inform practice note

construction industry development

Issued by the Construction Industry Development Board

Development through partnership

construction procurement and delivery

SCALING UP DELIVERY AND ACCELERATING EMPOWERMENT

Content
1 Introduction ............................................................................. 2 2 Fresh approaches to procurement and delivery ..................... 3 3 Changing the contracting strategy .......................................... 4 4 Programme approach ............................................................. 5 5 Increasing the size of contracts .............................................. 6 6 Increasing the duration of contracts........................................ 7 7 Introducing a systems approach to delivery on projects of a repetitive nature .......................................................................... 8

Practice Note # 1
August 2006 (Version 1 - August 2006)

cidbs inform practice notes provide guidance and clarity in achieving client objectives in construction procurement and delivery. Practice notes inform clients and practitioners on how to embrace best practice and to deal with issues that may arise. They are aligned with, but do not replace regulation.

Synopsis:

Construction output needs to double in size over the next 5 to 10 years to meet growing demand. At the same time, several government departments and municipalities are currently struggling to spend their allotted capital budgets for a number of reasons. Changes in current practices are necessary to address these challenges, to support client delivery capacity and to develop contracting capability. This practice note identifies systemic problems in scaling up delivery and accelerating empowerment and outlines fresh approaches and contracting strategies that increase the size and duration of contracts to enable: enhanced delivery and the efficient use of resources; sustainable enterprise growth, employment, workforce skills development; and sustainable empowerment.

In a nutshell Use larger contracts Use longer contracts Adopt a programmatic and a systems approach

Board: Pepi Silinga (Chairperson) Nonhlanhla Mjoli-Mncube (Deputy Chairperson) Brian Bruce Trueman Goba Carmel Marock Savannah N Maziya-Sandanezwe Nazir Alli Mandla Ndlovu Prof Raymond Nkado Dr Sean Phillips Shaun Webber Michael Wylie CEO: Spencer Hodgson

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1.1

Introduction
Increase in demand for construction services

The South African construction industry is entering a growth and expansion phase whereby both the public and private sector are increasing investment in infrastructure over the next few years. Major infrastructure projects have been announced by Transnet, Eskom and the mining sector, while work has commenced on Gautrain and the 2010 Soccer Word Cup Stadiums and related infrastructure. Government has also announced significant increases in infrastructure budgets (capital and maintenance) and will double the MTEF allocations to national, provincial and municipal spheres in the 5 year period to 2008/09. To put matters in a nutshell, the industry needs to double construction output over the next 5 to 10 years to meet growing demand. This is going to place a significant strain on existing resources and skills in both the industry and public sector.

1.2
Deficiencies approaches in the project

Current challenges in the public sector

The current approach to delivering infrastructure is inherently inefficient with virtually every project managed separately and through processes fraught with overlap and uncertainty. Letting contracts for hundreds of small projects, apart from being inherently inefficient, produces an enormous internal requirement for project management that is very difficult for the departments and municipalities to satisfy with its diminishing pool of skilled personnel. Unintended consequences of unbundling approaches The unintended consequence of unbundling is that it places additional demands on project managers and procurement staff to procure the works, significantly increases the number of administration actions and financial transactions, requires significantly higher inputs from built environment professionals tasked with the administration of the contracts and in many instances results in substandard work due to inexperience which in turn requires higher levels of maintenance.

Many departments and municipalities are currently struggling to spend their allotted capital budgets. This may be attributed to a number of capability and capacity constraints in the public sector, including inappropriate delivery models and a shortage of skilled programme and project managers. Where such skills exist, they are invariably overstretched due to poor delivery models which frequently overburden scarce skilled project management and administrative capacity. This capacity problem may in part be attributed to the predominance of small contracts which results from: 1) 2) the project approach whereby, for each and every project, consultants are appointed, briefed, directed and overseen by a gradually disappearing cadre of skilled staff; unbundling strategies aimed at reducing the size of contract in order to spread the sunshine across as many constituents as possible and to target small emerging enterprises.

While these approaches have opened up opportunity for emerging enterprises, they do not support sustainability and growth and are delivering limited quantities of infrastructure per contract, resulting in severe work overload for officials. They often lead to poor quality end products, rework and delays that add to the burden. Departments and municipalities have not necessarily been able to overcome capacity constraints by simply targeting large contractors. With the current abundance of work, some of the larger contractors are not tendering on public sector work for a number of reasons including past experience with delayed payment, onerous tendering and contract conditions, inappropriate risk allocation and a lack of performance incentives. Public sector contracts need to be made more attractive for large and medium sized contractors, and more developmental for small enterprises. Practice Note # 1 2 of 8

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Current BEE challenges and opportunities

Demand side access

Public Sector Delivery

Supply side support

The process of effecting a fundamental change in the business ownership patterns of enterprises participating in the construction sector may be achieved through: Option 1: Establishing and nurturing significant numbers of black SMMEs Option 2: Changing the structure in the equity ownership in large companies

Affirmative Procurement (APP) = ACCESS TO WORK OPPORTUNITIES

Emerging Contractor Development Programme = ACCESS TO SUPPORT

information & advice training & mentoring finance & credit

Delivery Empowerment, transformation Consolidation, emergence

The Affirmative Procurement Policy and Empowerment model developed by DPW in 1996 related Emerging Contractor Development Programme, which were launched by the National Department of Public Works in 1996 focused on the first option and made the construction industry attractive to new entrants. This policy and programme has been extremely successful in developing small enterprises. Today the vast majority of small registered contractors are black owned and are competing against each other for government tenders. The Broad Based Black Economic Empowerment Act, which in the near future will link the DTI scorecard to the preferencing system, focuses on the second option for changing business ownership patterns in large companies. It encourages transformation in all its dimensions, particularly in medium and large enterprises. The scorecard facilitates the rewarding of such enterprises with preferencing points in the evaluation of public sector tenders or partnering opportunities. The scorecard also supports small businesses that are transformed or embracing aspects of empowerment through the preferential procurement element by which enterprises are scored in terms of the supplies, services and works procured from BBBEE contributors.

DTIs BBBEE scorecard Element Ownership Management control Employment equity Skills development Preferential procurement Enterprise development Residual component
Max score Target Enterprise parameter Multiplier Score

Accordingly, the DTI scorecard provides a solid platform for engaging larger contractors in the delivery process whilst simultaneously promoting broad based black economic empowerment objectives throughout the supply chain.

2.

Fresh approaches to procurement and delivery

Fresh approaches to procurement and delivery need to: enhance delivery in the context of growth, capacity constraints and more efficient use of resources; enable continuity of contract work that allows enterprises to consolidate and grow; enable sustained jobs, workforce skills development; promote sustainable empowerment. 3 of 8 Practice Note # 1

Fresh approach to procurement and delivery to meet current challenges include: Go bigger Go longer Go a programmatic and systems approach

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DESIGN BY EMPLOYER

Changing the contracting strategy

Employer

Consultant (designer)

Contractor (constructor)

The historic approach to delivery in the civil and building sector has been the design by employer strategy whereby the contractor only undertakes construction on the basis of full designs issued by the employer. This contracting strategy requires that the design and specifications be adequately developed before tenders are invited. Employers are today under pressure to deliver projects, on time, on budget, to a higher standard of quality and within shorter time frames than in the past. Employers accordingly require a range of contracting options which:

DESIGN & BUILD Employer Contractor (designer & constructor)

DEVELOP & CONSTRUCT Employer

Consultant (conceptual design)

Contractor (designer & constructor)

accelerate the time for completion; provide shared incentives that are designed to ensure that both designer and contractor have a material alignment with the client's objectives; provide for an appropriate and shared allocation of risks; and permit the project to be broken down into several phases, with early ones starting on a cost reimbursable basis whilst design work is finalised.

CONSTRUCTION MANAGEMENT

Employer Construction manager Consultants (professional services) Contractors (constructors)

In addition, the range of options need to be sufficiently flexible to accommodate requirements for emergency works, single point accountability and the assigning of collective responsibility to a structured group of partners. In the design and build strategy the contractor undertakes most of the design and all construction in accordance with the employers brief and his detailed tender submission, usually for a lump sum price. The develop and construct strategy is similar to the design and build strategy, except that the employer issues a concept design on which tenders are based. In the construction management strategy a construction manager can accept responsibility for delivering the completed project by a date set for a target or fixed price. Accordingly, a construction manager may provide management services from the time that the design process is initiated to the commissioning and hand over of the completed works which relate to the control of time and cost. Partnering approaches have also been recently introduced into the contracting arrangements on selected projects to:

ALLOCATION OF RISK IN DIFFERENT CONTRACTING STRATEGIES Design & build Develop & construct Design by employer Construction management

min min max

Employers risk Employers flexibility Contractors risk

max max min

share costs, risks and rewards e.g. provide a target cost in terms of which if the final cost is less than the level of target cost, the savings are shared according to a pre-agreed formula; draw upon the strengths and expertise of the different partners in a way that is specific to a project so that all partners can enjoy the benefits; share expertise and systems; and Practice Note # 1 4 of 8

 provide greater predictability in outcomes. Partnering is ideally suited to complex activities and large projects. A standard partnering option is provided for in the NEC3 family of contracts that allows for collective or individual motivation through the provision of Key Performance Indicators. A partner is paid an agreed amount if the performance target is achieved or improved upon. This is made part of the amount due in the partners own contract. If one partner lets the others down for a particular target by poor performance, then all lose the bonus for that target. The range of standard forms of contracts prescribed for construction works in the CIDBs Standard for Uniformity in Construction Procurement is sufficiently broad to allow clients to implement any of the aforementioned contracting strategies.

4.

Programme approach

The current project approach deals with projects on a project-byproject basis i.e. on a one-off basis. Consulting teams are appointed for each and every project and are managed by internal project managers one project at a time. In the programme approach, infrastructure is managed through a series of comprehensive multi-year programmes. In this approach, similar infrastructure projects, either at a regional or district level, are grouped together into a cluster of projects for a period of time, typically the MTEF period. The project approach currently used by departments and municipalities has tended to be reactive. This needs to be changed to a foresight based one that fosters a creative environment with proactive and collaborative relationships. This in turn requires a change in the manner in which service providers are appointed, remunerated and managed. Programme managers and consulting teams should be appointed on a competitive basis albeit with an ill defined scope of work, since the model requires their inputs in order to formulate what is to be constructed, repaired or maintained. The scope of work can be formulated in terms of performance. However, the form of contract on which these consultants are appointed needs to provide for open book accounting, the promotion of strong partnering relationships, contain rapid dispute resolution mechanisms, focus outputs on key performance indicators (KPIs), proactively manage shared risks and provide for incentives and disincentives. This will enable client or client department expectations to be realised.
Customer Department Employer etc

Programme manager

Programme manager

Consulting team Contractor(s)

Consulting team Contractor(s)

Programme 1

Programme 2

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Practice Note # 1

5.
Percentage of CIDB registered contractors having at least 50% black ownership CIDB grade 1 2 3 4 5 6 7 8* 9* Percentage of total 97 92 93 86 75 70 35 27 0

Increasing the size of contracts

Over the last decade, the trend has been to break projects down into smaller sizes to provide work for small black owned enterprises. Although this targeting strategy has been successful in growing the market for such enterprises, it has placed strain on public sector capacity, impeding its ability to deliver at scale and to spend capital budgets. Furthermore, it has reduced the number of opportunities for medium sized enterprises, resulting in the lack of black owned contractors registered at grades 7 and higher. The new BBBEE strategy enables public sector contracts to be awarded to medium and large enterprises without compromising empowerment objectives. It also encourages such enterprises to outsource to and develop smaller black owned enterprises in order to maintain and improve their BBBEE ratings as achievements in terms of preferential procurement and enterprise development are scored in the scorecard. Sustainable enterprise growth and empowerment is linked to: access to work opportunities; development of commercial, administrative, entrepreneurial and technical skills and competencies within an enterprise in the fields within which they operate; and establishment of appropriate company and business systems within an enterprise. So far Employers have largely taken the approach of using the preferencing system and unbundling strategies, linked to emerging contractor development interventions, to develop and grow small enterprises. Such enterprises have benefited at the enterprise level with these interventions, particularly through mentorship. However, these enterprises have not generally invested in the training of their staff or proved to be sustainable employers. The awarding of contracts to large contractors, due to economy of scale and the expertise residing in such companies, presents an excellent opportunity to cost effectively provide work opportunities and to develop targeted contractors. Such contractors can be: required to subcontract identified portions of work to targeted contractors using a procedure established in the CIDB Standard for Uniformity in terms of which the employer and contractor jointly appoint subcontractors; required to provide construction and materials management support to potentially emerging contractors in the lower grades that require such support; rewarded with a price preference at tender stage should they offer to achieve a contract participation goal relating to the subcontracting of work to or enter into a joint venture with targeted contractors; required to subcontract a percentage of the work to targeted contractors; or

* some of these are public listed companies

Source: CIDB register of contractors (March 2006)

Advantages in using large contractors: access to expertise in contract management, technical skills, quality assurance and financial capacity; rapid delivery on a large scale; economies in scale; reduced management burden on employer; reduced contractual risk; reductions in professional fees better utilization of scarce skills

Practice Note # 1

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 offered an incentive bonus should they equal or exceed a contract participation goal relating to the engagement of targeted enterprises. The abovementioned measures ensure that access to work opportunities is provided to targeted contractors. In order to provide such opportunities, large contractors might have to offer some support to targeted contractors, e.g. in the form of shorter payment cycles, access to credit facilities and plant, construction management support and mentorship. Development support may, however, be provided in a much more targeted, focused and measurable manner should key performance indictors (KPI) be established for large projects and bonus incentives be paid if large contractors equal or exceed the performance targets set.
Schedule of partners
Name of partner Contribution and objective Joining date Leaving date Key performance indicator Target Measurement arrangement Amount of payment if target is achieved or improved upon

For example, KPIs can be established in respect of: training outcomes e.g. number of persons attending specified training courses; contractor development outcomes such as the number of contractors improving their CIDB contractor grading designations over the duration of the contract; new enterprise formation in classes of works where there is a scarcity of black owned businesses.

The partnering approach, which may be used in any of the aforementioned contracting strategies, may be applied not only to the large contractor but also to each and every member of the project team. In this manner, the entire project team (consultants, contractors, accredited training providers etc) can be offered incentives to accelerate empowerment through a particular project. This approach is attractive to large contractors as their participation in contracts of this nature will contribute to their score in terms of the BBBEE score card and as such will provide their companies with a competitive edge in securing contracts.

6.

Increasing the duration of contracts

Tip Issue contact for a single year and renew contract for subsequent years subject to satisfactory performance.

There is considerable merit in increasing the duration of the contract, particularly where the work is repetitive in nature over a period of time. Instead of issuing a new contract every year or several small contracts within a year, a three to five year contract should be entered into.

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Practice Note # 1

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This longer period for a contract has the following benefits: offers considerable savings in management and administrative costs and professional fees as fewer contracts will need to be tendered and managed; allows contractors to purchase plant and equipment for the project and to write off the costs associated with such purchases against the overall larger and longer project; allows contractors to develop their staff and subcontractors, thus improving their proficiency in performing the contract; provides contractors with a steady and predictable flow of work which allows them to consolidate and expand their business; and supports long term jobs and skills development.

practice note
Practice note 1 - August 2006
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construction industry development

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This approach is developmental and supports contractors to improve their CIDB contractor grading designations over time. A well structured programme will identify and target those potentially emerging contractors who have the potential and desire to improve their grade through the contract. In the first year, the employer might provide supply side measures in the form of mentorship, to provide the necessary support to managing the risk associated with a contractor working in one grade higher than they are currently registered in. In subsequent years, the need for mentorship may fall away and incentive bonuses can be offered to the contractor for skills training offered to staff and the attainment of quality and health and safety standards. Such an approach may raise contractor performance, competitiveness and profitability, whilst reducing the administrative burden on the client.

Further information on contracting strategies may be found in the following documentation contained in the CIDB website (see www.cidb.org.za): CIDB Best Practice Guideline A5: Managing Construction Procurement Risks CIDB Best Practice Guideline C2:Choosing an appropriate Form of Contract for Engineering and Construction Works Module 3 (Delivering construction projects) of the Manual to Guide Infrastructure Development for the Soccer World Cup which may be downloaded from the CIDB website.

7.

Introducing a systems approach to delivery on projects of a repetitive nature

Standardisation in procurement documentation, designs of buildings, specifications, procurement, pricing, contracting and targeting strategies within a particular infrastructure programme can bring about significant efficiencies in the time and cost of the delivery of projects and improvements in project outcomes measured by quality and end user satisfaction. Such standardization not only significantly reduces the internal and external professional inputs required to deliver projects but also affords contractors the opportunity to be more productive and profitable. Alternative building technologies such as tilt up construction and prefabricated building systems may also be used effectively to accelerate delivery and eradicate backlogs. A systems approach enables more infrastructure to be delivered and budgets to be spent in shorter time frames and more consistently. This increases the volume of work that is available to contractors and provides a solid base for sustainable enterprise development. Sporadic or intermittent work flows have a very negative impact on the viability of enterprises.

Development through partnership

cidb website: www.cidb.org.za

Practice Note # 1

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