable to finish. Thus, it is very important to

manage the subcontracting in a project to minimize loses.

The main purpose of this research is to explore and minimize the issues regarding subcontracting

practices in Malaysia’s construction industry.

1.2 Problem Statement

Subcontracting has been a tradition for a long time in construction industry. It is impractical to

complete a project without subletting part of the work to subcontractors because different skills

and knowledge is required in different stage of the construction process. However,

subcontracting practices also introduce certain issues that affects both construction quality and

management (Choudhry et al., 2012)

Subcontracting is both beneficial and risky to the success of a project because the performance of

the subcontractor will drastically impact the performance of the project. Lew at al. (2012)

claimed that the ability of main contractor to appoint a suitable subcontractor is essential to the

success of a construction project. The statement also been reinforced by Mbachu (2008),

conforming that subcontractors is the major factor to the ability of main contractor to complete

the construction project on time with cost and quality assurance.

In Malaysia, subcontracting practices is associated with many issues. One of the biggest issue

arising from subcontracting is payment problem. Main contractor often withheld a high

percentage of subcontractor’s work done as a retention money. Other than that, the final payment

due to subcontractor is often delayed by main contractor. As a result, subcontractor will face

financial issues and directly affect his work.

Safety issues is also a major problem arising from subcontracting whereby subcontractor practice

a poor safety and health measure at the construction site. The construction sector has always

been regarded as one of the most hazardous sector compared to other sectors (Rozanah, 2015).

Safety precaution is mandatory in all construction activities from excavation work to structural

works. Nonetheless, subcontractors tend to ignore the safety precaution in order to gain extra

profit. As a consequence, construction site accident occurs in almost every project. Table 1.1
shows the statistic done by the Department of Occupational Safety and Health (DOSH) on fatal

accident in year 2018. The construction sector has recorded 232 accidents, which is among the

top 3 most hazardous sector.

Table 1.1: Malaysia Occupational Accidents Statistics by Sector Year 2018 (DOSH, 2018)

Non-
Permanent
SECTOR Death Permanent Total
Disability
Disability
Hotel and Restaurant 2 1 120 123
Utilities (Electricity, Gas, Water and Sanitary
5 168 173
Service)
Finance, Insurance, Real Estate and Business
5 22 190 217
Services
Construction 8 118 106 232
Transport, Storage and Communication 1 12 124 137
Manufacturing 197 62 2969 3228
Wholesale and Retail Trade 3 1 69 73
Public Services and Statutory Authorities 1 9 48 58
Mining and Quarrying 3 4 34 41
Agriculture, Forestry and Fishery 14 26 709 749
TOTAL 234 260 4537 5031

Communication issues arises with subcontracting especially when there is two or more layer of

subcontractor is involved. As the layer of subcontracting increases, the harder it is to pass down

order or information. In the fast paced nature of construction industry, communication issues will

severely impact the work progress and cause delay in a construction project.

The involvement of subcontractors in the construction industry presents challenges that will

affect the project’s performance in many ways. Therefore, to tackle the problem as mentioned

above, this research will answer the following questions.

i) What are the issues associated with subcontracting practices in construction industry

of Malaysia.
 ii) What are type of subcontractor and why do main contractor sublet work in

construction industry of Malaysia.

iii) What are the necessary action that needed to be taken in order to minimize the issues

associated with subcontracting practices in construction industry of Malaysia.

1.3 Research Objectives

The research objective are as follow:

i) To study the issues arising from subcontracting practices in construction industry of

Malaysia.

ii) To identify the type of subcontractor and why main contractor sublet work in

construction industry of Malaysia.

iii) To propose the necessary actions that needed to be taken in order to minimize the

issues arising from subcontracting practices in construction industry of Malaysia.

1.4 Scope of the Limitation

To complete the research, main contractor and subcontractor will be selected. Both of the parties

are directly responsible for the construction process and directly involved in the subcontracting

issues. Main contractor is the client who contractually engage with the subcontractor to perform

part of his contracted work the project owner or developer. Hence, the main contractor shall deal

with the subcontractor appropriately to reduce the subcontracting issues.

This research will be focusing on minimizing the issues arising from subcontracting practices in

construction industry of Malaysia. Thus, the research data will be collected primarily in the

Klang Valley in Selangor, Malaysia.

1.5 Significance of Study

The finding of this research will benefit two primary parties. The first party, consisting of the

builders including the main contractor and subcontractor. With minimum subcontracting issues,

they can proceed their work with minimum hindrance. As a result, they can finish their contract

work in time, with minimum cost and produce good quality. The second party who will be

benefited from this research is the owner of the project/building. By minimizing the

subcontracting issues, the completed building can be handover back to the owner on time with

higher quality assurance. The study will help them to uncover critical areas of subcontracting

issues and help them to implement an appropriate management process so that the subcontracting

issues can be minimized.

 CHAPTER 2 LITERATURE REVIEW

2.1 Introduction

In order to conduct a research, it is important to review past studies that were been done by

others. The previous chapter has overviewed and explained the practice of subcontracting. Other

than that, the problems which would arise from subcontracting have also been identified. This

chapter will further discuss the topic on the problem associated with subcontracting, type of

subcontractors, reason for applying subcontracting and the possible way to minimize

subcontracting’s issues based on reviews from literature.

2.2 Issues Arising from Subcontracting Practices in Construction Industry of Malaysia

2.2.1 Payment Issue

The first issue that arises from subcontracting practices is payment issue. Adnan, Faisal &

Bassam (2012) identified that delay in contract payment is one of the major causes of problems

between main contractor and subcontractor. A local culture of Malaysia’s local culture is that

subcontractor shall only be paid when the main contractor has received payment from the client.

The phenomenon is known as the “back-to-back payment”. In local industry practice, the back-

to-back payment clause is often included in the provision of their subcontract by the main

contractor. Mohamed Nor Azhari at el. (2014) stated that the back-to-back payment issue is more

relevant to nominated sub-contractor in case of main contractor does not received payment from

the client. As the main contractor delay in honoring payment to his direct subcontractor, all
layers of subcontractor will receive late payment as well (Samuel, 2011 & Munaaim, Dauurl and

Abdul-Rahman, 2007). The late or non-payment by the main contractor will have a serious effect

on subcontractor’s cash flow. A subcontractor may suffer from bankruptcy or become insolvent

from the cash flow problem. As a result, the completion of the project will be delayed.

2.2.2 Safety Issue

Another issue arising from subcontracting practices is safety issue. Patrick et al. (2014) identified

that the practice of subcontracting had an adverse effect on the safety of site workers. As the

layer of subcontract increases, the subcontractor will gain lesser and lesser profit from the

contract. Thus, majority of subcontractor ignore site safety measure in order to save cost

(Charan, Sidney and Andrew, 2017). Patrick et al. (2014) observed that subcontractor often

intended to complete their work in the shortest possible time in order to receive a greater amount

of progress payment. To achieve the goal, subcontractor tends to work in excess hour and

eventually, closing their eyes on the safety measures. As a consequences, the risk of site accident

will increase. Pia and Nadezha (2015) claimed that site accident happens more frequently in

specialist subcontracted work such as piling works because they are considered more dangerous

and hazardous.

2.2.3 Communication Issue

Adnan, Faisal & Bassam (2012) claimed that communication issues will arise from

subcontracting practice. A subcontractor has no direct communication with the consultant or

project client. When a decision is made by a consultant or project client, the decision will be
passed down to the main contractor in the form of work order or site instruction. Subsequently,

the main contractor will then issue another work order or site instruction to the subcontractor

who actually does the work. When the layer of subcontracting increases, the process will be

repeated multiple times, resulting in a lengthy communication chain. The same lengthy process

will be applied when the subcontractor intend to obtain an approval or respond to any site issues.

Other than that, a communication error might occur when the information is being transferred to

another party. For example, a main contractor might misunderstand the instruction from

consultant and convey an impropriate instruction to subcontractor. As a result, various dispute

will be happened. Wang et al. (2018) observed that poor and lengthy communication chain is one

of the major factor to cause a project delay.

2.3 Type of Subcontractors in Construction Industry of Malaysia

2.3.1 Domestic Subcontractor

Domestic subcontractor is the type of subcontractor who is selected and appointed by the main

contractor himself. The domestic subcontractor enters into contract with the main contractor to

perform part of the main contractor’s work. The main contractor is free to appoint any

subcontractor according to his own selecting criteria. The main contractor remains fully

responsible to all the work performed by the domestic subcontractor.

2.3.2 Nominated Subcontractor

Nominated subcontractor is the type of subcontractor who is selected and recommended by the

project owner (client), but enters into contract with the main contractor. The client will have the

freedom of choosing which subcontractor to perform a specific work. After that, the client will

nominate the subcontractor to the main contractor and instruct the main contractor to employ the

nominated subcontractor. Thus, the main contractor will held no responsibility to the work

performed by the nominated subcontractor.

2.4 Reason of Applying Subcontracting Practices

2.4.1 Need for Special Expertise

One of the main reason to practice subcontract is to be access to their specialist skill.

Construction industry is large and unique because all firms offer different service of works. It is

very rare for one contractor to have his own in-house work force who can perform every tasks

needed in order to construction a building. A subcontractor usually specialized in one of the

work. For example, a piling contractor is an expert of piling foundation who is familiar with all

the work method, safety measures and authority requirement. A specialist contractor can perform

the work more efficient than a general contractor, leading to a lower cost, higher quality and

shorter time construction.

2.4.2 Shortage in Resources of Main Contractor

Another reason to practice subcontract is due to the shortage in resources of the main contractor.

The two major resources that was needed by a contractor to perform a work is labor and plant.

However, it is almost impossible for a main contractor to own, operate and maintain all kinds of

equipment and plant (Choudhry et al., 2012). Besides, Choudhry et al. (2012) also mentioned

that a main contractor is usually incapable of hiring skilled workers in every specialist field to

complete a building project. For instance, a piling work will require the use of heavy piling and

crane machine. If a main contractor were to own a piling machine, the plant will used during

foundation work and will be idling for the rest of the project duration. Thus, it is impractical to

own the machine for a long term period due to its high maintenance fee. As a result, it is

inevitably to the piling work to a specialist piling contractor.

2.4.3 Benefit to Project Client

Samer and Assem (2013) stated nomination of subcontractor is having various benefit to the

project client. Firstly, the main reason for a project client to nominate a subcontractor is to allow

the project client to proceed with main contractor tender process when part of the works is not

fully developed. Other than that, the project client can have total control over the cost, time and

quality due to earlier involvement of nominated subcontractor to assist the consultant in the

design stage. Samer and Assem (2013) also found that the nomination subcontractor’s

involvement will shorten the time of main contractor to submit his tender because the main

contractor will only need to price for profit and attendance.

2.5 Actions that needed to be Taken In Order To Minimize Issues Arising from

Subcontracting Practices in Construction Industry of Malaysia

2.5.1 Limit the Number of Subcontracting Layer

With the increases of subcontracting layer, various issues will be faced including the

communication issue which is the direct factor of project delay. Choudhry et al. (2012) suggested

that by reducing the number of subcontracting layer, the communication issue arising from

subcontracting can be minimized. If the number of subcontracting layer is reduced, the

communication chain between parties will be shorten. As a consequences, less time will be

consumed when issuing instruction and less error will be made when conveying information.

Besides, limited layer of subcontracting can also allow a higher profit margin for the bottom

layer subcontractor who perform the work. Thus, the subcontractor can allow more cost in safety

measures. Therefore, the safety issue will be minimized.

2.5.2 Subcontractor Prequalification

In Malaysia’s construction industry, the prequalification of contractor was normally applied

when seeking main contractor. Prequalification of contractor is a process to evaluate a

contractor’s capability, resources, capacity, past record of completed projects and various other

criteria. Hesaham, Remon and Enas (2018) stated that the conventional appointment of

subcontractor solely based on “lowest bid” may results in inappropriate subcontractor

appointment. Hence, In order to minimize subcontracting issues, Choudhry et al. (2012)

recommended that prequalification to be carry out before appointing a subcontractor. For

example, a subcontractor with poor safety records will be eliminated from being invited for

tender. As a result, subcontracting issue will be minimized.

2.5.3 Adopt Standard Form of Contract between Contractor and Subcontractor

In Malaysia, standard form of contract such as PAM subcontract 2018 is commonly used

between main contractor and nominated subcontractors. Contrarily, domestic subcontractors are

normally bind by a simple contract drafted by the main contractor which have only included

some basic provision such as retention money and completion date. Samuel (2011) & Choudhry

et al. (2012) recommended that a standard form of contract between contractor and subcontractor

shall be adopted in order to minimize payment issue arising from subcontracting practices. All

form of standard contract such as PAM subcontract 2018 and PDW 203A provides provision on

payment and non-payment such as procedure and timeframe to honour payment and the

consequences of non-payment (Thanuja, 2013). Failure of employer (main contractor) to pay

subcontractor will then result in the breach of contract so that subcontractor has his right to

suspend his work or determine his own employment. Furthermore, all standard form of contract

available in Malaysia does not contain the back-to-back payment clause which has been used by

main contractor frequently as the reason for late payment to subcontractors.

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Markowitz, J. L. (2007). “Exploratory study of subcontracting.” M.S. thesis, Univ. of Florida,

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