LRT3 contractors may see LAD of 100% contract value

This article first appeared in The Edge Malaysia Weekly, on November 27, 2017 - December 03, 2017.
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CONTRACTORS for the Light Rail Transit Line 3 (LRT3) project are facing the prospect of having to bear a higher level of liquidated and ascertained damages (LADs), as Prasarana Malaysia Bhd and project delivery partner (PDP) MRCB George Kent Sdn Bhd (MRCBGK) seek to ensure timely completion.

The industry is abuzz with news of the LAD, which is said to be between RM100,000 and RM200,000 per day, and up to a maximum of 100% of the contract value. The usual practice is to cap the LAD at 20% to 30% of the contract value.

“While this may not be much of a problem if your contract is valued at RM1 billion or RM2 billion, subcontractors that receive RM50 million or RM60 million worth of contracts will feel the pinch.

“This is because main contractors will usually apply the same LAD that is imposed on them on the subcontractors, so if the delay is at the subcontractors’ level, the main contractors would not have to bear a higher LAD than the subcontractors,” says one industry player.

A main contractor, which was recently awarded an LRT3 contract, declined to comment on the issue, saying it is a sensitive matter.

Some observers say the high LAD level will be a hurdle for smaller contractors that want to bid for jobs at the subcontract level, as they may not receive funding from the banks due to higher perceived risks.

This will, in turn, jeopardise efforts to have bumiputera contractors undertake 45% of the estimated RM9 billion project, if most of them do not qualify or can’t bear the risk of higher LADs, say one of the observers.

In November last year, Prasarana collaborated with Unit Peneraju Agenda Bumiputera (Teraju), the Ministry of Works and Construction Industry Development Board to ensure that 45% of the LRT3 contracts will be undertaken by bumiputera contractors graded G2 to G4.

This collaborative effort was aimed at growing and developing the contractors’ capacity and capability via their participation in large-scale infrastructure projects. A tender briefing was held in Putrajaya on Nov 24 last year, which saw the participation of about 135 companies.

The G2 to G4 grading refers to small and medium enterprises, which are allowed to tender for projects valued at RM200,000 to RM500,000 (G2), RM500,000 to RM1 million (G3) and RM1 million to RM3 million (G4).

These contractors may not be able to bear the LAD charges as their contracts are small.

“Imagine if your contract is just RM1 million. A five-day delay would mean that you have undertaken the contract for free if the LAD is RM200,000 per day and up to a maximum of 100% of the contract value,” says an industry player.

The main work packages under LRT3 are divided into 120 smaller work packages, worth about RM60 million in total, to allow the bumiputera contractors with G2 to G4 grading to participate.

The work packages will comprise — but are not limited to — areas such as surface, mechanical and engineering, concrete, external architectural and interior fit-out works.

The LRT3 project will connect Bandar Utama in Petaling Jaya to Johan Setia in Klang upon completion and is set to commence operation in August 2020. It will have 26 stations, with five of them integrated with other modes of rapid transit.

According to Prasarana, 21 LRT3 work packages have been awarded as at Nov 20. The awarding of the projects is expected to be completed by early next year.

About 70% of the work packages have gone to the main contractors such as WCT Holdings Bhd, Mudajaya Group Bhd, TRC Synergy Bhd, Gabungan AQRS Bhd and Sunway Construction Group Bhd.

The five companies have secured a total of RM7.16 billion worth of contracts. Another RM2 billion worth of contracts will be awarded by the end of this year and early next year, according to Prasarana.

It is believed that the main contractors are still negotiating with Prasarana on the definitive terms of the contracts. Industry players say the high LAD level is expected to be a point of contention.

However, some observers say the LAD is being imposed to ensure that only qualified contractors with the required financial muscle will bid for the contracts.

“MRCBGK as the PDP is doing what it can to ensure that the LRT3 project is implemented smoothly and without much delay. This is a very important project for the country — to improve the public transport network in the Klang Valley.

“Local contractors that do not have the financial muscle or the requisite expertise can form consortiums to bid for the project. The main contractors have known about the LAD from the start, and they are still confident that they can deliver the jobs anyway,” says one observer.

In response to The Edge’s questions on the LAD, MRCBGK says it is not at liberty to divulge the terms and conditions of the contracts due to legal implications.

“As LRT3 is a national infrastructure project, our priority is to ensure that the government’s and the public’s interests are protected and to ensure convenience for all.

“The objective was to ensure that all possibilities are considered and that we provide a public transport system that improves the mobility of all Klang Valley residents and promote better quality of life to Malaysians,” it says in an email.

Nevertheless, one insider close to MRCBGK says, as the PDP, the company’s priority is to deliver the project on time and in good quality. Thus, it is imperative that Prasarana awards the contracts to the best construction companies.

“At the end of the day, the PDP is responsible for the overall delivery. If the project is not delivered on time and has a lot of construction flaws that needs rectification, it is the taxpayers’ money that will be going down the drain,” the insider says.

Meanwhile, the underground portion along Persiaran Hishamuddin and Persiaran Dato’ Menteri in Shah Alam is said to be off the table, following requests from residents of the affected areas, say sources.

If this is true, the remaining contracts that Prasarana will award may be much less than anticipated, as extensive land acquisition and tunnelling works would not be needed in the area.

Persiaran Dato’ Menteri and Persiaran Hishamuddin are among the major thoroughfares in Shah Alam, where places of significant importance to the Selangor government are located. There was to be one LRT3 station in the area, in Persiaran Hishamuddin.

Only Gamuda Bhd and MMC Corp Bhd have the required technology and expertise at the moment to undertake major rail and road tunnelling works in Malaysia. Both companies acted as the PDP for the Sungai Buloh-Kajang mass rapid transit line and the contractor for the underground portion.