TABLE OF CONTENTS
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Table of Contents v
List of Tables v-vii
List of Figures viii
Abstract ix
1.0 CHAPTER ONE:
1.01 Introduction 1-2
1.02 Background of the problem 2-3
1.03 The Aim of study 3
1.04 Study Objectives 4
1.05 Research Questions 4
1.06 Research Hypothesis 4
1.07 Scope and Delineation 5
1.08 Significance of study 5
2.00 CHAPTER TWO: LITERATURE REVIEW
2.01 Preamble 6
2.02 Nature of a building project 6-7
2.03 Need for money in project procurement 8-10
2.04 The cash flow on a construction project 10-12
2.05 The importance of payment in the construction industry 12
2.06 Problems associated with payment in the construction industry 13-15
2.07 Causes of late and non-payment on construction industry 15-18
2.08 Effects of late and non-payment on construction industry 18
vi
2.08.1 The structure of a construction contract 19
2.08.2 The distribution of payment and risks within a
Construction project 20
2.09 Experience of other countries 21-24
2.10 Legal and contractual background of contractor is right
To payment and remedies for non payment 25
2.10.1 Introduction 25
2.10.2 Entire performance and right to be paid 26-28
2.10.3 Contractual Remedies for payment default 28-30
2.11. Review of payment provisions in lump sum form of contract
JCT 80 (FMW current edition) 31-32
2.11.1 Introduction 31
2.11.2 Express payment provisions 32
2.11.3 Procedures and condition precedent for payment 32-33
2.11.4 Payment Sequences 34
2.11.5 Timing of payment 35-37
2.11.6 Quantum of payment 37-38
2.11.7 Deduction of payment 38-39
2.11.8 Summary of literature review 39-40
3.00 CHAPTER THREE: RESEARCH METHODOLOGY 41
3.00 Research Design 41
3.00 Sample population 41
3.03 Sample size and sampling techniques 42
3.04 Research instrument and date collection procedure 42
3.05 Method of data analysis 42-43
3.06 Relative importance index (rank order) 43
3.07 Constraints to data collection 43
vii
4.00 CHAPTER FOUR: DATE PRESENTATION AND ANALYSIS 44
4.01 Preamble 44
4.02 Questionnaire distribution analysis 44
4.03 Analysis of respondent’s characteristics 45
4.04 Presentation and analysis of questionnaires 45-59
4.05 Testing of hypotheses 59-62
4.05.1 Summary and discussion of findings 62-63
5.00 CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS 64
5.01 Conclusion 64
5.02 Recommendations 65-66
5.03 Suggestions for further research 66
References 66-69
Appendices (Questionnaire) 70-80
viii
LIST OF TABLES
Table 4.02. Questionnaire distributions analysis
Table 4.03. Analysis of respondents characteristics
Table 4.04. Presentation and Analysis of questionnaire
Table 4.04.1. Nature of organization
Table 4.04.2. Construction industry service experience
Table 4.04.3. Age of respondent (officer)
Table 4.04.4. Academic Qualification of respondent
Table 4.05.5. Position in organization
Table 4.04.6. Construction industry work experience
Table 4.04.7. Assessment of validity of respondent’s statement
Table 4.04.8. Assessment of validity of respondent’s statement
Table 4.04.9. Period of occurrence of late payment
Table 4.04.10. Assessment of period of late payment as effects organization
Table 4.04.11. Period of occurrence of late payment
Table 4.04.12. Assessment of period of non-payment as effects organization
Table 4.04.13. Assessment of amount held over delayed on non-payment
Table 4.04.14. Assessment of time taking to resolved dispute of late and non-payment
Table 4.04.15. Factors causing late payment
Table 4.04.16. Factors causing non-payment
Table 4.04.17. Key factors causing late payment
Table 4.04.18. Key factors causing non-payment
Table 4.04.19. Effects of late payment
Table 4.04.20. Effects of non-payment
Table 4.04.21. Assessment effects of late payment
Table 4.04.22. Assessment of effects of non-payment
Table 4.04.23. Reaction to late payment
Table 4.04.24. Reaction to non-payment
Table 4.04.25. Rate reactions to late payment
Table 4.04.26. Rate reactions to non-payment
Table 4.04.27. Solutions to late payment
Table 4.04.28. Solutions to non-payment
Table 4.04.29. Effectiveness of solutions to late payment
Table 4.04.30. Effectiveness of solutions to non-payment
Table 4.05.1. Working table hypothesis one
Table 4.05.2. Working table hypothesis two
ix
LIST OF FIGURES
Fig 2.1. Representative construction model
Fig 2.2. Working capital in construction
Fig 2.3. Cash flow on a construction project
Fig 2.4. The structure of a construction contract
Fig 2.5. Distribution of payment and risks
Fig 2.6. Payment sequences
Fig 2.7. Timing of payments
x
ABTRACT
The construction industry plays an important role in Nigerian soci-economics development.
It is both growth-imitating, and growth-dependent. The industry establishes buildings and
infrastructure works required for socio-economic growth. The success of economic
development will further lead to increase in disposal incomes, thereby generating demand
for additional construction activities.
However, there remains a chronic problem of delayed and non-payment in the payment in
the industry affecting the entire project delivery chain.
The Nigerian construction industry operates the outdated and inefficient payment practices
which were inherited from our colonial masters.
The security of payment problem is common to many commercial relationships, but the
construction industry presents a peculiar problem, because payment terms are on credit,
rather than on delivery.
The growing affluence and higher quality expectation of purchasers and consumers spurs
developers to stipulate longer defects liability period and higher retention amount.
This study therefore focuses on the causes, effects and reactions of indigenous contractors
to late and non-payment issues and to identify ways to mitigate the problem. The research
focused on contractual payments from the employer to the contractor.
To facilitate the study, fifty questionnaires received from the filed survey of relevant
construction companies were analyzed using mean item score, while two hypotheses were
tested using the chi-square.
Findings from the study indicate that the main factors causing for Late and non-payment in
the construction industry identified are: Delay in certification, employer’s poor financial
management, local culture/attitude, underpayment of the certified amount, and short of
current year budget.
The finding show that Late and non-payment create cash flow problem, stress on
constructors, high cost of projects abandonment and some reactions to late and nonpayment encountered by contractors may have adverse effects on their own business.
The findings show that late and non-payment create cash flow problem, states on
constructors, high cost of projects and abandonment and some reactions to late and nonpayment encountered by contractors may have adverse effects on their own businesses.
Among the most appropriate solutions to overcome the problem Late and non-payment
faced by indigenous contractor’s include; a right to regular period and defined time-frame
for payment; a right speedy dispute resolution mechanism, and a right to suspend work.
In the main, the professional bodies, Government and other stake holders should study
and amend the existing standard form of contract to provide protection and promote
balanced allocation of risks and fair contract to all related parties.
Finally, the findings of the research may assist the relevant parties in addressing the
problems associated with late and non-payment in an effective manner, to the benefit of
all.
1
CHAPTER ONE
1.01 INTRODUCTION
The construction industry is one of the largest industries in Nigeria. It
contributes about 2% of the gross domestic product (GDP). It employ’s a
workforce of about two million people and engages support services from a
wide range of professionals such as architects, engineers, builders, and
surveyors.
The industry produces buildings and infrastructure works required for socioeconomic development, which contribute to the overall economic growth.
The national yearly development plan usually includes the construction
sector as its major component. The development of the industry is therefore
a critical success factor in the development of the overall national economy.
The most common project procurement method used in commercial
construction in Nigeria is the traditional design-bid-build system of
contracting. Here, most contracts are awarded to main contractors, who also
enter into contracts with subcontractors, suppliers, and ultimately skilled
artisans and laborers who are employed by these firms.
However, it is common to find that the problem of the contractor is on the
inadequacies of the payment regime in the construction industry.
Many in the industry see and often themselves suffer the effects of payment
default and keep moaning about it. Nevertheless, the problem was not a
major issue during the good times of the oil boom of 1970’s when jobs were
2
plenty and many contractors or even sub-contractors would tolerate late
payment.
However, the problem became magnified as the industry is deeply affected
by bleak market and falling construction demand. The general legislation
and the existing contractual arrangement for project procurement have not
prevented the problems.
There is therefore an urgent need to provide new mechanisms that will
address the cash flow problems facing contractors in the Nigerian
construction industry.
1.02 BACKGROUND OF THE PROBLEM
Payment is said to be the lifeblood of the construction industry. Yet, there
remains a chronic problem of Late and non-payment, Lin Chon Fong (2005).
The federation of building and civil engineering contractors in Nigeria has
been lamenting on this problem as frequently reported in the press. This is a
major concern because the quantum of payment for works and services
rendered in the industry is large, often in billions of naira.
The industry works and will continue to work provided those works and
services are properly paid for. The practice of efficient and timely payment is
a major factor that contributes to a project success (CIOB 2004).
A survey of payment performance has shown that the construction industry
has developed a late and non-payment culture, John stone, (1999), which in
some cases, often leads to disputes. This usually create severe cash flow
3
problems especially to contractors, because payment is post-phoned pending
the resolution of the dispute.
The common available mechanisms of dispute resolution in the construction
industry are presently by way of arbitration and litigation. In practice, these
mechanisms leave much to be desired because of their many inadequacies
and shortfalls.
The situation is getting worse because:
There are only limited security of payment and remedies available to the
unpaid contractor in Nigeria pending dispute resolution.
There is no common law right of suspension of work by the contractor for
non-payment, else the court may find him guilty of repudiating the
contract.
Even though the standard form of contract (JCT 80 Nigerian edition),
contain express provisions for determination of his employment for nonpayment, most contractors as a matter of practice are reluctant to go on
this route in order to maintain commercial goodwill with employers.
This is the present dilemma of the unpaid Nigerian contractor, as he watches
his cash flow and profitability put into jeopardy.
1.03. AIM OF THE STUDY
The aim of the study is to investigate the causes, effects, reactions and
solutions to late and non-payment problems encountered by contractors in
the Nigerian construction industry, (Enugu State).
4
1.04. STUDY OBJECTIVES
The study objectives are:
To identify the causes of late and non-payment of construction
projects
To establish the common reactions by contractors in managing the
problems
To examine the effects on the contractors
To identify ways to mitigate the problems
1.05. RESEARCH QUESTIONS
What are the causes of late and non- payment in Nigeria construction
industry
What are your reactions when it faced with a late and non-payment
situation
What are the effects of late and non-payment on performance of
contracts
How can the problem of late and non-payment be reduced
1.06. RESEARCH HYPOTHESES
Research Hypothesis 1
HO There is no significant difference in factors causing late payment.
H1 There is significant difference in factors causing late payment.
Research Hypothesis 2
HO There is no significant different in factors causing non-payment.
H1 There is significant difference in factors causing non-payment.
5
1.07. SCOPE AND DECLINATION
Although late and non-payment do occur in several construction contracts,
this study is restricted to the investigation of late and non payment issues in
building construction projects.
Owing to the problem of accessibility of data, the data for this study will be
based on the contractors whose offices are located in Enugu State, namely
small, medium and large organizations.
The most prevalent used form and conditions of contract in Nigeria is the
JCT 8o (current edition) issued by the Federal Ministry of Works (FMW). This
mostly will be referred to in this study.
1.08. SIGNIFICANCE OF THE STUDY
First and foremost, the aim is to increase the awareness of both the
employers and contractors in relation to their obligations on payment issues.
For the contractors, it will provide a better understanding of their rights to
payment and their legal position if payment is delayed or not paid.
In the main, the findings of the study may assist the stakeholders in the
industry, in addressing the problems of late and non-payment in a holistic
manner for the benefit of all.
Specifically, it may be useful for the introduction of a legislation to be called
“construction payment Act” as already found in many developed countries.
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