Participation Of Foreign Contractors In Construction Projects In Malaysia – Real Estate and Construction

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Malaysia:

Participation Of Foreign Contractors In Construction Projects In Malaysia

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Participation of Foreign Contractors in Construction Projects
in Malaysia

Introduction

In recent years, Malaysia’s construction industry has been
on the rise with a whole host of newly-announced large scale
projects which is seen as ongoing momentum to the industry growth.
Given the expansion scale of the market, it is unsurprising that
overseas market players, particularly foreign contractors have
targeted at the opportunities offered by Malaysia’s
construction industry. This article aims to provide an overview on
the compliance of foreign contractors with the registration
requirements of the Malaysia statutory authority.

Regulatory Body

The Construction Industry Development Board
(“CIDB“) is a body corporate established
under the Construction Industry Development Board Act 1994
(“Act“) and is an agency under the
Ministry of Works, Malaysia (Kementerian Kerja Raya Malaysia). The
main functions encompass advisory, regulatory and to oversee the
development and promote quality assurance in the construction
industry. The mission of the CIDB is achieved largely through the
accreditation and registration of contractors who engage in
construction projects in Malaysia and the levy which it imposes on
the substantive construction projects.

Registration Requirement under CIDB Act

Under Section 25 of the Act, no person shall undertake any
construction works unless he is registered and holds a valid
certificate of registration issued by the CIDB. “Construction
works” are defined in Section 2 of the Act to cover “the
construction, extension, installation, repair, maintenance,
renewal, removal, renovation, alteration, dismantling, or
demolition of:

  1. any building, erection, edifice, structure, wall, fence or
    chimney, whether constructed wholly or partly above or below ground
    level;
  2. any road, harbour works, railway, cableway, canal or
    aerodrome;
  3. any drainage, irrigation or river control works;
  4. any electrical, mechanical, water, gas, petrochemical or
    telecommunication works; or
  5. any bridge, viaduct, dam, reservoir, earthworks, pipeline,
    sewer, aqueduct. culvert, drive, shaft, tunnel or reclamation
    works

and includes –

  1. any works which form an integral part of, or are preparatory to
    or temporary for the works described in paragraphs (a) to (e),
    including site clearance, soil investigation and improvement,
    earth-moving, excavation, laying of foundation, site restoration
    and landscaping.
  2. procurement of construction materials, equipment or workers,
    necessarily required for any work described in paragraphs (a) to
    (e);

Section 29 of the Act states that a person who does not comply
with the registration requirement could be liable to a fine not
less than RM10,000 but not exceeding RM100,000 and Section 30
confers the power to the CIDB to serve on the contractor by notice
in the prescribed form requiring him to abstain from commencing or
proceeding with the construction works. Contractors who failed to
comply with the notice shall be guilty of an offence and shall, on
conviction, be liable to a fine not exceeding RM5000, and in the
case of a continuing offence, to a fine not exceeding RM1000 for
every day or part of a day during which the offence continues after
conviction.

Definition of Foreign Contractor

According to the CIDB Contractor Registration Guideline, foreign
contractors include construction companies that are incorporated in
Malaysia as a joint venture company with local shareholders and the
joint venture company has a foreign equity holding of more than
30%. Alternatively, a foreign contractor can also be a construction
company that has been incorporated overseas. The 30% threshold is a
general threshold and varies depending on joint venture
arrangements with foreign contractors from particular countries as
stated below:

Table 1: Foreign Equity Holding Thresholds

Joint venture arrangement between construction companies in
Malaysia and the respective countries

Foreign equity holding threshold
(to be classified as foreign contractor)

Malaysia-Australia

More than 49%

Malaysia-New Zealand

More than 49%

Malaysia-Australia-New Zealand

More than 49%

Malaysia-India Comprehensive Economic Cooperation Agreement

More than 51% for joint venture with a local contractor holding
the CIDB Certificate Grade G7

Malaysia-Korea

More than 30% (i.e. standard threshold)

Malaysia-China

More than 30%

Malaysia-Japan

More than 30%

Malaysia-Pakistan

More than 30%

Source: CIDB Requirements and Procedure on
Contractor Registration, July 2018

Registration as Foreign Contractor

Registration as foreign contractor will be required where a
foreign construction company participates in a construction project
on its own capacity or without any joint venture with local
construction company.

Foreign contractor registration will generally involve two
stages.

  1. First, if a foreign contractor was never registered with the
    CIDB, the company is required to submit a pre-registration
    application
    to the CIDB.
  2. Second, a foreign contractor will be required to apply for a
    Provisional Registration Certificate (PRC) for the
    permission to participate in a tender exercise as specified in the
    PRC using Form R2 (Participation of Tender in
    Malaysia Registration Application Form);
  3. After the foreign contractor is offered with the Letter of
    Award, application for Registration Certificate
    (RC)
    is required to be submitted using Form
    R3
    (Projects Awarded in Malaysia Registration Application
    Form).

The registration procedure and conditions for foreign contractor
can be summarised in the table as follows.

Table 2: Summary of Foreign Contractors Registration
Procedures

Provisional Registration Certificate (PRC)
(Form R2 Application)

Registration Certificate (RC)
(Form R3 Application)

Purpose of Registration

To participate in tender of construction project in
Malaysia.

To execute and undertake construction projects in Malaysia.

Registration Requirement

1) Submission of the following document/information to the
CIDB:

a) Tender advertisement or invitation letter from client;

b) Company’s construction experience; and

c) Certificate of registration with the Company Commission
Malaysia (CCM) or a copy of the company registration from the
country of origin.

2) Prior to this application, foreign contractors registering
with the CIDB for the first time has to submit a pre-registration
application to the CIDB.

Note: The approval of the pre-registration
application does not allow the company to participate in any tender
nor any construction work.

3) Financial resource of minimum RM750,000 / equivalent to the
value of the currency of the country of origin. (i.e. minimum
paid-up capital of RM750,000); if the company is not registered
with the Company Commission Malaysia (CCM) or is without any
paid-up capital, a copy of the company’s current account
statement has to be submitted.

4) Employment of at least one (1) Malaysian citizen with the
academic qualification in a construction related field as technical
personnel.

1) Submission of the following document/information to the
CIDB:

a) Certificate of registration with the Company Commission
Malaysia (CCM);

b) Letter of Award for the particular project and such a project
will be specified in the Registration Certificate;

c) A copy of at least two (2) Malaysian technical persons’
bachelor degree certificate. The degree must be in a construction
related field. At least one technical person must have at least
five years of experience in construction. (Years of experience to
be derived from the date of completion of the bachelor degree).

2) Prior to this application, foreign contractors registering
with the CIDB for the first time has to submit a pre-registration
application to the CIDB.

Note: The approval of the pre-registration
application does not allow the company to participate in any tender
nor any construction work.

3) Minimum paid-up capital of RM750,000; if the company is
registered with the Company Commission Malaysia (CCM) as a Branch
office without any paid-up capital, the company is required to
declare the latest financial documents of the company registered in
the country of origin.

4) Employment of at least two (2) Malaysian citizens with
bachelor’s degree or above in the construction field; and one
of them must possess more than five years relevant experience in
construction industry.

Fees and Charges

Processing fee: RM50
Registration fee: RM500

Processing fee: RM50
Registration fee: RM5,000

Certificates upon Successful Application

Provisional Registration Certificate
(“PRC“)

Registration Certificate (“RC“)

Conditions for Holder of Certificates

1) The Certificate cannot be transferred;

2) The Provisional Certificate of Registration shall be valid
only until the deadline or extended deadline for the tender in
question;

3) The certificate cannot be used for carrying out any other
tender except the one being specified in the Certificate; and

4) The applicant is required to submit an application for a
Registration Certificate for Foreign Contractor upon successful in
the bid as a foreign contractor before starting any work.

1) The Certificate cannot be transferred;

2) The validity period for a Registration Certificate is as
indicated in the Certificate itself in accordance with the letter
of award submitted earlier and if for any reason the date of
completion of the project is extended, the contractor has to apply
to the CIDB for an extension of the validity of the Certificate;
and

3) The Registration Certificate allows the holder to execute
only the project specified in the certificate.

Source: CIDB Requirements and Procedure on
Contractor Registration, July 2018

Joint Venture between Foreign Contractor and Local
Contractor

It is also common for foreign contractors to enter into joint
venture arrangements with local construction companies in Malaysia
to undertake construction activities. The procedure for registering
the joint venture with the CIDB and whether the joint venture
parties are required to incorporate an entity in Malaysia (a joint
venture company) to jointly undertake the construction project work
in Malaysia depend on:

  1. Whether the foreign contractor’s interests exceed the
    applicable foreign participation threshold (see Table 1 above);
    and
  2. Whether the local construction company (the local partner) of
    the joint venture is currently registered with the CIDB.

Conclusion

The construction industry is one of the most crucial industries
for a country’s development and growth. Recognising the
importance of the industry for the country’s long term
sustainable growth, the Malaysian government is always active in
formulating rules and policies to monitor and regulate the
construction industry. Foreign contractors are strongly advised to
comply with the requirements of CIDB and other laws and
regulations.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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