Subject to whether the construction is at the planning stage, design stage, development stage, construction stage or dispute stage, one or more of the following pieces of legislation are relevant for projects within the West Malaysia:

• the Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 (Construction Industry Development Board Act 1994);
• the Town and Country Planning Act 1976;
• the Street, Drainage and Building Act 1974, read together with the Street, Drainage and Building (Amendment) Act (2019);
• the Uniform Building By-Laws 1984;
• the Occupational Safety and Health Act 1994;
• the Environmental Quality Act 1974;
• the Architects Act 1967;
• the Registration of Engineers Act 1967;
• the Quantity Surveyors Act 1967;
• the Contracts Act 1950; and
• the Limitation Act 1953.

The Construction Industry Payment and Adjudication Act 2012 (CIPAA), read together with the Construction Industry Payment and Adjudication (Amendment) Act 2024, deals specifically with issues relating to payment within the construction industry.

There are standard contracts available in Malaysia, which can be adopted or modified by the parties involved. The use of a specific standard contract is not mandatory in Malaysia.

For public sector projects awarded by the government of Malaysia, the Public Works Department (PWD) forms are preferred. Depending on the party contracting with the government, the following forms are used.

• Between the government (employer) and contractor:
1. PWD Form 203A – when the contract contains bills of quantities;
2. PWD Form 203 – when the contract is based on drawings and specifications; and
3. PWD Form DB – when the contractor undertakes both the design and construction of the project.
• Between the contractor and nominated subcontractor:
1. PWD Form 203N.
• Between the contractor and nominated supplier:
1. PWD Form 203P.

For projects in the private sector, depending on whether the contract is administered by an architect registered under the Malaysian Institute of Architects (Pertubuhan Akitek Malaysia, or PAM) or by an engineer registered under the Institution of Engineers (IEM), and/or depending on the nature of the project, the parties involved may opt to adopt the following standard building contracts.

• Where the contract is administered by an architect for building projects:
1. Between the employer and contractor:
1. Agreement and Conditions of PAM Contract 2018 (With Quantities); or
2. Agreement and Conditions of PAM Contract 2018 (Without Quantities).
2. Between the contractor and nominated subcontractor:
1. Agreement and Conditions of PAM Sub-Contract 2018.
• Where the contract is administered by an engineer for engineering and building projects:
1. Between the employer and contractor:
1. IEM Form of Contract for Civil Engineering Works; or
2. IEM Form of Contract for Mechanical and Electrical Engineering Works.
2. Between the contractor and nominated subcontractor:
1. IEM Form of Nominated Sub-Contract for Engineering Works.

In addition to the above, the Construction Industry Development Board (CIDB) and the Asian International Arbitration Centre (AIAC) have also published their respective standard contracts, as follows.

• Construction Industry Development Board:
1. CIDB Standard Form of Contract for Building Works (2022 Edition);
2. Standard Terms of Construction Contract for Renovation and Small Projects; and
3. CIDB Standard Form of Sub-Contract for Nominated Sub-Contractor.
• Asian International Arbitration Centre:
1. The Standard Form of Building Contract;
2. The Standard Form of Building Sub-Contract;
3. The Standard Form of Minor Works Building Contract;
4. The Standard Form of Design and Build Contract; and
5. The Standard Form of Sub-Contract for Design and Build Contracts.

International contracts such as the FIDIC suite of contracts are gaining popularity in Malaysia and would be adopted where foreign employers are involved.

Generally, employers can be categorised as follows:

• where the projects are for the public (eg, construction of infrastructure and public facilities), government bodies such as federal or state government, statutory bodies or local authorities will be the employer;
• private projects are typically commissioned by property developers, real estate investment trusts (REITs) or private corporations; and
• in public-private partnership or concession projects, the public and private sectors may incorporate joint venture companies or special purpose vehicles.

Rights and Obligations of Employers

The rights and obligations of an employer are governed by the construction contract. Generally, the employer is required to:

• procure the necessary licences, approvals and permits;
• appoint consultants;
• provide possession of the project site within the agreed time;
• issue information and instructions; and
• make payment in accordance with the contract.

In turn, the employer is entitled to have the works completed within time and in accordance with the contract specifications and design. If the works are delayed, the employer may claim liquidated damages. The employer may also monitor and inspect the works through its consultants or staff, and issue variations or change orders to amend, add or omit parts of the works. Depending on the project, the employer may require the contractor to rectify defects during the defects liability period, typically between 12 and 36 months. The employer may also terminate the contractor’s services for breach of contract or failure to perform the works.

Relationship Between Parties in the Construction Industry

Typically, the employer enters into a contract with the main contractor for the execution of the project. The main contractor will then enter into separate contracts with domestic or nominated subcontractors for specialised works such as mechanical, electrical or structural works. Generally, there is no direct contractual relationship between the employer and the subcontractors.

Financiers are usually not parties to the construction contract, and financing arrangements are governed by separate agreements.

Typically, the contractors in Malaysia are public listed companies, private limited companies, joint ventures or consortiums. Depending on the nature of the project (eg, construction of infrastructure such as highways and railways, or high-rise residential buildings, or hospitals and factories), the contractor with the expertise and know-how will be appointed as the main contractor of the project.

Rights and Obligations of Contractors

The rights and obligations of the contractor are governed by the executed contract. Generally, the contractor is required to carry out the works in accordance with the drawings, specifications and contract requirements determined by the employer. The works must be performed to the required quality standard and in a workmanlike manner. The contractor is obliged to comply with any variations or change orders that are validly issued by the employer or consultant. The contractor is also typically responsible for supplying labour, materials, machinery, equipment, temporary works and site facilities, and for rectifying defects during the defects liability period at its own cost.

Contractors are generally paid progressively, pursuant to the payment terms in the contract for work done and/or materials supplied. The employer is then required to make payment within the contractual period. If events such as delayed instructions, variations or inclement weather delay the progress of the works, the contractor may be entitled to an extension of time. If the employer breaches the contract, such as by failing to make payment, the contractor may suspend work or terminate the contract.

The general relationship between the parties is as described in 2.1 The Employer.

Subcontractors in Malaysia are appointed based on their respective expertise – eg, piling, mechanical and electrical, landscaping, interior fit-out. Depending on the size of the project, the subcontractors may be public listed companies, private limited companies, joint ventures or consortiums.

Rights and Obligations of Subcontractors

The rights and obligations of the subcontractor are governed by the subcontract. Generally, the subcontractor is required to complete the relevant part of the works in accordance with the drawings, specifications and contractual requirements, and to carry out the works to the required quality standard and in a workmanlike manner. The subcontractor is also required to comply with the work programme, co-ordinate with the main contractor and other subcontractors, and rectify defects during the defects liability period, at its own cost.

Subject to the terms of the subcontract, subcontractors are generally paid progressively for work done and/or materials supplied. If delays are caused by events such as main contractor delays, variations or inclement weather, the subcontractor may be entitled to an extension of time. Where the main contractor breaches the subcontract, such as by failing to make payment, the subcontractor may suspend work or terminate the subcontract.

The general relationship between parties is as described in 2.1 The Employer.

Construction projects in Malaysia are commonly financed by financial institutions – eg, commercial and retail banks or development financial institutions established by the government of Malaysia to support certain sectors, such as infrastructure.

Rights and Obligations of Financiers

Financiers are not typically parties to construction contracts. The financiers will have a separate financing agreement with the borrower and procure security over the project or borrower’s assets. However, some construction contracts may contain provisions which allow the financiers to monitor the progress of works and certify the progress claim submitted by the contractor. Once the conditions in the financing agreement are met and the financiers are satisfied with the progress of work, the financiers shall release the funds accordingly.

The general relationship between parties is as described in 2.1 The Employer.

Depending on the type and complexity of the construction project, the designer (also known as a consultant in Malaysia) may be an architect or engineer. An architect is responsible for the planning, building and design layout and the preparation of architectural drawings and specifications, among other matters. On the other hand, an engineer undertakes technical and design services in respect of, among others, civil and structural engineering, mechanical and electrical systems and infrastructure design.

Rights and Obligations of Designers

The designers are typically appointed by the employer of the project. The contract with the designers is separate from the contract with the contractor. Generally, the designers are responsible for preparing the design, drawings, specifications and other technical documents. They also act as the advisers for the employer and administer the contract.

The designers are usually paid by the employer based on milestones or stages of the project. The designers shall be paid the agreed consultancy fees, reimbursement of expenses, supervisory fees and other additional services agreed between parties. The designers would typically retain the copyright over the drawings and designs prepared by them. The designers are entitled to suspend their services or terminate the contract in the event of breach of contract by the employer, including the employer’s failure to make payment on time.

Subject to the terms of the contract, the designers are obligated to prepare designs, drawings, specifications, the tender and technical documents, among others. The designers must comply with the laws and regulations, as well as the professional codes of conduct. The designers are also responsible for monitoring and inspecting the progress of works to ensure compliance with contract requirements, and for certifying the contractor’s progress claim in accordance with the progress of works.

General Relation Between the Designer, Employer and Contractor

The designer is typically appointed by the employer. Whilst there is no contractual relationship between the designer and the contractor, the contractor shall comply with the instructions given by the designer, as the designer acts as an agent for the employer.

In short, the employer appoints the designer and contractor in separate contracts. The employer funds the project and provides input on the concept of the project; the designer provides administrative and technical services; and the contractor undertakes the construction works.

Generally, the scope of works is determined in the contract between the employer and the contractor, as well as the technical documents. For example, the scope of works is determinable as follows:

• contract drawings provide the layouts, dimensions, elevations, sections and structural details;
• specifications define the quality and specification of materials, workmanship, methods and standards;
• the programme of requirements is typically where the employer outlines its functional needs, design criteria, performance objectives and budget in design and build projects;
• bills of quantities provide a list of itemised works, quantities and prices; and
• technical documents such as method statements and site information outline specific technical information.

Variations by Employer

A variation can be issued directly by the employer or more commonly by the employer’s appointed consultant or superintending officer. A variation that fundamentally differs from the original scope of works may require a separate agreement to be executed. The employer must follow the procedures for the issuance of variations stipulated in the construction contract – eg, on the issuance of instructions, and the method of measuring and valuing the variation works. The scope of variation can be determined from the following, among others:

• the variation as defined under the construction contract;
• the wording in the instructions for variations issued; and
• drawings and specifications issued.

The costs involved for variations similar to the original scope of works are generally prescribed in the construction contract, and are valued based on the existing or similar rates with necessary adjustments. Where there is no suitable existing rate, the price will be valued based on the prevailing or reasonable market rate for labour, materials, machinery and plant. Some variations may be valued on a day-work basis.

Variations by Contractor

Whilst contractors do not commonly request variations, it may occur when the contractor proposes alternative designs, materials or construction methods for practical purposes during the construction process or when value engineering suggestions are made. Request for variations by the contractor must not differ from the employer’s requirements, must comply with statutory requirements and safety and technical standards, and must be approved in writing by the employer or consultant.

The price for variations may be determined by the employer and contractor (either as set out in the construction contract or based on fair market value). In construction contracts where value engineering is provided, there may be shared cost savings between the employer and contractor.

Time-Related Costs

If the variation works delay the completion of the project, the contractor will be entitled to loss and expenses or prolongation costs, calculated based on the site overhead cost, head office overhead cost (if any), extended preliminaries and others, provided that the contractor has not caused such delay. When the rates/prices are absent from the construction contract, the contractor may claim from the employer based on the actual costs incurred.

The responsibilities of the employer, the designer/consultant and the contractor vary depending on the procurement method, as elaborated below.

Traditional Procurement Method

This is the most common procurement method in Malaysia, where the employer retains responsibility for the completion of a project in accordance with the designs. The employer appoints the designer (architect or engineer), approves the designs, and provides the project requirements and instructions.

The appointed designer is tasked with preparing the designs, drawings and specifications in accordance with the project’s objective and budget. The designer must ensure that the designs comply with the relevant laws, regulations and codes.

The contractor on the other hand is responsible for construction according to the design provided by the employer. Variation between the design and completed works constitutes a breach of contract. Whilst the contractor has limited design responsibility, the contractor may undertake design responsibility for temporary works or shop drawings. If specialist subcontractors are appointed, such subcontractors shall design the specialist systems.

Design and Build Procurement Method/Engineering, Procurement and Construction (EPC)/Turnkey Projects

Under this procurement method, the contractor is responsible for both the design and construction of the project. However, the contractor’s design will need to satisfy the employer’s requirements, specifications, project objectives, budget and performance criteria. The EPC contractor is responsible for the design, procurement and construction of the project, as well as testing and commissioning.

The contractor will usually appoint the designers/consultants directly where the detailed designs are prepared and supervise the construction process to ensure compliance with the designs. The contractor is thus responsible for co-ordinating the consultants as well.

The employer may appoint third-party consultants to independently review the designs and building construction to ensure compliance with the employer’s requirements.

The allocation of responsibilities depends on the procurement method adopted for the project., but the most common scenario is as follows.

Employer

The employer is responsible for securing land ownership and procuring development approvals. Once the project is approved, the employer would then appoint the relevant consultants – architect, engineer, quantity surveyor, etc. The employer would fund the project or procure financing in order to make payments to the contractor and consultants. Once the contractor is appointed, the employer shall deliver site possession for the commencement of construction works. The employer may appoint a clerk of works to monitor and inspect the progress of the project for quality control and ensure compliance.

Contractor

The contractor is responsible for the overall execution and completion of the project. As the contractor is directly appointed by the employer, the contractor would then appoint subcontractors for specialist works, and is responsible for co-ordinating, supervising and making payment to such subcontractors. The contractor would generally be required to procure labour, materials, machinery and equipment. The contractor is usually contractually obligated to rectify all the defects discovered in the project.

Subcontractors

The subcontractors are responsible for completing the specific works set out in the subcontract. As the subcontractors are appointed directly by the main contractor, their obligations are towards the contractor and they usually take instructions directly from the contractor.

Designers/Consultants

The designers/consultants design the project in accordance with the employer’s concept, objectives and requirement. They then provide the relevant drawings, specifications, information and instructions to the contractor for the construction of the project. The designers/consultants usually value and certify the contractor’s progress claim and final claim upon inspecting the works carried out by the contractor.

Clerk of Works

A clerk of works acts on behalf of the employer to inspect the workmanship, materials and safety on site. The clerk of works’ main responsibilities are to ensure that the project satisfies the building regulations, specifications and safety, conduct site inspections, maintain comprehensive reports/records on the progress of works and report to the project manager/employer.

Subject to the wording of the construction contract and statutory and environmental legislation, the status of the construction site is usually a shared responsibility between the employer and the contractor. The employer is generally required to provide baseline information concerning the site condition, while the contractor is usually contractually required to inspect and examine the site to manage the construction risks. Once the site is handed over to the contractor, it is responsible for carrying out the works in compliance with the Occupational Safety and Health Act 1994.

Pollution

The responsibility lies primarily with the contractor as it has overall control of the construction site. The construction contract usually contains provisions whereby the contractor is to comply with the Environmental Quality Act 1974 and with regulations/directives/orders issued by the Department of Environment Malaysia or local authorities.

Underground Obstacles and Geotechnical Conditions

Underground obstacles may include buried utilities lines, pipelines, cables or rock formation. Subject to the express terms in the construction contract, the employer may be responsible for providing information such as utility mapping to the contractor. Under such circumstances, the employer will be responsible if there are utilities/cables that are not identified on the map.

Certain standard building contracts contain provisions whereby the contractor is to inspect the site and conduct due diligence on the site condition. With this provision, the employer transfers the risks of certain unforeseen site conditions to the contractor upon handover of the construction site.

Archaeological Finds/Antiquities

The National Heritage Act 2005 provides that any object found with cultural heritage significance by an agent, contractor or executor of the landowner must immediately be reported to the Commissioner of Heritage. The works at the affected area should be ceased immediately. Generally, under standard building contracts, the employer owns any minerals, fossils, articles or objects discovered.

In Malaysia, construction projects generally require a wide range of approvals before and during construction, including planning, building, environmental, utility, safety and operational approvals. The approvals are generally administered by the local authorities, planning and utility authorities, fire authorities, occupational safety regulators, the CIDB and the Department of Environment Malaysia.

• Under the Town and Country Planning Act 1976, it is mandatory for the landowner/employer/developer to obtain the planning permission or development order for land use or major developments. The applications are usually prepared and submitted by town planners, architects or the planning consultants.
• The building plan approval (eg, architectural drawings, structural plans) is procured by the employer/developer through the appointed consultants. This approval is made mandatory by the Street, Drainage and Building Act 1974, the Uniform Building By-Laws and the local authority regulations.
• Earthworks and excavation approvals are required prior to commencement of excavation and foundational works, in compliance with local authority regulations. These permits are usually procured by the employer through its geotechnical consultant. However, the contractor can apply for temporary excavation permits during construction.
• Fire department approvals are mandatory under the fire safety regulations and Uniform Building By-Laws, and are required for fire protection systems, designs for fire safety compliance, and exits. These approvals are to be procured from the Fire and Rescue Department Malaysia (BOMBA) by the employer through architects and/or engineers.
• Upon completion of the building, it is mandatory for the principal submitting person (usually a professional architect) under the Street, Drainage and Building Act 1974 and related regulations to submit an application for a Certificate of Completion and Compliance to confirm, among others, that the building is constructed in accordance with the approved building plans, the building is safe and fit for occupation, and the essential services are provided.

The responsibility for maintenance is usually governed by the construction contract, whereby the contractor is often responsible for maintaining permanent works, temporary works, materials, equipment and machinery on-site, during both the construction stage and the defects liability period. Upon expiry of the defects liability period, the responsibility is then transferred to the employer/owner.

There are essentially four broad categories of maintenance works.

• Preventative maintenance – scheduled cleaning and servicing to maintain the overall functions (eg, lift maintenance, HVAC servicing and routine checking of fire and electrical systems).
• Corrective maintenance – to repair defects as and when they appear (eg, pipe leakages, water seepages, wall cracks and flooring issues).
• Structural and systems maintenance – to maintain the general appearance of the building (eg, landscaping, painting and façade cleaning).
• Facilities maintenance – for large developments where various facilities are provided, maintenance is required for security, parking systems, utilities and waste management.

During the construction stage, the maintenance works are carried out by the contractor or subcontractor. However, post-completion or after the defects liability period has lapsed, the employer/owner will generally execute separate contracts with other operators to maintain the building and facilities.

Generally, the employer does not instruct the contractor or third parties on operation, finance or transfer in the construction process. However, subject to the procurement structure, financing arrangement and operational requirements, the employer may have specific arrangements with the contractor or specialist subcontractor/operator on the operation, finance and transfer.

Operation

For example, under an Operation and Maintenance (O&M) contract, the contractor may be required to operate and maintain the facility (eg, power plant, railway system) upon completion of the project.

Finance

In some government projects or infrastructure-related projects, the contractor may be required to assist with the financing of the project through deferred payment structures or private financing initiatives.

Under public-private partnership or concession models, a concessionaire may be responsible for raising the capital to fund the project and will be repaid during the course of the concession period (eg, through toll revenues).

Transfer

For the construction of infrastructure or public facilities, the following project delivery models may typically be used:

• build, lease, maintain and transfer (BLMT);
• build, operate and transfer (BOT); or
• build, own, operate and transfer (BOOT).

Under these models, the employer may require the contractors to provide operation training, technology transfer and maintenance manuals.

The testing and commissioning process typically follows the sequence below:

• substantial completion of the construction works;
• notification by the contractor that the works are ready for testing;
• testing and commissioning are carried out;
• test reports detailing the test results are issued by the contractor;
• inspection by the employer or consultants;
• issuance of the Certificate of Practical Completion; and
• procurement of the Certification of Completion and Compliance.

The contractor is usually responsible for executing the testing and correcting any failed tests, whereas the consultant or contract administrator would inspect, monitor and approve the tests carried out.

Completion Process

In Malaysia, once the construction works are practically completed, the contractor will issue notification to the contract administrator to inspect the works. If the contract administrator is satisfied that the conditions for practical completion as set out in the contract are met, then the Certificate of Practical Completion will be issued. However, if there are incomplete works and/or major defects discovered during the inspection, the contractor will be required to complete or rectify these works to the satisfaction of the contract administrator.

The issuance of the Certificate of Practical Completion usually signifies the commencement of the defects liability period and the release of the first moiety of the retention sum by the employer to the contractor (subject to contract).

Additionally, the principal submitting person is required to submit and procure a Certificate of Completion and Compliance, which proves that the building is safe and fit for occupation.

Takeover Process

Upon the issuance of the Certificate of Practical Completion, the employer is deemed to have taken possession of the construction works. Responsibility for insurance, security, utilities and routine maintenance typically passes to the employer at this point. If there is delay in the completion of works, the date of issuance of the Certificate of Practical Completion stops the contractor’s liability for liquidated damages.

Delivery Process

Subject to contract, the contractor is generally required to deliver as-built drawings, operation and maintenance manuals, warranties and guarantees, test certificates and commissioning records, among others, to the employer.

In residential projects, the developer would be required to deliver vacant possession to the purchasers upon the issuance of the Certificate of Completion and Compliance.

Influence

Whilst these processes may be distinct milestones in a typical project, the absent of the elements in the process will influence the next step. For example, without the Certificate of Practical Completion, the employer cannot legally takeover possession and control of the construction works, and the contractor will still be liable for the delay (if any) and project risks, and will not be entitled to the release of the first moiety of the retention sum; without the Certificate of Completion and Compliance, the developer will not be legally entitled to deliver vacant possession to its purchasers.

The period for which the contractor can be held liable for defects in the works is subject to the agreement between the employer and contractor, as set out in the construction contract. Subject to the scale and complexity of the project, the defects liability period may vary between 12 and 36 months.

The contractor is responsible for rectifying any patent defects (visible defects discoverable during inspections, such as cracks and leakages), at its own cost, during the construction period and defects liability period. If the contractor refuses to rectify the defects notified, the employer may carry out the rectification works itself or engage third-party contractors to rectify the defects. The employer can then back-charge the rectification costs to the contractor or set-off against the retention sum.

For latent defects (hidden defects, such as structural deficiencies) that are discovered after the defects liability period, the employer may commence an action in court against the contractor for breach of contract and/or negligence for such defects, subject to the limitation set out in the Limitation Act 1953.

The notification of defects to the contractor is governed by the construction contract between the employer and the contractor. There are usually procedure and conditions to be complied with in the issuance of the notification to the contractor, failing which the employer may not be entitled to compel the contractor to rectify the defects and to claim for damages from the contractor.

In Malaysia, the contract price is generally determined by agreement between the parties. Common pricing methods include lump sum, re-measurement, cost-plus, and design-and-build contracts. Lump sum pricing is commonly used where the scope of works is sufficiently defined, while re-measurement contracts are used where final quantities cannot be fully determined at the outset.

The contract price generally comprises labour, materials, plant and machinery, equipment, temporary works, preliminaries, overheads and profit. Depending on the contract, it may also include provisional sums, prime cost sums and contingencies.

Milestone payments are used in some projects, although payments are more commonly made through periodic valuations of the works, usually on a monthly basis.

The indexation of prices is not commonly used as a default mechanism in Malaysian construction contracts. Whether the contract price may be adjusted due to fluctuations in labour, materials, fuel, currency exchange or other costs depends on the express terms of the contract.

In fixed-price or lump sum contracts, contractors generally bear the risk of price fluctuations, unless the contract contains a price adjustment mechanism. Where fluctuation clauses are included, the contract may specify the adjustable cost categories and the method of adjustment, such as by reference to agreed formulas, market rates, government indices or actual cost increases.

The allocation of risk ultimately depends on the contract. Employers generally prefer price certainty, while contractors may seek fluctuation provisions for long-duration projects or projects involving volatile material prices.

In Malaysia, interim or progress payments are commonly used in construction contracts to maintain cash flow during the project. Contractors typically submit payment claims at agreed intervals, usually monthly, and the amount payable is assessed and certified in accordance with the contract.

Construction contracts typically manage late or non-payment by setting out both the payment mechanism and the contractor’s contractual remedies. These may include:

• a fixed timeline for the certifier to assess and certify payment claims;
• a fixed timeline for the employer to make payment after certification;
• contractual interest on late payment;
• the contractor’s right to suspend or slow down works if payment remains outstanding after notice, and to claim for loss and expense; and
• the contractor’s right to determine or terminate the contract if non-payment continues for a specified period.

Advance payments are used in some projects, particularly where upfront funding is required for mobilisation or procurement, and they are commonly agreed in larger projects. These payments are usually recovered through deductions from subsequent payments.

Delayed payment is not commonly adopted as a standard payment arrangement. Failure to pay within the contractual timeline is generally treated as a payment default entitling the contractor to contractual remedies.

In Malaysia, invoicing in construction contracts is usually tied to the contractual payment procedure. After the contractor’s payment claim has been assessed and the amount payable has been certified or otherwise agreed, the contractor will typically issue an invoice or tax invoice for the certified or agreed amount.

The invoice will usually refer to the relevant payment certificate, valuation, variation instruction or other supporting documents required under the contract. For variation works, invoicing is generally made after the variation has been instructed and valued, or provisionally assessed pending final valuation.

For final payment, the contractor will usually submit a final account upon completion of the works. The final account typically includes the value of the original works, approved variations, adjustments, claims for loss and expense, retention release, and any deductions. Once the final account is assessed and certified, the contractor will issue the final invoice based on the final certificate or agreed final sum.

Construction contracts in Malaysia generally require the contractor to prepare and submit a work programme setting out the sequence and timing for completion of the works. The programme typically includes commencement dates, milestones, critical activities, schedules and the completion date.

The employer plays a supervisory and administrative role in the planning process, usually through the architect, engineer or superintending officer.

The contractor is primarily responsible for planning, co-ordinating and executing the works in accordance with the contractual completion period. This includes co-ordinating with consultants, suppliers, subcontractors and the relevant authorities to ensure that the works progress efficiently and in compliance with the programme.

Planning is commonly safeguarded through progress monitoring mechanisms such as:

• regular site meetings;
• progress reports;
• revised work programmes;
• milestone dates;
• interim certifications; and
• liquidated damages provisions for delay.

Milestone payments are commonly used in construction contracts. In building contracts, payments are more commonly based on interim progress claims certified according to the value of work completed.

In the event of delays, construction contracts in Malaysia generally require the contractor to notify the employer or consultant within the prescribed time under the contract. The contractor is usually required to provide details of the delaying event, its causes, the expected impact on completion, and mitigation measures taken.

The contractor is generally obligated to take reasonable steps to mitigate delays and minimise disruption to the works. The employer or consultant will then assess whether the contractor is entitled to an extension of time and/or additional costs.

Time-related costs arising from delays are commonly dealt with through claims for loss and expense, prolongation costs or disruption claims. Such claims may include:

• site overhead costs;
• extended preliminaries;
• machinery and equipment costs;
• labour costs; and
• head office overheads.

The contractor is generally required to substantiate such claims with contemporaneous records and supporting documents.

Concurrent delay is recognised in Malaysia, although its treatment largely depends on the terms of the contract and common law principles.

In the event of delays, employers in Malaysia are generally entitled to several contractual and legal remedies.

The most common remedy is the imposition of liquidated damages (LD) for failure to complete the works within the contractual completion period. Construction contracts usually stipulate a pre-agreed rate of LD, calculated on a daily basis until practical completion is achieved.

In addition to LD, employers may terminate the contract in serious cases of delay or abandonment.

Where delays are caused by the employer or neutral events entitling the contractor to an extension of time, the contractor may avoid liability for LD. In certain circumstances, if no valid extension of time mechanism exists or the prevention principle applies, time may become “at large”, in which case the contractor’s obligation is to complete the works within a reasonable time.

Contractors in Malaysia typically request an extension of time (EOT) by submitting a formal written notice and supporting particulars, pursuant to the procedures prescribed in the contract. The contractor is generally required to:

• notify the delaying event within the stipulated contractual period;
• explain the causes and effects of the delay; and
• provide supporting documents such as revised programmes, progress reports and site records.

Grounds commonly entitling a contractor to EOT include:

• variations and change orders;
• delayed instructions or approvals;
• exceptionally adverse weather conditions;
• delays by authorities or utility providers;
• force majeure events;
• employer-caused delays;
• suspension of works instructed by the employer; and
• unforeseen site conditions.

The assessment of EOT is typically carried out by the architect, engineer or superintending officer administering the contract.

Force majeure is not specifically codified under Malaysia law, and generally depends on the contractual provisions agreed between the parties.

Construction contracts in Malaysia commonly define force majeure events to include circumstances beyond the reasonable control of the parties, such as:

• natural disasters;
• floods;
• earthquakes;
• war;
• terrorism;
• epidemics or pandemics;
• riots or civil commotion;
• governmental actions; and
• nationwide shortages of labour or materials.

Parties are generally free to define, limit or exclude specific force majeure events contractually. As such, the scope of force majeure relief depends largely on the wording of the contract.

Typical consequences of force majeure include:

• entitlement to EOT;
• suspension of contractual obligations;
• relief from liability for delay; and
• termination rights if the force majeure event continues for a prolonged period.

Unforeseen circumstances in Malaysia are generally governed by the terms of the construction contract rather than mandatory statutory provisions.

Construction contracts commonly contain provisions addressing unforeseen physical conditions, changes in law, shortages of materials and other exceptional events affecting the execution of the works. The allocation of risks arising from unforeseen circumstances depends on the contractual risk allocation agreed between the parties.

Where unforeseen circumstances arise, the contractor is generally required to notify the employer or consultant promptly, and to provide details of the impact on costs and time. Depending on the contract terms, the contractor may be entitled to:

• extension of time;
• additional payment; or
• both.

In the absence of express contractual provisions, parties may attempt to rely on common law doctrines such as frustration. However, the doctrine of frustration is narrowly applied in Malaysia and generally only applies where the contractual obligations become impossible or radically different from what was originally contemplated by the parties.

Disruption is generally recognised in Malaysia as a basis for claims relating to additional costs and, in certain circumstances, extension of time.

Disruption differs from delay in that it concerns the loss of productivity or efficiency in carrying out the works, even if the overall completion date is not necessarily affected. Common causes of disruption include:

• excessive variations;
• resequencing of works;
• restricted site access;
• late instructions;
• overcrowding of trades; and
• suspension or interference with the contractor’s planned work sequence.

Construction contracts may expressly provide for claims arising from disruption under provisions relating to loss and expense or additional costs. To establish a disruption claim, contractors generally need to demonstrate:

• the disrupting event;
• the causal link between the event and the loss of productivity;
• the actual disruption suffered; and
• the additional costs incurred.

Such claims are commonly supported by records, productivity analyses, work programmes, manpower records, expert reports and financial documentation.

In Malaysia, whilst parties to the contract are generally free to stipulate the terms and conditions agreed upon (within the extend of the law), including exclusion of liability clauses, there are several categories of liability that cannot be contractually excluded.

• Under Section 29 of the Contracts Act 1950, parties to the contract are not allowed to absolutely restrict a party from enforcing his right through court proceedings, nor to improperly limit the time for the other party to enforce its rights.
• Section 71 of the Malaysian Consumer Protection Act 1999 prohibits sellers from using contract terms, notices or other provisions to limit or exclude liability for damage caused by defective products.
• Under Section 14(2) of the Civil Law Act, any contractual provision excluding or limiting an employer’s liability for personal injuries suffered by an employee due to the negligence of persons in common employment will be rendered void.
• Under the common law principles (which are applied in Malaysia through Sections 3 and 5 of the Civil Law Act 1956), a party cannot exclude liability for death or personal injury resulting from their own negligence.

The concepts of wilful misconduct and gross negligence exist in Malaysia, but are governed by common law and are not statutorily codified. The courts of Malaysia interpret what amounts to “wilful misconduct” and “gross negligence” based on the facts of the case and available precedents.

Parties are generally permitted to contractually limit their liability, save for excluding the liabilities as discussed in 6.1 Extension of Liability. The wording in the contract on the limitation of liability must be express and unambiguous.

• For the employer, it is common to exclude its liability to compensate the contractor for loss of profit, loss of opportunity or business disruption.
• For the contractor, limitation of liability is usually for delay damages (eg, to limit the liquidated damages imposed to be capped at 10% of the contract price) and rectification of defects (eg, to limit the defects liability period at 24 months from the issuance of the Certificate of Practical Completion).
• The designer/consultant will typically seek to limit its liability to the employer to be tied to its professional indemnity insurance or to be capped to the fees earned.

Indemnities are widely used in Malaysian construction contracts to allocate and manage risk between the parties. Common indemnities relate to personal injury, death, property damage, third-party claims, breach of statutory or safety obligations, and loss or damage arising from the carrying out of the works.

Contractors are often required to indemnify employers against claims arising from site operations, negligence, non-compliance with safety requirements, and the acts or omissions of subcontractors or employees.

Performance bonds are widely used in Malaysian construction projects as security for the contractor’s performance obligations. These are commonly issued by banks or insurers, typically in the form of on-demand bonds amounting to 5% of the contract sum.

Parent company guarantees are also used, particularly for large projects or where the contractor is a special purpose vehicle or subsidiary.

Guarantees are usually provided by contractors in favour of employers and may secure performance, rectification of defects, or repayment obligations. Their scope depends on the contractual terms and may extend to delay, non-performance, or breach of contractual obligations.

The use and enforcement of guarantees are primarily governed by contract and common law principles, although banking and insurance regulations may apply to the issuing institutions.

Construction contracts in Malaysia typically require contractors to procure Contractors’ All Risks (CAR) insurance, covering physical loss or damage to the works, materials and site property during the construction period.

Other common insurances include public liability insurance, workers’ compensation or employer’s liability insurance, SOCSO-related employee coverage, professional indemnity insurance for consultants and designers, and insurance covering construction plant and equipment. These policies usually cover risks such as accidental damage, fire, theft, third-party injury or property damage, employee-related claims, and professional negligence.

Malaysian construction contracts commonly contain provisions allowing termination upon the insolvency, winding-up, judicial management or bankruptcy of a party. The consequences differ depending on which party becomes insolvent and the contractual allocation of risk.

Where the contractor becomes insolvent, the employer is typically entitled to terminate the contract, take possession of the site and materials, engage replacement contractors, and recover additional completion costs.

Where the employer becomes insolvent, contractors may suspend works or terminate the contract, subject to the contractual terms and applicable insolvency laws.

Risk allocation and risk sharing are fundamental features of Malaysian construction contracts. Risks are typically allocated based on the parties’ respective ability to control or manage them, although certain risks are shared contractually between the parties. Common shared or allocated risks include:

• delays;
• unforeseen ground conditions;
• design responsibility;
• price fluctuation;
• force majeure events;
• changes in law;
• regulatory approvals; and
• co-ordination with nominated subcontractors or utility providers.

Construction contracts typically address these risks through extension of time provisions, loss and expense mechanisms, variation clauses, fluctuation clauses, insurance requirements, and performance security arrangements.

Shared risks are typically reflected in the contract price through contingencies, provisional sums, insurance costs, and contractor risk premiums.

Construction contracts in Malaysia generally set out the roles, qualifications, rights and obligations of the personnel involved.

Contract Administrator

The contract administrator plays a vital role in the project and is vested with powers and authorities to oversee and monitor the completion of the works. Depending on the nature of the project and the construction contract adopted, the contract administrator or superintending officer may be a professional architect (Agreement and Conditions of PAM Contract 2018) or a professional Engineer (IEM Contract). Commonly, standard building contracts would stipulate a contract administrator’s responsibilities to include:

• valuing and certifying the contractor’s progress claims and final claim;
• determining whether the works have achieved practical completion;
• considering extension of time applications made by the contractor;
• issuing instructions for variation; and
• valuing variations.

Site Agent

In some construction contracts, a contractor may appoint a site agent to oversee the day-to-day site activities, ensure compliance with the drawings and specifications. and prepare progressive site reports for the project manager, among other actions.

Site Staff

The Agreement and Conditions of PAM Contract 2018 specifically allow the employer to appoint site staff to monitor and inspect the daily construction operations on behalf of the employer.

Labour and Foreign Workers

Most construction contracts specifically require the contractor to engage labour in compliance with local employment legislation such as the Employment Act 1955, the Employees Provident Fund Act 1991 and the Employees Social Security Act 1969.

Foreign workers hired for construction projects must have valid work permits/visas, and the contractor must provide accommodation, medical screening and wages to the workers.

Provisions for the appointment of subcontractors are common in construction contracts in Malaysia. Contractors typically appoint domestic subcontractors, while employers or consultants may nominate specific subcontractors for appointment by the contractor.

There is generally no direct contractual relationship between the subcontractor and the employer. However, where permitted under the subcontract, the subcontractor may request direct payment from the employer or apply for a direct payment order under CIPAA.

Most construction contracts do not allow the contractor to subcontract the entire works without the employer’s approval. Subcontractors are also commonly restricted from assigning their rights or further subcontracting substantial parts of the works. A subcontractor’s rights and obligations are governed by the terms of the subcontract, and are usually aligned with the obligations under the main contract.

The contractual provisions regarding intellectual property are subject to the wording in each contract, and are based on the nature of the contract. Generally, the creator of the intellectual property (architect or engineer) would retain ownership unless otherwise expressly stated to be transferred to the employer.

For design and build contracts, the contractor is the creator of the intellectual property (designs, drawings, construction methods, etc). In such instance, the contract usually contains provisions where the intellectual property in the design is vested in the employer upon receiving full payment or the contractor grants a licence to the employer for the rights to use the intellectual property for operation, maintenance, repair and future expansion of the project.

There are usually warranties/representations from the creator that its design does not infringe upon any third-party intellectual property rights or may lawfully be used for the project. A breach of this warranty or representation would trigger the indemnity clause, whereby the creator is liable to indemnify the employer against any claims, proceedings or damages arising from such infringement.

In Malaysia, the remedies available for breach of a construction contract depend on the terms of the contract, the nature of the breach, and the applicable common law principles. Common remedies include general damages, liquidated damages, termination, set-off, suspension of works or payment, specific performance, and injunctive relief.

Employers are commonly entitled to claim liquidated damages for:

• delay;
• defect rectification costs;
• damages arising from defective or incomplete works; and
• termination damages.

They may also exercise rights of set-off or have recourse against performance bonds and retention sums.

Contractors commonly claim for:

• unpaid sums;
• variations;
• extension of time;
• loss and expense; and
• damages arising from employer-caused delay, disruption or wrongful termination.

Consultants and designers may face claims for professional negligence, defective design, breach of professional duties or improper certification, while retaining rights to claim unpaid professional fees and damages for breach of consultancy agreements.

It is common for construction contracts to contractually limit or regulate the remedies available, including:

• limitation of liability clauses;
• exclusion of indirect or consequential losses;
• contractual time bars for claims;
• agreed liquidated damages regimes for delay;
• limitations on extension of time claims; and
• provisions governing termination, set-off, retention sums and performance bonds.

However, parties cannot exclude liability for fraud, illegality or certain statutory rights. For example, “pay when paid” clauses are unenforceable under CIPAA.

Malaysian courts generally uphold contractual risk allocation and freedom of contract. However, exclusion and limitation clauses are construed strictly by the courts, particularly where the wording is ambiguous.

In Malaysia, standard forms such as the PAM Contract 2006, PWD and CIDB forms do not generally comprehensively restrict parties to a single exclusive remedy; instead, they usually provide multiple overlapping contractual remedies (eg, LD, termination, set-off, performance bond calls, defect rectification, damages).

That said, “sole remedy” concepts do appear in certain contexts, especially in:

• bespoke EPC contracts;
• international projects;
• energy and infrastructure projects; and
• heavily negotiated commercial contracts.

A common example is where the contract provides that LD constitutes the employer’s sole and exclusive remedy for delay up to termination.

Construction contracts in Malaysia often exclude indirect or consequential losses, including loss of profit, loss of opportunity, and reputational damage. Exclusion clauses are generally enforceable, although Malaysian courts interpret them strictly and require clear wording before excluding liability.

Retention rights are not commonly excluded in Malaysian construction contracts. Retention provisions are widely used as security for defective or incomplete works until practical completion and expiry of the defects liability period.

Suspension rights, however, are more commonly regulated and limited by contract. Malaysian law does not recognise a broad standalone common law right to suspend works for non-payment absent contractual or statutory entitlement. As such, suspension rights usually depend on the express contractual terms and may also arise under the CIPAA.

Construction contracts may be terminated pursuant to express contractual provisions or under common law for repudiatory breach. Standard building contracts such as the PAM Contract 2018, PWD and FIDIC contain detailed termination mechanisms.

Employers may terminate for substantial delay, abandonment, insolvency or failure to proceed regularly and diligently. Contractors may terminate for persistent non-payment, prolonged suspension or serious employer breaches.

Typical consequences include payment for work completed, recovery of additional completion costs, claims for damages, and recourse against retention sums or performance bonds. Wrongful termination may itself amount to repudiatory breach and expose the terminating party to damages.

In Malaysia, if the construction contract does not contain an arbitration clause, the courts of Malaysia have jurisdiction to decide the disputes. Subject to the value involved, disputes can be heard in the first instance in either the Subordinate Courts or High Courts:

• the Magistrates’ Court hears and determines civil claims up to a value of MYR100,000;
• the Sessions Court handles civil claims between MYR100,001 and MYR1 million; and
• the High Court hears and determines civil actions involving amounts exceeding MYR1 million.

The Court of Appeal and the Federal Court exercise appellate jurisdiction to hear appeals originating from either the Sessions Court or the High Court.

Specialised High Courts known as “Construction Courts” were established to resolve construction-related disputes in the High Court of the Federal Territory of Kuala Lumpur and Shah Alam.

Various alternative dispute resolution mechanisms are available in Malaysia, governed by the relevant legislation.

Arbitration

Where parties have agreed to arbitration under the construction contract, disputes arising from or in connection with the contract may be referred to arbitration. Arbitration is commonly used in large-scale local and international construction projects and is governed by the Arbitration Act 2005, which is based on the UNCITRAL Model Law.

Parties commonly adopt institutional arbitration rules such as those of the Asian International Arbitration Centre (AIAC) or Pertubuhan Arkitek Malaysia (PAM). Another arbitral institution is the Borneo International Centre for Arbitration and Mediation, established in 2023.

Statutory Adjudication

Since its introduction on 15 April 2014, CIPAA has become a popular mechanism for contractors, subcontractors, consultants and suppliers to recover payment for work done or services rendered in relation to construction work. It provides a quick and cost-effective dispute resolution process. An adjudication decision is binding unless set aside by the court or arbitration, or superseded by a settlement agreement. As adjudication is a statutory right, parties cannot contract out of CIPAA.

Mediation

The mediation process in Malaysia is generally governed by the Mediation Act 2012. Although mediation is not commonly initiated voluntarily, parties are encouraged to resolve disputes amicably through mediation.

Parties involved in court proceedings may also opt for court-annexed mediation under Order 34 Rule 2 of the Rules of Court 2012 and Practice Direction No 4 of 2016. The presiding judge or another judicial officer may act as mediator. If a settlement is reached, it may be recorded as a binding consent judgment.

Expert Determination

For disputes involving technical issues, such as engineering defects or construction valuations, parties may refer the matter to an independent expert with relevant industry knowledge for determination. The expert’s decision is usually final and binding, subject to the terms of appointment. Expert determination is contractually driven and not governed by specific legislation.