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Opinion: South African construction contract participation requirements appear to be out of touch with reality

28th October 2021

     

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In this opinion piece, MDA Consulting director Ian Massey writes about construction contract participation requirements in South Africa being unrealistic and resulting in greater risk for contractors.

South Africa’s struggling construction sector is understandably buoyed by the South African National Roads Agency Limited's (Sanral’s) rumoured rollout of 35 to 40 contracts in the Eastern region this financial year, all of which are subject to specified contract participation goal (CPG) requirements.

To facilitate CPG involvement, Sanral has structured its construction contracts to direct the required portion of the contract value to qualifying CPG subcontractors.

I believe that current CPGs may be unrealistic and result in greater risks for contractors. In fact, they are likely to have the unintended consequence of negatively affecting transformation goals.

Contract participation goals (CPG) are not new in the construction sector. The requirements range between 20% and 50% of contract values, depending on the BBB EE status of the main contractor and they are intended to develop targeted businesses by ensuring greater participation (and therefore exposure and skills development) in construction projects.

CPG percentage participation allocations are arbitrary and don’t seem to take the nature of work into consideration. 

In an extremely competitive market, adverse cost effects are mainly being borne by the main contractors, which is not sustainable in the medium to long term. There are several factors, unpacked below, which exponentially increase risks for the main contractor and reduce its span of control. Ultimately, transformation goals suffer.

Key considerations for contractors will always be the level of control they have over delivery on time and budget, providing the right quality, working safely and managing risk.

Assuming the promised roll out of Sanral work does take place, it is important to remember that targeted labour and enterprises can only be sourced from a specified area. It is likely that that there won’t be enough CPG subcontractors to meet this demand in specific areas, nor are there enough enterprises when one considers that work done by a CPG contractor that qualifies to do work on one stretch of road, doesn’t automatically qualify to do work on the next stretch of the same road.

A CPG contractor with the requisite skills and experience is then also effectively prevented from using these skills to geographically expand the business as job creation is effectively regionalised. Taking a broader view, it means we are not building on skills that are already there and the efforts to select and train CPG contractors will potentially be fruitless.

Contractors need to allow for two major risks: the management of numerous smaller subcontractors and the skills levels of subcontractors, who are graded based on experience and complexity of work completed.

SKILLS, TRAINING AND LABOUR COSTS
Experience has shown that as small, emerging businesses, CPG subcontractors seldom have the capital to hire plant or buy materials. In addition, they often have an insufficiently developed technical and commercial skills base, and these factors generally combine to limit their contribution to providing basic labour. While there are requirements to identify skills availability and training needs as a part of the CPG procurement process, competency takes years to develop, which means that on a contract lasting two years, competency levels are unlikely to be meaningfully improved.

It’s an untenable reality - as a rough guide, the contractor’s wage bill is around 30% of the contract value. Directing 30% to basic labouring entities (if that is the CPG contract percentage required) would use up a contractor’s entire wage allowance. Basically, the price would then need to be loaded to cover the contractor’s own semi-skilled and skilled employees which he would still need to deploy.

Sanral’s contract has a prohibition on awarding CPG work at rates more than 15% higher than the main contractor’s rates for that work. This creates a bizarre situation where the main contractor must work with a CPG subcontractor at up to 15% more than its own rates for doing the work. And the contractor needs to train and mentor the CPG subcontractor to keep up with programme, work within his allowable cost and provide work to the required quality. This in a business climate in which rates and profit margins are under extreme pressure and employers are reluctant to relax time frames.

POOL OF CPG SUBCONTRACTORS
CPG subcontractors must hold Construction Industry Development Board (CIDB) gradings, which define the maximum value for which CPG subcontractors can tender. A CIDB CE2 subcontractor, for instance, can tender for civil engineering work to a maximum of one million rand. The CPG subcontractors intended to benefit from the CPG work allocation arrangement include CIDB level 5 who can tender for contracts up to R10-million.

With Sanral’s substantial contract values, contractors will require a large number of CPG contractors to achieve the CPG percentage allocation or face sanctions when such targets are not met. Aside from the challenge of managing so many subcontractors, the pool of CPG contractors simply isn’t large enough at the moment to meet CPG requirements.

Even if contractors meet CPG requirements from the available pool of subcontractors, another significant risk in South Africa is the potential of intervention by business forums, which can result in disruptions and delays. These are at the contractor’s risk on Sanral contracts.

SOLVING THE PROBLEM
Most South Africans fully support the initiative to uplift previously disadvantaged people and communities. After years of being in place, I am not aware of CPG allocation case studies to support it as a successful development model. Put simply, it doesn’t seem to be working for anyone.

There are examples of successful transformation initiatives, such as the construction of the Durban International Convention Centre (ICC). This model required each consultant and contractor to appoint junior joint venture partners to undertake a set percentage of the work. Several viable business entities were created. To my knowledge, this model has not been adopted on other projects since the ICC was completed in 1997.

Employer bodies need to acknowledge that transformation comes at a cost which cannot simply be added or bolted on to existing contracts, particularly in cases where competitive tenders where the lowest price is the main criteria for the awarding of contracts. Instead, contract pricing and terms of standard form contracts should reflect a shared risk profile.

Edited by Creamer Media Reporter

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