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Contractor’s right to claim for additional cost 

 

After I saw Affin Hwang’s article today which you can see below, I wrote this to explain Jaks’ legal position and also for those who are not familiar with construction contract.

Lump Sum Contract

Basically, there are 2 types of building contracts. One is a lump sum contract and the other is a bill of quantities contract. Lump sum contract is usually for small buildings or small contracts costing less than Rm 0ne million. Sometimes during the construction of the small building, the owner wanted an additional garage to be constructed.

In this case, the contractor obviously has the right to claim for reimbursement of additional cost. But often the dispute arises from the amount of compensation. What is the fair amount?

Usually, the contractor can claim more than his actual cost because the contractor has the advantage. There is a Chinese saying “Tai say cow kown kar” because the owner cannot get another contractor to construct the garage. If he insists on engaging a new contractor, the existing contractor can claim for obstruction of his work.

Bill of quantities contract

There is another type of building contract, called Bill of Quantities contract, BQ contract. This is usually for large building or road and bridges or other large structures. In this case, a quantity surveyor is involved who calculates the quantities of work from the design drawings measures and prepares a bill of quantities for tender.

When the owner wants any small variation or change, the quantity of work is paid according to the rates as quoted in the original contract.

This basis of measurement is not meant for big variation or change. If the owner wanted an addition structure or building, the original quoted prices cannot be applied. The price for the new building and all the major changes has to be renegotiated

For example:  About 6 years ago, Jaks made an agreement with The Star to buy the land. Instead of paying cash, Jaks agreed to build an office building for the land. Since Jaks did not pay cash, Star required Jaks to provide a Rm 50 million performance guarantee from the Bank.

However, during the period Star has requested numerous changes to the design that warrant the change of building plan. In addition, with the change of chairman, Star wanted to acquire additional building and asked JAKS to convert the building from residential to office use.

All these changes would require more time and expenses. Jaks had to alter the architectural and structural engineering design drawings for submission to the various Authorities’ approval.

Jaks had requested for the reimbursement of additional cost. While this dispute is not yet settled, as you can see a few days ago, Star wanted to forfeit the Rm 50 million performance guarantee and Jaks had applied to the court for an injunction to stop Star’s action.

The building is about 97% completed. I think Jaks has a very strong case to win the reimbursement for additional cost.

How investors react?

In the stock market, investors always overreact to good or bad news. Moreover, bad news spreads like wild fire. As a result, shareholders quickly dump their holdings without second thought.

Please see the following from Affin Hwang:

  Affin Hwang Capital Daily Insight | Wednesday, 14 March 2018  
   

 

Top Calls
 
Company Update – Jaks Resources (BUY, maintain)

Litigation impact (one-off) is manageable

We maintain our BUY call and 12-month TP of RM2.25 on Jaks Resources (Jaks) after meeting with management regarding the recent litigation, as we believe that the impact on both earnings and cash flow is manageable, even in a worst-case scenario. The current litigation has no impact on Jaks’ day-to-day operations, and current earnings growth will likely continue to be supported by its Vietnam EPCC contract

 

 

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Research Team
research@affinhwang.com

Alan Tan
Head of Research/ Chief Economist | RESEARCH
+603 2146 7540
alan.tan@affinhwang.com

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