Contractor Development Programme

• Jan 7, 2013
• contractors, construction industry
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A construction business requires very limited permanent capital to start operations.ⁱ Construction projects are largely financed through interim or monthly payments that fund the next stage or period of work.ⁱ Capital requirements are restricted to the spread in cash flow between payments and receipts. Further, many types of construction require nominal levels of technology.

This means that it is a business with very low barriers to entry. On this basis, the industry represents a major opportunity for empowerment of previously disadvantaged individuals.

What needs to be cultivated is an enabling environment where this transformation can occur. The construction sector, which consists of different disciplines with a proliferated client and supplier base, performs an indispensable role in the economy of South Africa.

The contracting sector covers a wide range of specialisation, with greatly varied levels of sophistication, high labour intensity and perceived low barriers to entry to basic contracting. In general, the sector operates in an environment characterised by high risk and low profit margins.

Graphic by Melissa Whitehead

While opportunities for black- and women-owned enterprises have been rapidly expanded in the general building contracting category, the specialist contracting sectors have largely not been penetrated, including electrical and mechanical engineering, which require specialist skills and greater capital resources. This seems to indicate the limitations of procurement as a sole driver of empowerment and the need for programmes aimed at the rapid development of specialist black enterprises.

A Construction Industry Development Board (CIDB) surveyⁱⁱ indicated that national contractors typically now earn 30% to 50% of their turnover outside South Africa. Large firms, and increasingly medium-sized contractors, have adopted a “walk-away” policy towards segments of the market where the risk-to-reward ratio is considered untenable. This has been evidenced, for example, in the subsidised low-cost home-building market. Tendering is regarded by many of the more successful contractors as less important, as much of their work comes from longer-term relationships with private clients, based on overall performance.

The survey indicated that emerging contractors are entering the market at the low end, and in the general contracting category, making this sector extremely competitive and unsustainable. Large numbers of emerging contractors have moved into higher-value public sector tendering in the R500 000 to R2-million market, which is also becoming overly competitive.

Addressing supply-side constraints

A number of interventions were implemented in Gauteng with varying degrees of success. These included:

• Training and mentorship: The provision of mentorship was seen as essential. Many contractors interviewed required assistance with pricing of contracts and compilation of accounts/invoices. Banks also view contractors that participate in mentorship programmes much more positively than other emerging contractors that don’t. A mentorship programme is seen as a necessary supplement for inexperience and an insufficient track record, and is important to assure banks and other financial institutions (e.g. the Industrial Development Corporation) of reduced business risks.
• Credit records and working capital: Several emerging contractors have credit records at credit bureaus, in many cases for outstanding personal debts. This prevents access to working capital. Emerging contractors find it extremely difficult to develop a capital base as a means of providing working finance on future contracts.
• Working capital loans and sureties: A number of institutions, under an agreement with the national Department of Public Works, are providing bridging finance and sureties to emerging contractors at reasonable costs and interest rates.
• Project management support services: Some banks provide bridging finance and sureties subject to a number of conditions, including the provision of project management, which incurs a fee in addition to short-term interest rates of up to 10% per month. Within the framework of the project management service, the bank arranges payment terms with material suppliers, and contractors generally do not develop business relationships and track records. Contractors questioned the extent of actual empowerment achieved through these arrangements.
• Cession agreements:Many public sector clients allow the signing of cession agreements with materials and plant suppliers and with banks to facilitate access to supplies and finance. The use of cession agreements is seen by some as disempowering, as these contractors do not have control over major aspects of their business, including cash flow. There have also been instances where these cession arrangements have been overlooked through a lack of suitable control at client level and contractors have been overpaid.

Development of the emerging sector continues to grapple with a range of supply-side constraints, including access to finance, surety, credit, entrepreneurial skills and cash-flow management, which is a critical factor for success in the contracting sector. Emerging contractors feel that banks are reluctant to deal with them unless at exorbitant interest rates and through compulsory business management services.

Many emerging contractors have been able to access finance through institutions such as the Industrial Development Corporation when working within development programmes of national government departments, and at provincial level through institutions such as Ithala (KwaZulu-Natal). Mentorship, using methods such as the Contracting Entrepreneurial Training Programme, has contributed towards the development of key skills.

• Progress and challenges: A key factor for success in the transformation of large-scale construction enterprises will be the potential of the industry to attract and fast-track the development of black built-environment professionals and managers.

Since small-scale construction companies generally evolve as one-person or family enterprises, their ability to grow and consolidate beyond a certain threshold will also depend to a large extent on the availability of professional capability. Because of the high levels of capital investment in the materials manufacturing and, to some extent, specialist contracting sectors, empowerment will depend on innovative financing and transformation models that open up increasing opportunity to historically disadvantaged South African partners. On the basis of such models it may be necessary to augment industry commitment through black economic empowerment (BEE) funds set aside by the government.

• Equity ownership: While equity ownership in pubic listed companies can be achieved via the stock exchange, in many instances the acquisition of a 25% share of a major company could require millions of rands of investment. If the funds are borrowed at ruling rates, this means that the dividend payments must exceed the interest rate for this to be a viable investment.
• Employment equity:Many respondents regarded it as not being problematic in the short to medium term to meet the requirements of the scorecard.
• Skills development:Performance levels for skills development appear to exceed the requirement of the Skills Development Levy. All companies expressed commitment to skills development, and see this as a very important component of their BEE responsibility.
• Indirect empowerment: Many companies have problems performing on this criterion because large proportions of their procurement are obtainable only from large, established manufacturers and suppliers. Certainly, the commitment of those interviewed is there to procure as much as possible on a preferential basis, and this will undoubtedly assert pressure on the materials manufacturing and supply sectors.
• Enterprise development: This component of the scorecard is addressed creatively by many organisations in downstream development and investment in enterprises. However, the percentage of total assets would be relatively small because many organisations have a large asset base and by comparison, an investment in enterprise development, although significant, would only represent a small proportion of total assets.
• Management equity: In the longer term, there is absolute commitment to achieving equity targets. However, it was noted that the current pool of management talent is small in relation to demand. Most of the companies interviewed have their own accelerated management development programmes, and intend to progress black management as rapidly as possible.

Public works intervention

In the period 2005 to 2009, the Gauteng Department of Public Transport, Roads and Works embarked on a process of restructuring its relationship with contractors in line with new CIDB processes. It was considered essential that a performance management system be implemented for both the CIDB contractor process and in relation to the appointment of the professional service providers. A number of issues that needed to be measured and monitored were identified, namely:

• First and foremost is in relation to performance and delivery in terms of the tender conditions, time allocations and within the budgetary parameters.
• Achievement of the BBBEE (broad-based black economic empowerment) requirements of the project. This monitoring segment was to include both a quantitative and qualitative assessment. The assessment of labour content for contractors was under way in 2009 – however, qualitative assessment in the form of sustainable job creation, multitasking, and internships, etc, had not then commenced. The process of assessment of the professional service providers in relation to how they are achieving job creation, empowerment and capacitation had also not commenced.
• Management of the project lifecycle. Reference is made to the Project Management Resource Group process, which had great success in addressing the elements highlighted.

For any contractor development programme to succeed, the monitoring of the following aspects must be undertaken:

• Performance of each contractor within the incubation programme on a monthly basis
• Monitoring of skills development during the project
• Monitoring of obstacles and challenges within the project or programme
• Research and reports on successes and failures of the programme during and after its completion
• Quarterly updates to senior managers of the client department on the incubation programme
• Monitor business and financial performance of individual companies within the incubation programme