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NEC4 ALLIANCE CONTRACT

The NEC has released a draft of a new NEC4 Alliance Contract, for consultation, allowing users to shape the final contract. This consultation process is now open and is expected to close on 30th November 2017. Formal publication is expected in January 2018.
It will be a single standalone contract, one of the NEC suite, consistent with all other NEC4 documents. It is designed for use on major projects or programmes of work, where longer-term collaborative ways of working are to be created. Due to the time investment needed, pre-contract, to create an alliance, it is not envisaged for use on low risk or low complexity projects.

The NEC contracts have always encouraged collaboration (although some disagree with its effectiveness in this regard[1]), with the NEC3 offering an additional partnering option under Clause X12. This option has, however, been criticised for its failure to create a multi-party set of relationships, to provide a basis for early contractor involvement or to provide adequate enforcement mechanisms[2].

These are issues which have been addressed in the PPC (Project Partnering Contract) 2000, which is a suite of standard form contracts developed, in the United Kingdom, for use on construction projects. It is one of a number of tools recommended by Constructing Excellence (a construction industry membership organisation based in the United Kingdom) as a means of helping to implement collaborative working.

Under the PPC2000 Employers (referred to as Clients), their agents such as the Engineer/Project Manager/Principal Agent (referred to as Consultants) and Contractors (referred to as Constructors) all sign a single multi-party contract, which can also accommodate early contractor involvement. The PPC200 has been used to good effect on projects such as the Cookham Wood Young Offenders Institution and North Wales Prison Trial Project in the United Kingdom.

A similar alliance agreement has also been shown to be effective through its use by the Stronger Christchurch Infrastructure Rebuild Team, established to repair roads and underground services damaged by earthquake.

The NEC4 Option X12 is now titled multi-party collaboration, however, the substance of this clause remains similar to Option X12 in the NEC3. NEC contracts allow all members of the supply chain to be engaged on similar terms and conditions, however, these are still two party rather than multi-party contracts.

The NEC4 Alliance Contract, on the other hand, is a single contract form, with a single set of terms and conditions which make provision for shared risks and rewards, that all members of the supply chain sign. It also makes provision for early contractor involvement, which allows budget, time and performance targets to be agreed with more accuracy.

What is envisaged is a cost reimbursable contract (defined cost-plus fee) similar to Main Option E in the other NEC suite contracts.

The members of the alliance then work together as an integrated team, work being allocated on a ‘best for project basis’, with an alliance board managing the alliance on behalf of the members, for the achievement of the alliance objectives, as determined by the Employer. Integrated systems and processes such as an early warning register and information modelling are used to assist the alliance members in achieving their objectives.

  1. Decisions of the alliance board must be unanimous and will bind all members of the alliance. All liabilities are shared and manged by the alliance, except wilful default by one of the partners and third-party claims, which are the client’s risk.
  2. Disputes are resolved by senior representatives or the alliance board, with third party support, if required. There is no provision for traditional dispute resolution provisions such as adjudication or arbitration, and a failure to resolve a dispute brings the alliance, or a partner’s involvement, to an end. It must, however, be born in mind that recourse to adjudication at any time is a statutory right afforded to all those engaged in construction operations in the United Kingdom, per the Housing Grants, Construction Regeneration Act 1996.
  3. Although similar regulations have been published for comment in South Africa, there is no such automatic right in this country yet.
  4. “A perception has emerged that NEC is a partnering or collaborative style of contract. That is an error unless the express Partnering Option X12 is adopted” Phillip Capper, King’s College London and White and Case 
  5. David Mosey “Module C – Collaborative Contracting under Partnering Contracts” King’s College London 2017, page 22 

“The purpose of using subcontracting arrangements is usually to distance parties from each other rather than to bring them into a direct legal relationship” [Laurence McIntosh Ltd v Balfour Beatty Group Ltd [2006] CSOH 197]

It is a generally accepted principle that a main contractor is fully liable to an employer, for the works and cannot rely upon the default of his/her subcontractor to excuse poor workmanship or delay. [Loots Construction Law and Related Issues Juta & Co Ltd 1995, page 511] This is often re-stated in standard form contracts, such as the GCC 2010, which provides at Clause 4.4.2 that “[t]he Contractor shall be liable for the acts, defaults and negligence of any subcontractor, his agents or employees as fully as if they were the acts, defaults or negligence of the Contractor”.

This principle is applicable to all subcontractors, whether they are domestic, selected or nominated. A distinction must, however, be drawn between delays in nominating or re-nominating a subcontractor and delays caused by a subcontractor’s poor performance.

“It would be a clear breach of contract by the employers if their failure to nominate a subcontractor impeded the contractor in the execution of its work” [Reilly (RM) Ltd v Belfast Corporation [1970] NI 68] and while an employer does not warrant that a nominated subcontractor will not default in the execution of the subcontract, s/he will be liable for a delay in nominating a further subcontractor [Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd 69 LGR 1, (1976) 1 BLR 114 CA].

Delays caused by a subcontractor’s poor performance are subject to the general principle stated above. There are, however, in certain circumstances, arguments available to assist the main contractor, which may be extracted from the English cases.

Firstly, there is the matter of Holland Hannen and Cubitts (Northern) Ltd v Welsh Health Technical Services Organisation & Others (1981) 18 BLR 80, where it was held that the failure of the employer’s agent to issue a variation order, when they discovered that works designed by the nominated subcontractor were defective, breached the employer’s implied duty to ensure that he and his architect do all things necessary to enable the contractor to carry out the works and refrain from hindering or preventing the contractor from carrying out and completing the works.

Secondly, it has been proposed by Loots (at pages 513 and 514) that it may be implied, in exceptional cases, that an employer has entered into a direct contract with a subcontractor. Such exceptional circumstances could arise, as in Wallis v Robinson (1862) 130 RR 841, where the employer’s agent, with the express approval of the employer, requested the subcontractor to perform certain work for which he would be paid extra. It was held that this created a direct contract between the employer and the subcontractor.

As pointed out by Loots (at page 514), a contractor will be entitled to an extension of time for delays caused by another direct contractor employed by the employer.

Primat Construction CC / Nelson Mandela Bay Metropolitan Municipality (1075/2016) [2017] ZASCA 73 (1 June 2017)

The case dealt with the issue of whether a party to a contract, who has elected not to accept a repudiation of the Contract by the other party, may, in the face of persistent and unequivocal intention of the other not to be bound, change its stance and cancel and sue for damages for breach of contract.

The facts of the matter were as follows:

  1. The parties had entered into a contract, pursuant to a tender, in terms of General Conditions of Contract for Construction Works (2004), for the upgrade of roads in Motherwell, Port Elizabeth and Primat was required to attend to the reconstruction of the road and supply materials;
  2. The works were scheduled to commence in April 2010 and end in November 2010, however, as a result of delays including severe storm damage, late payment of an insurance claim to Primat for the damage and non-payment by the Municipality against monthly payment certificates, the completion date was therefore extended to November 2011;
  3. As a result of the non-payment of their certificates, Primat suspended the work. The Employer was not happy with the suspension and wrote to Primat purporting to terminate the contract with immediate effect. It is common cause that the letter did not constitute a proper termination and Primat argued that the letter amounted to a repudiation of the contract by the Municipality and such repudiation was not accepted by Primat.
  4. The Municipality maintained that the contract was terminated and requiring Primat to vacate the site. Primat was adamant that they intend to remedy any alleged breaches by it but they were denied access to the site and despite their continued engagement with the municipality, the Municipality insisted that the contract had been terminated and that they will procure other contractors to finish off the works.
  5. As a result of the Municipality’s persistence that the contract had been terminated, Primat gave notice of its election to now accept such repudiation and cancelled the contract and that they intend to sue for damages in the sum of R22 million.
  6. The Municipality argued that once Primat elected not to accept the repudiation, it was precluded from changing its election and could not therefore cancel and claim damages.

The court found that:

  1. Generally, an aggrieved party must choose between the different remedies and is bound by his or her election. The remedies are inconsistent. The choice of one excludes the other, he cannot approbate and reprobate. Once he has elected to pursue one remedy, he is bound by his election and cannot resile from it without the consent of the other party (Bekazazu Properties (Pty) Ltd v pam Golding Properties (Pty) Ltd 1996 (2) SA 537 (C ) at 542E-F);
  2. However, the court held that the Municipality’s argument failed to take account of the fact that the doctrine of election is not inviolable. An aggrieved party is allowed to claim in the same action specific performance and in the event of non-compliance, cancellation and damages. The aggrieved party gives the defaulting party the opportunity to repent and if the defaulting party refuses or fails to perform, the aggrieved party should then be entitled to change its election, and cancel and claim damages. despite the opportunity to relent, the aggrieved party may elect to cancel;
  3. Where the defaulting party is clearly determined not to purge the breach, and shows an unequivocal intention not to be bound by the Contract, the aggrieved party may abandon his or her futile attempt to claim performance and change the election, claiming cancellation and damages.
  4. The Municipality argued that to allow a change of election would negate the fundamental principle that on breach, an aggrieved party must make an election and is then bound by it.

The court found that, the Municipality persisted in its repudiation and showed in no uncertain terms that it would not comply with its obligations and would not allow Primat to continue to perform. The court confirmed that Primat was therefore entitled to change its election and proceed to cancel the contract and claim damages.

This case highlights a very important point. Had the court confirmed the Municipality’s stance, Primat would be stuck with a contract where they are not able to perform and remedy the alleged breach and sustaining damages that they cannot recover which would not make any sense at all.

Water for thought

Water is a resource that affects all and without it, the reality we face is that businesses and industries will eventually collapse. There will ultimately be very little or no economic growth. The lack of water has a fundamental impact on the construction industry whether we would like to believe it or not.

South Africa has recently been experiencing severe water shortages. The water scarcity has deteriorated to a critical level that requires urgent attention. To prevent long term damage, we urgently need solutions.

We are not alone in South Africa. The global increase in water scarcity has initiated the creation of a panel of high level global leaders by the United Nations. Convened to address global water crises, the panel met for the first time in September 2016 in South Africa to discuss water management and sustainability. The High Level Panel on Water concluded that water governance is inherently complex, with many shareholders or stakeholders across multiple sectors. It is characterised by incomplete data as well as hydrological and administrative boundaries that often conflict. In addition, it requires a “whole society approach”.

To address the water deficit, we need to accept the responsibility of managing our water resources as members of society and private stakeholders in the construction industry. We cannot attribute the responsibility of managing resources solely to the government.

The problems we face are the following:

  1. Investments in water infrastructure and waste management systems are lacking. People are reluctant to invest due to the lack of confidence in the return of the investment and water infrastructure is inherently costly. Private entities need supplement government funding by investing in water infrastructure and developments.
  2. South Africa does not have the infrastructure to manage water usage by industry. Water-intensive sectors include construction, mining, manufacturing, chemical, energy and agriculture. In addition, the waste water produced by these industries needs to be managed. The lack of water management and waste management systems in the construction industry means that we need to implement proper and better waste management systems to treat waste water and eradicate further harm being caused and compromising the quality of water being consumed further downstream.
  3. Ground water and surface water is being affected by acid mine drainage. The water/sludge pumped out by mining companies into local dams, streams and river (water supplies) has a long term impact on the quality of water and may be causing a greater impact than understood – drainage of dams, drying of dams – all of which have a knock on effect in the longer term. We need to prioritise our waste management systems.
  4. There is a lack of desalinisation plants to enable us to utilise sea water in coastal areas to supplement municipal water supplies. The solution is to invest in such plants or test desalination in coastal regions as case studies.
  5. We need to monitor the usage of clean drinking water by major plants and substitute this with grey water for all other uses.

I believe that the lack of suitable infrastructure is the largest contributing factor to the water crises we face today. We need technical solutions that are both functional and sustainable. If we do not develop the infrastructure to properly manage our resources, we will certainly not be able to provide water services that are necessary for future economic development.

I believe that South Africa has ignored this issue over a prolonged period of time and adopted a passive approach to the water crisis which has caused the diminished resources. We need to become aggressively reactive to ensure that the problems we face are effectively dealt with.

In order to ensure that we have an efficient and fully functioning water management system, we need to invest our time and efforts to discover new ways or technologies, in order to progress and become sustainable, so that we do not aggravate the water crises in South Africa. The solutions need to be designed essentially to work collectively with nature and the environment.

Author: Trenelle Moodley, Candidate Attorney

The builder and the lien

A lien is the right of X to retain possession of Y’s property, either movable or immovable. This right arises when X spends money or incurs costs with respect to this property, and comes to an end when the money or cost is reimbursed to X.

Liens may be divided into two general categories:

  1. Enrichment liens; and
  2. Debtor and creditor liens.

An enrichment lien arises when X spends money or incurs cost in preserving or improving the property, in order to maintain or enhance its market value. Y, as the owner of the property, is enriched by X’s actions. An example of this would be repairing a damaged water pipe or upgrading the external facade of an old building.

A debtor and creditor lien arises when X spends money or incurs cost that neither preserves nor improves the property. Y is not enriched by X’s actions and the only way in which X can claim reimbursement is if there is a contractual agreement in terms of which Y agrees to reimburse X for such expenditure. An example would be where a builder incurs expense in mobilising its resources to site, but the contract is terminated before any work can commence.

The main difference between the two types of lien, is that when X has an enrichment lien, the right to retain possession of Y’s property is enforceable against the whole world. An example would be where Y bought property off-plan from a developer, who, in turn, contracted with X to build a house on the property. In building the house, X enhanced the market value of the property. If the developer doesn’t pay X for the cost of building the house, X can hold an enrichment lien over the property, regardless of the fact that Y didn’t actually contract with X.

On the other hand, when X has a debtor and creditor lien, the right to retain possession of the property is only enforceable where Y, as owner of the property, contracted with X for the expenditure. In combining the two examples given above, this would mean that X could not hold a lien over Y’s property, for the cost of mobilisation alone, where X had contracted with the developer and not Y.

When considering holding a lien over Y’s property, X must, therefore, consider:

  1. Whether there is a contract between X and Y? and
  2. If not, whether Y has been enriched at X’s expense?

If the answer to both questions is “no”, then X has no right to retain possession of Y’s property.

If X does have a right to retain possession of Y’s property, then s/he must perfect his/her lien. This means that X must take some special step to show the world that s/he is holding a lien over the property. In the case of a construction site, this would require evidencing possession of the site. For example, this could be done by stationing a representative, in charge, on the site, securing it, putting up signage and generally making it clear that X is in physical control of the site.

If X gives up possession of the site, the lien will fall away. If Y takes back possession of the site by force, X can make application to the courts for a spoliation order, returning possession to him/her.

Y can offer security for the sum claimed by X, pending resolution of any dispute over the matter, in exchange for the return of possession of the site. If X refuses to accept such security, the courts have a discretion, upon application by Y, to order return of possession of the site to Y, in exchange for such security.

The situation is more complicated where public property is concerned as, although it has not definitively been decided, there is some authority for the proposition that a lien cannot be held over public property. [See Loots, Construction Law and Related Issues, 1995, pages 422 – 426]

A wavier is the voluntary giving up of a right. X may waive his/her lien. Certain construction contracts may, in fact, include a clause expressly agreeing to such waiver [See Clause 3.3 of the JBCC Principal Building Agreement, 5th edition and Clause 9.2.1.3 of the GCC 2010].

The waiver of X’s lien does not, however, have to be express. It could also be tacit, meaning that it is conveyed by X’s actions. These actions would have to show a clear and unambiguous intention not to hold a lien over Y’s property. An example would be where X, as a contractor, removes his/her labour, equipment and materials from the site and returns possession of the property to Y.

Author: Michelle Kerr, Senior Associate.

Natural Justice in Adjudication – How is it determined?

When involved with construction adjudication, you often hear and come across the use of the term ‘natural justice’, i.e. the adjudicator is obliged and should always ensure that natural justice prevail. But what exactly does this entail and when is natural justice breached?

A recent UK judgment “Dawnus Construction Holdings Limited v Marsh Life Limited [2017] EWHC 1066 (TCC) (11 May 2017)” (“Dawnus case”), dealt with an application brought by the claimant (Dawnus Construction Holdings Limited) for summary judgment for the enforcement of an adjudication decision and in defending the application, the defendant (Marsh Life Limited) argued that the adjudicator failed to apply the rules of natural justice by failing to consider and deal with certain of the defendant’s defences that was put forward. This article is not intended to deal with the facts of this particular case, but mainly to clarify principles of ‘natural justice’ as was determined by the courts (most of which are from the UK, but can be cited and referred to when dealing with similar issues and disputes in South Africa).

In the Dawnus case, dealing with natural justice, the court referred to a matter, “Hutton Construction v Wilson Properties [2017] EWHC 517 (TCC)” (“Hutton case”). In this case the judge inter alia stated that “the starting point… is that, if the adjudicator has decided the issue that was referred to him, and he has broadly acted in accordance with the rules of natural justice, his decision will be enforced” (Macob Civil Engineering Limited v Morrison Construction Limited [1999] BLR 93), and it was further said that “Adjudication decisions have been upheld on that basis, even where the adjudicator has been shown to have made an error” (Bouyques (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522.). In “Carillion Construction Limited v Devonport Royal Dockyard Limited [2006] BLR 15), the judge stated that “the need to have the ‘right’ answer has been subordinated to the need to have an answer quickly.”

As you note from the above, few matters have dealt with this issue regarding the principles of natural justice.

The Dawnus case further confirmed that the authorities have consistently emphasised that, for a breach of natural justice to be a bar to enforcement, the breach must be “plain“, “significant“, “causative of prejudice” or “material“.

In considering earlier authorities, in “Cantillon v Urvasco [2008] BLR 250” (“Cantillon case”), the applicable principles related to breaches of natural justice in adjudication were summarised to be the following:

a) It must first be established that the adjudicator failed to apply the rules of natural justice;

b) Any breach of the rules must be more than peripheral; they must be material breaches;

c) Breaches of the rules will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to have given the opportunity to comment upon which it is one which is either decisive or of considerable potential importance to the outcome of the resolution of the dispute and is not peripheral or irrelevant.

d) Whether the issue is decisive or of considerable potential importance or is peripheral or irrelevant obviously involves the question of degree which must be assessed by any judge in any case such as this.

e) It is only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon a factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment on or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case of Balfour Beatty Construction Company Ltd v The Camden Borough of Lambeth was concerned comes into play. It follows that, if neither party has argued a particular point and the other party does not come back on the point, there is no breach of the rules of natural justice in relation thereto.”

Based on the above, it does seem straight forward. If you are an adjudicator or looking to become one, stay updated with most recent cases on these type of topics, whether to be found under our own South African law, UK or otherwise. It is important to keep ahead with the game to prevent that you fall subject to a possible review of your adjudication decision/ruling.

Author: Barry Herholdt – Associate

BBB-BEE and the construction sector

An entity’s Black Economic Empowerment (“BEE”) score and recognition status is measured either in terms of the Broad Based Black Economic Empowerment Generic Codes of Good Practice (“BB-BEE Codes”), or in terms of a specific sector code. The main difference between the two is that the BB-BEE Codes address empowerment and transformation for all sectors where there is no sector code. At the same time, the BB-BEE Codes provide guidance regarding the measurement principles to be applied, and incorporated into sector codes. A sector codes addresses empowerment and transformation within a defined sector and is more alive to a sector’s challenges and requirements.

During October 2013, the amended generic BB-BEE Codes of 2013 (“Amended Codes of 2013”) were gazetted, providing for revised principles of measuring transformation and empowerment. In the circumstances, all sector charter councils were required to amend their respective sector codes and submit these to the minister. The construction sector was no different and was required to prepare a draft construction sector code and submit it to the minister, however, failed to do so timeously. As a result, in February 2016, the Construction Sector Codes of 2009 (“Construction Codes”) were repealed.

The consequence of the minister’s decision to repeal the Construction Codes was that all entities previous falling within the scope and application of the Construction Codes would now to be measured in terms of the amended Codes of 2013. As mentioned, in some instances a generic code fails to adequately address sector specific challenges and consider whether it may become onerous to apply it measurement principles in a specific sector.

A draft of the revised construction sector codes (“Revised Codes”), gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment Act 53 of 2003 as amended by B-BBEE Act 46 of 2013 (“the Act”), was issued for public commentary. For a sector code to become applicable to a specific sector, in place of the prevailing BB-BBE Codes, it must be gazetted in terms Section 9(1) of the Act. Until this happens entities falling within construction sector continue to be measured against the Amended Codes of 2013.

The period within which to submit comments to the Revised Code has elapsed, yet the minister has not provided indication of his intention to gazette the Revised Codes under Section 9(1) of the Act. Furthermore, unlike the previous Construction Codes that had a transitional period when they were first published, the Revised Codes propose no transitional period. A transitional period would provide the sector with an opportunity to plan and adjust to the revised requirements prior to being compelled to apply the revised measurement principles. On publication, in terms of Section 9(1) of the Act, all entities falling within their scope of application may be forced to undertaken their measurement of BEE in terms of the Revised Codes. Such a provision has the potential to further stall the progress made by the sector.

The industry remains in an uncertain position, addressing transformation and empowerment in terms of the Amended Codes of 2013 which do not necessarily appreciate the sector’s challenges, similarly, aware that the Revised Codes await the minister’s gazetting whereafter application may be an immediate requirement.

Author: Tsele Moloi, Associate

Transparent and Accountable Public Procurement under the Constitution

The importance of a transparent and accountable public procurement process cannot be understated. It impacts the public, in general, in terms of service delivery and a failure to comply therewith can result in the wasting of tax payer’s funds.

What happens where it is obvious that public officials involved in a public procurement process have been corrupt, grossly negligent or otherwise did not apply their minds during the tender adjudication and arbitration process?

This issue is regularly raised, resulting in frequent referrals to Tender Appeal Tribunals and the various courts for a decision and evaluation of the process followed.

One such case is Westwood Insurance Brokers (Pty) Ltd v eThekwini Municipality (8221/2016) [2017] ZAKDHC 15 (5 April 2017). In short, a company by the name of NC South West Brokers CC (South West) was awarded a tender, by eThekwini Municipality, in the sum of approximately R 81 000 000.00, for the provision of insurance for water loss through underground leaks for individual dwelling units. The Conditions of Tender required that a letter of undertaking from an insurance company licensed to operate in South Africa, accompany the tender, and that the underwriter must be registered with the Financial Services Board (FSB). South West, however, submitted a quotation for professional indemnity insurance from Marsh (Pty) Ltd whose registration with the FSB, as an insurer, had not been established.

The tender award was challenged on this basis. The court found that

“whatever [eThekwini’s] motives were the irrationality of their choice of South West is so obvious and egregious that it ineluctably leads me to conclude that the officials knowingly acted unlawfully, unconstitutionally and unethically”.

When the court considered the far-reaching effects of the decision of awarding the tender to South West (i.e. vulnerable people occupying, for instance, municipal and other sub-economic housing schemes having no insurance for water leaks), the court came to the conclusion that it was not advisable for South West to retain the contract.

The court, however, did not stop there. It considered whether the eThekwini officials, involved in the procurement process, had failed to uphold the values of the Constitution and the guidelines provided to them when considering offers from tenderers. The court also considered the obligation of all persons performing public services, to be accountable and transparent.

The court found that both South West and the officials in question must be held accountable for their actions, by way of being held liable for the costs of the proceedings. As such, the court ordered as follows:

  1. South West was held liable for 50% of the legal costs:
  2. The 16 public officials ranging from the City Manager, Members of the Bid Adjudication Committee, Bid Evaluation Committee, the Head of eThekwini Water and Sanitation, Deputy Head Supply Chain Operations, Divisional Manager for Regional Customer Services Water and Sanitation, and the Contracts Administrator were held liable for the remaining 50% of the legal costs, to be paid out of their own pockets.

This case sounds a warning to all public officials who act unlawfully and unethically to the disadvantage of the general public and other suitably qualified tenderers who would have benefited from the process.

Author:  Nombuso Shange, Associate.

BBB-BEE and the construction sector

An entity’s Black Economic Empowerment (“BEE”) score and recognition status is measured either in terms of the Broad Based Black Economic Empowerment Generic Codes of Good Practice (“BB-BEE Codes”), or in terms of a specific sector code. The main difference between the two is that the BB-BEE Codes address empowerment and transformation for all sectors where there is no sector code. At the same time, the BB-BEE Codes provide guidance regarding the measurement principles to be applied, and incorporated into sector codes. A sector codes addresses empowerment and transformation within a defined sector and is more alive to a sector’s challenges and requirements.

During October 2013, the amended generic BB-BEE Codes of 2013 (“Amended Codes of 2013”) were gazetted, providing for revised principles of measuring transformation and empowerment. In the circumstances, all sector charter councils were required to amend their respective sector codes and submit these to the minister. The construction sector was no different and was required to prepare a draft construction sector code and submit it to the minister, however, failed to do so timeously. As a result, in February 2016, the Construction Sector Codes of 2009 (“Construction Codes”) were repealed.

The consequence of the minister’s decision to repeal the Construction Codes was that all entities previous falling within the scope and application of the Construction Codes would now to be measured in terms of the amended Codes of 2013. As mentioned, in some instances a generic code fails to adequately address sector specific challenges and consider whether it may become onerous to apply it measurement principles in a specific sector.

A draft of the revised construction sector codes (“Revised Codes”), gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment Act 53 of 2003 as amended by B-BBEE Act 46 of 2013 (“the Act”), was issued for public commentary. For a sector code to become applicable to a specific sector, in place of the prevailing BB-BBE Codes, it must be gazetted in terms Section 9(1) of the Act. Until this happens entities falling within construction sector continue to be measured against the Amended Codes of 2013.

The period within which to submit comments to the Revised Code has elapsed, yet the minister has not provided indication of his intention to gazette the Revised Codes under Section 9(1) of the Act. Furthermore, unlike the previous Construction Codes that had a transitional period when they were first published, the Revised Codes propose no transitional period. A transitional period would provide the sector with an opportunity to plan and adjust to the revised requirements prior to being compelled to apply the revised measurement principles. On publication, in terms of Section 9(1) of the Act, all entities falling within their scope of application may be forced to undertaken their measurement of BEE in terms of the Revised Codes. Such a provision has the potential to further stall the progress made by the sector.

The industry remains in an uncertain position, addressing transformation and empowerment in terms of the Amended Codes of 2013 which do not necessarily appreciate the sector’s challenges, similarly, aware that the Revised Codes await the minister’s gazetting whereafter application may be an immediate requirement.

Author: Tsele Moloi, Associate

Transparent and Accountable Public Procurement under the Constitution

The importance of a transparent and accountable public procurement process cannot be understated. It impacts the public, in general, in terms of service delivery and a failure to comply therewith can result in the wasting of tax payer’s funds.

What happens where it is obvious that public officials involved in a public procurement process have been corrupt, grossly negligent or otherwise did not apply their minds during the tender adjudication and arbitration process?

This issue is regularly raised, resulting in frequent referrals to Tender Appeal Tribunals and the various courts for a decision and evaluation of the process followed.

One such case is Westwood Insurance Brokers (Pty) Ltd v eThekwini Municipality (8221/2016) [2017] ZAKDHC 15 (5 April 2017). In short, a company by the name of NC South West Brokers CC (South West) was awarded a tender, by eThekwini Municipality, in the sum of approximately R 81 000 000.00, for the provision of insurance for water loss through underground leaks for individual dwelling units. The Conditions of Tender required that a letter of undertaking from an insurance company licensed to operate in South Africa, accompany the tender, and that the underwriter must be registered with the Financial Services Board (FSB). South West, however, submitted a quotation for professional indemnity insurance from Marsh (Pty) Ltd whose registration with the FSB, as an insurer, had not been established.

The tender award was challenged on this basis. The court found that

“whatever [eThekwini’s] motives were the irrationality of their choice of South West is so obvious and egregious that it ineluctably leads me to conclude that the officials knowingly acted unlawfully, unconstitutionally and unethically”.

When the court considered the far-reaching effects of the decision of awarding the tender to South West (i.e. vulnerable people occupying, for instance, municipal and other sub-economic housing schemes having no insurance for water leaks), the court came to the conclusion that it was not advisable for South West to retain the contract.

The court, however, did not stop there. It considered whether the eThekwini officials, involved in the procurement process, had failed to uphold the values of the Constitution and the guidelines provided to them when considering offers from tenderers. The court also considered the obligation of all persons performing public services, to be accountable and transparent.

The court found that both South West and the officials in question must be held accountable for their actions, by way of being held liable for the costs of the proceedings. As such, the court ordered as follows:

  1. South West was held liable for 50% of the legal costs:
  2. The 16 public officials ranging from the City Manager, Members of the Bid Adjudication Committee, Bid Evaluation Committee, the Head of eThekwini Water and Sanitation, Deputy Head Supply Chain Operations, Divisional Manager for Regional Customer Services Water and Sanitation, and the Contracts Administrator were held liable for the remaining 50% of the legal costs, to be paid out of their own pockets.

This case sounds a warning to all public officials who act unlawfully and unethically to the disadvantage of the general public and other suitably qualified tenderers who would have benefited from the process.

Author:  Nombuso Shange, Associate.

Favourable business ethics & pushing up your construction company's CIDB grading

Last year, I am sure as most will agree, various companies, in particular within the construction industry (as well as other institutions / organisations) felt the sting of a tough economical period. However, as the fight goes on, it made me think about an old song by Judy Collins called the “Liverpool Lullaby”, with a lyrical line that states “Although we have no silver spoon, Better days are coming soon”.

With that in mind, we remain hopeful and positive that this year will make a turn for the better. With economic rehabilitation and growth, will come new opportunities, new developments etc. This will then hopefully open the doors wide again for existing construction companies, big or small and even new players to the game to get on the tender playing field. Therefore, with this article I felt it necessary to remind current players and for those who are unfamiliar, what is expected ethically wise and what can be done to grow your CIDB grading.

As you would know, and as stressed and promoted by inter alia the Constructio Industry Development Board (CIDB), it remains crucial that all players in the construction industry should strive in upholding high standards of ethics in all business dealings, especially at the start, when participating from tendering stage.

On the CIDB’s website, a “Code of Conduct” is provided for all parties engaged in construction procurement and I invite all to familiarise yourselves with this Code of Conduct, to view click here:

Further, what I think a lot have wondered about or have asked in the past (especially for the smaller or new construction companies coming into the game), what can be done to grow that CIDB grading and gunning for the giants (i.e. your bigger budget projects etc.)?

Your CIDB grading gets determined by some factors, such as your companies’ works capability and further your financial capabilities. To be able to get financially stronger and to better works capability, participate and keep tendering for projects at your specific qualified level, then work it up from there, increasing works capability and by doing so, getting paid by satisfied clients (hopefully the ones that do pay) to grow financially.

If you are small, attempt to build subcontractor relationships with other higher grading contractors or seek for possible Joint Venture opportunities. Trust and good relations is important in this regard. In light of the above, continue and endeavour to do business in good faith, upholding good business ethics and by doing so, building strong trusting relationships with others in the industry in order to grow yourself into one of the big players.

Author: Barry Herholdt, Associate

Favourable business ethics & pushing up your construction company's CIDB grading

Last year, I am sure as most will agree, various companies, in particular within theconstruction industry (as well as other institutions / organisations) felt the sting of a tough economical period. However, as the fight goes on, it made me think about an old song by Judy Collins called the “Liverpool Lullaby”, with a lyrical line that states “Although we have no silver spoon, Better days are coming soon”.

With that in mind, we remain hopeful and positive that this year will make a turn for the better. With economic rehabilitation and growth, will come new opportunities, new developments etc. This will then hopefully open the doors wide again for existing construction companies, big or small and even new players to the game to get on the tender playing field. Therefore, with this article I felt it necessary to remind current players and for those who are unfamiliar, what is expected ethically wise and what can be done to grow your CIDB grading.

As you would know, and as stressed and promoted by inter alia the Constructio Industry Development Board (CIDB), it remains crucial that all players in the construction industry should strive in upholding high standards of ethics in all business dealings, especially at the start, when participating from tendering stage.

On the CIDB’s website, a “Code of Conduct” is provided for all parties engaged in construction procurement and I invite all to familiarise yourselves with this Code of Conduct, see link below: http://www.cidb.org.za/publications/Documents/Code%20of%20Conduct.pdf

Further, what I think a lot have wondered about or have asked in the past (especially for the smaller or new construction companies coming into the game), what can be done to grow that CIDB grading and gunning for the giants (i.e. your bigger budget projects etc.)?

Your CIDB grading gets determined by some factors, such as your companies’ works capability and further your financial capabilities. To be able to get financially stronger and to better works capability, participate and keep tendering for projects at your specific qualified level, then work it up from there, increasing works capability and by doing so, getting paid by satisfied clients (hopefully the ones that do pay) to grow financially.

If you are small, attempt to build subcontractor relationships with other higher grading contractors or seek for possible Joint Venture opportunities. Trust and good relations is important in this regard. In light of the above, continue and endeavour to do business in good faith, upholding good business ethics and by doing so, building strong trusting relationships with others in the industry in order to grow yourself into one of the big players.

Author: Barry Herholdt, Associate

Standing adjudication and replacement of members

The GCC 2010 Adjudication Board Rules (the Rules) define standing adjudication as a flexible procedure available to the parties, from the outset of the contract, for its full duration.  The intention is to have the adjudication board members (the members) on hand for the duration of the contract, to assist the parties in reducing conflict.

The parties are required, at the outset of the contract to jointly select one or three persons from the SAICE panel of standing adjudication members.  Failing selection by the parties, the president of SAICE, on application of either of the parties, will nominate the required person/s.

These persons are required to provide disclosure statements to the parties.  Once both parties are satisfied with these disclosure statements, the member/s are appointed by entering into the Adjudication Board Agreement (the Agreement) with the parties.

If a three-member adjudication board is required, the parties will jointly pick the chairman.  Failing agreement by the parties, the members will select their chairman, amongst themselves.

Clause 4 of the Agreement permits the parties to jointly terminate it.  This must be done individually with respect to each member.

But what happens if only one of the parties lose confidence in a member or members?  This is not specifically catered for in either the Rules or the Agreement.

The only guidance provided by the Rules is that in Rule 3.7, which states:
“If an Adjudication Board Member for any reason cannot or ought not to continue as Adjudication Board Member, the new Adjudication Board Member shall be appointed in the same manner as the Adjudication Board Member who is being replaced.” [Emphasis added]

While this explains the procedure to be followed in appointing new members, it does not establish the criteria for when a member “ought not to continue” as such.

The answer to this may be found, it is suggested, in Rule 6.3, which requires the adjudication board to conduct its proceedings in accordance with:
  1. The contract and the Rules;
  2. The principles of fairness and impartiality;
  3. Consideration for the wishes of the parties; and
  4. The rules of natural justice.

Rule 6.4.11 of the Rules authorised the members to settle any dispute regarding the Agreement and decide on their own jurisdiction.

While a loss of confidence in one or more of the members, should in and of itself lead such members to seriously consider whether they “ought” to continue acting or not, this could be countered by the knowledge that such allegations may be used by intractable parties to delay proceedings.  Should a party, however, be able to make a sufficiently strong case for the members’ failure to comply with the requirements of Rule 6.3, this may be more likely to sway the members in question.

Should they, despite being furnished with such argument, refuse to recuse themselves, it will support an objecting party’s case for damages for any future infractions, on the basis that the members were acting in bad faith, as per Rule 10.1.

Author: Michelle Kerr, Senior Associate

Real time technology provides an alternative method of managing risks on construction projects

In an industry where new projects are limited and profits margins are severally depressed, it is important for the industry to consider innovative ways to weather the storm.

The ability of a project team to identify and manage issues, without delay as work progresses, is increasingly becoming important to reduce the, actual and time related, costs incurred to remedy defective work, address issues, and to ensure work is completed timeously.

The traditional approach of identifying and remedying defective work or issues is a delayed process. It is has also become inefficient in an environment where the loss of time has consequences for both the employer and the contractor. The risks can be managed more effectively if issues can be identified and communicated accordingly, and in real time. In other words, reducing the passage of time between identifying the issue and addressing it.

Real time technology provides an alternative method of managing risks on construction projects. An article recently published on the Engineering News website, reviews the uses of google glasses and drones to do this.

Procore and drones are real-time software application, and hardware, respectively, being used by professional teams to identify issues on construction sites, assessing the issues against the scope of work and communicating deficiencies to the contractor promptly to be remedied. The benefits are to lessen the time wasted identifying, communication, and addressing, the issues.

The result is an efficient means of managing the risks of costs overruns and avoidance of failing to complete the work within the construction period due to time taken to remedy issues.

To view the full article, click here.

Author: Tsele Moloi, Associate

Adjudicator decisions when deciding on disputes (referred or not referred) made in error and the subsequent enforcement thereof by courts

The Society of Construction law recently released an article by Mr. Daryl Royce, titled “Errors in Adjudicator’s Decisions: Right Questions, Wrong Answer”, which I thought is an interesting piece to share.

Briefly, the article turned around a dispute where the subcontractor claimed certain monies from the main contractor and the adjudicator deciding the dispute, decided in favour of the subcontractor by deciding that a certain amount is to be paid to the subcontractor. The issue turned around the calculation of the amount. At the time of the dispute, the works had not been completed, but the adjudicator in his decision dealing with the amount due to be paid to the subcontractor by the main contractor, deducted sums paid that “excluded retention from a gross sum that included retention”. What is the issue? Well seeing that the works had not been completed at time of dispute, no retention could have been due to the subcontractor.

The adjudicators decision had the effect that retention was released to the subcontractor. When the subcontractor then approached the court to enforce the adjudicators decision, various questions came into play, raised by the opposition, which were dealing inter alia regarding circumstances when an adjudicator makes a decision on a point that was never referred for decision, meaning issue on jurisdiction and or, as was held by the Court of Appeal later when this matter was referred to it, the adjudicator had not exceeded its jurisdiction, but gave the wrong answer to the question referred to him. It deals further whether such decision can still be binding and be enforced.

This article canvasses over very interesting topics for discussion, inter alia various tests that has been applied over the years by courts hearing enforcement applications, advantages and or disadvantages on courts’ intervention to make a further ruling on adjudicator’s decisions and or correcting and adjudicator’s errors made in adjudication proceedings.

For the full article, Click here and follow the instructions (in particular for non-registered individuals).
Author: Barry Herholdt, Associate

Late Payment by Organs of State and State Owner Entitles – National Treasury coming to the assistance of the suppliers/contractors

As of 1 July 2016, National Treasury Instruction 5 of 201/17 came into effect. What this instruction does is come to the aid of any contractors or suppliers currently working for Organs of State (Government Departments) and Public Owned Entities (the likes of Eskom and Transnet). The Instruction is issued to all Accounting Officers of Departments and Constitutional Institutions, Accounting Authorities of Public Entities and Head officials of Provincial Treasuries and deals specifically with payments due to suppliers / creditors exceeding 30 days after submission of a valid invoice.

The instruction states that it aims to resolve non-payment to those suppliers exceeding 30 days and informs that a dedicated call centre is being established to assist affected suppliers in resolving non-payments.

Once a complaint is lodged with the call centre, the Accounting Officer/ Authority will be notified and required to settle payment within 5 days from receipt of the complaint if there is no dispute.

The Accounting Officer/ Authority must report to National Treasury within 5 working days of being so notified on the resolution of the outcome, in case of a dispute this reporting requirement remains and the reasons for non-resolution must be stated.

National Treasury will investigate any dispute and provide recommendations, should the National Treasury decide that payment is in fact due, the Accounting Officer / Authority has 5 working days within which to implement this decision, if it does not do so the National Treasury may invoke the provisions of S216(2) of the Constitution which allows the Treasury to enforce compliance. Further to all the above, the instruction allows National Treasury to release publicly every month all details of outstanding creditors per Department and Entity.

Once the call centre is in place, it will most certainly be of assistance to contractors and suppliers who are suffering hardships due to late or non-payment where there is no dispute regarding such payment.

To view the full instruction, click here.

Author: Taryn van Deventer, Senior Associate

When is a dispute a dispute?

It is inevitable, considering the many features of a construction project, and the expensive risks associated therewith, that disagreements will arise between contractors, employers and their agents. The way these disagreements are managed will determine how easily they may be overcome. More and more often, parties are turning to adjudication for this.

In order for an adjudicator to have jurisdiction, however, a dispute must actually exist between the parties. Determining whether a dispute is, in fact, a dispute which is ripe for adjudication is more complex than it first appears.

It is typical that in construction projects parties will raise issues which will be discussed at length, usually over a protracted period of time. The question is, when do these issues crystallise into disputes which are capable of being referred to adjudication.

A number of construction contracts provide for the issuing of a notice of dispute which signifies that at least one of the parties to the contract believes that a dispute has come into existence. The issuing of such notice does not, however, automatically mean that a dispute exists and further interrogation may be required.

Where the term “dispute” is not defined, regard must be had to the common law. The definition of a dispute has been thoroughly considered in the United Kingdom and the applicable case law is of persuasive value.

In the English case of Halki Shipping Corp v Sopex Oils [1998] 1 W.L.R. 726 it was held that a “dispute” means any claim of which the opposing party has been notified, which that party has refused to admit or pay.

In the English case of AMEC Civil Engineering Limited v Secretary of State for Transport [2005] B.L.R. 227, [2005] 1 W.L.R. 2339 the Court of Appeal approved the following seven propositions:

  • The word dispute should be given its normal meaning;
  • Judicial decisions on particular situations where the word “dispute” was in dispute, produce helpful guidance;
  • The mere fact that one party notifies the other of a claim does not automatically give rise to a dispute. A dispute will only arise if the claim is not admitted;
  • The circumstances under which a claim is not admitted are numerous and variable;
  • The period of time for which a party may remain silent before a dispute is to be inferred depends upon the facts of the case and the contractual structure;
  • If a deadline is imposed by a party for responding to a claim, that deadline, although a relevant consideration, does not automatically curtail what would otherwise be a reasonable time for responding; and
  • If the claim is so vague that it cannot be reasonably responded to, neither silence by the other party nor an express non-admission is likely to give rise to a dispute for the purposes of adjudication.

Author: Michelle Kerr, Senior Associate

Appointment of an adjudicator under the GCC 2010 

So you’ve submitted your claim in terms of Clause 10 of the GCC 2010 but the Engineer comes back to you, in terms of Clause 10.1.5, rejecting your claim.  What now?

Provided that you are sufficiently confident in the merits of your claim, you may wish to skip over the amicable settlement provisions contained in Clause 10.4 and proceed directly to the next step.  This is adjudication, however, navigation of the provisions taking a party from the Engineer’s ruling to the appointment of an adjudicator may be confusing for the lay person.

First and foremost, you are required to submit a notice in terms of Clause 10.3 disputing the Engineer’s ruling within 28 days thereof.  This is important as a time bar attaches to this notice and if it is not submitted timeously, you will lose your right to claim.

Secondly, you need to consider whether the contract provides for standing or ad-hoc adjudication.  This is dealt with in Clause 10.5, read with the contract data.  The contract data will specify whether one or three adjudicators are required.

From there, reference needs to be made to the Adjudication Board Rules contained at the back of the GCC 2010, read with Clause 10.9.

If the contract provides for standing adjudication, the parties should have selected one or three persons to act as adjudicator/s at the outset of the contract, from the SAICE panel of standing adjudication members.  If the parties do not make a selection within seven days of either party delivering a request in writing for such a selection, either party may apply to the President of SAICE or his nominee to make a nomination.  A referral may then be made to the adjudicator.

If the contract provides for ad hoc adjudication, the Adjudication Board Rules require a few extra steps before such a referral can be made. In terms of Rule 4.1 a notice of adjudication must be delivered within 28 days of the event giving rise to the adjudication.

It is often debated whether this event is the Engineer’s ruling or the delivery of the notice of dispute.  For this reason, it is advisable to ensure it is delivered within 28 days of the Engineer’s rulings.  This is important as this notice is separate and distinct from the dispute notice and is subject to its own time bar clause.

Included in this notice must be the names and fees of three or more potential adjudicator selected from the SAICE panel of ad hoc adjudicators, who have confirmed their availability to act.  The other party is required to select one or three of these adjudicators within seven days of receipt of the adjudication notice.

If they do not, either party may apply to the President of SAICE or his nominee for this nomination.  Once the nomination has been made and the Adjudication Board Member Agreement/s concluded, the dispute may be referred.

Author: Michelle Kerr, Senior Associate

Considering environmental risk

Before construction commences and during the construction process, there is a plethora of environmental and heritage laws, regulations and processes in South Africa that must be complied with. The question of who bears the risk for compliance with environmental regulations and processes is often dictated by the type of contract utilised.

In FIDIC contracts, for example, it is the employer’s responsibility to ensure that all planning, zoning or similar permissions for the works are in place prior to commencement unless otherwise specified. The contractor is obliged to comply with all laws and regulations.

The GCC2010 has a similar risk allocation: the employer is responsible for planning approvals in respect of the permanent works, but the contractor is responsible for all consents, permits or approvals arising from any legislation, ordinance, Regulation or By-Law.

In the JBCC, the allocation is not borne out of the standard form, which means that the parties must allocate the risk. The only requirement that is required by the standard form is that both parties comply with all laws, regulations and bylaws of local and other authorities.

The unique complexities of each project will dictate how the specific risks are allocated. Using an example of a biogas production plant construction contract, the contractor is probably best placed to ensure that all emission regulations are complied with, while the employer would likely make application for any zoning or planning approvals as owner of the new plant and land on which it is situated.

Aside from the obvious requirement to comply with regulations, both contractors and employers have a moral and ethical duty to protect our environment and heritage. Pay careful attention to which party between the contracting parties is responsible for ensuring compliance with both environmental and heritage laws.

Author: Taryn van Deventer, Senior Associate

Construction dispute resolution procedures should be properly regulated

James Pickavance, a Partner in litigation at Eversheds LLP – Solicitors in London, recently published an interesting article, titled “THE REGULATION OF MISCONDUCT IN ADJUDICATION AND ARBITRATION”.

This article confirmed that arbitration is still the dominant method for resolving large scale disputes in the construction industry all over the world, however the use and provision of adjudication as the first tier dispute resolution procedure, stipulated in almost all new published standard form construction contracts, has brought some growth in popularity for adjudication.

The article further shines light on the importance of a well regulated arbitration or adjudication procedure. Whether you are pursuing to resolve your disputes by either adjudication or arbitration or by any other means, it is important and advisable to seek the necessary assistance, advice and expertise from someone who knows the process and who has knowledge and practical experience with regards to the various standard form construction contracts. Any dispute procedure should be properly regulated and this should be confirmed and brought to everyone’s attention well before any dispute proceedings commence. Thus, before you commence, all parties concerned should consult and agree as to the procedure, the rules and the rights and obligations of each party to the dispute. These rules and procedures can be recorded in an agreement (whether its an Adjudication Agreement and/or an Arbitration Agreement), for all parties to agree and sign. In most cases, only after such agreement is agreed to and signed by all parties, the dispute resolution process will take effect.

By having such agreement in place, which provides each parties’ rights and obligations and further sets out the procedural rules, it will be easy to regulate the dispute process and you will be aware of the steps to take in the event there is any misconduct or failure by a party to comply with the agreement. This will include any party to the proceedings, either the contractor, the employer or the Adjudicator and the Arbitrator in event proceedings are not conducted as prescribed.

See link below for full article:

https://www.scl.org.uk/papers/regulation-misconduct-adjudication-arbitration

Author: Barry Herholdt, Senior Associate

Difference between ‘float’ and ‘time risk allowance’ under the NEC3

The NEC3 deals with the programme under clause 31 and states clearly what the contractor is expected to show on a programme which he submits for acceptance. Under clause 31.2 of the standard NEC3 contract, the terms “float” and “time risk allowance” are stipulated and we will be looking at the meaning and difference between these two terms.

Scholars on the NEC3 explains that “time risk allowance” (also known as “free float”) are for periods (events) which are for the contractor’s risk and which further have a great chance of occurring. Free float is thus owned by the contractor and cannot be used by the employer to mitigate the effect of a compensation event.

On the other hand, “float” records a period additional to what is required within the ordinary programme. Under usual conditions, it will record additional time on a programme to accommodate an impact of a compensation event in order to reduce planned completion and or to avoid delays thereto. This “float” is available for the project so the speak, and either the employer or the contractor, can use it in an endeavor to mitigate a delay caused by a compensation event and or other event having a negative influence on the programme.

Author: Barry Herholdt, Senior Associate

Who should bear the risk of community unrest and strikes?

At MDA Consulting we work on site and provide onsite commercial support so we often see strikes, community unrest, service delivery protests, taxi protests and other uniquely South African events first hand, which, in most circumstances, disrupt and delay the works.

These events often occur when:

  • the project is situated in a rural or excluded area where there is high unemployment, or
  • if more than one contractor is involved or
  • if the employer is a state owned company.

In these circumstances, all participants to a project lose money or are prejudiced in some way.

In most circumstances the standard form construction contracts make provision for such events under the definition of force majeure or prevention.

In this instance, the contractor will be entitled to submit a claim for an extension of time but not necessarily for payment of additional costs associated with the delay. Based on this, it is clear from the standard form contracts that the contractor may not be adequately compensated for all money lost.

As an example and with particular reference to FIDIC, clause 19 entitles the contractor to claim an extension of time and payment of additional cost – this does not include profit nor make provision for or take into account the disruption of works and decrease in productivity, which is likely to occur.

As the FIDIC is an international standard form contract used for international projects, it could be said that the principle of force majeure and more particularly the model of compensation in an international context is fair. However, within a South African context, the contractor is affected by force majeure events, which are unique to South Africa and over which the contractor has no control.

Based on this, the question remains whether the principle of force majeure and more particularly the model of compensation in a South African context is balanced? This is a concern in the South African construction industry.

At tender stage all parties need to consider the definition of force majeure and all potential risks. These should be dealt with upfront by deciding whose risk the event should be and to include the necessary particular conditions.

Author: Odette Potgieter, senior associate

The consequences of omitting work so as to pass it to another contractor

It is an unfortunate fact that relationships between employers and contractors occasionally deteriorate, often over issues which would have been unimaginable at tender stage.

One of the consequences of this is that the employer may be tempted to invoke the provisions of the contract, permitting omission of work, and remove items from the contractor’s scope of work.   The intention being to hasten the finalisation of the relationship between the employer and the contractor in question, and permit the employer to pass these items to another contractor (with less baggage) for completion.

It must be born in mind, however, that, in terms of the common law [See Hydro Holdings (EDMS) BPK v Minister of Public Works and Another 1977 (2) SA 778 (T); Van Streepen & Germs (Pty) Ltd v Transvaal Provincial Administration 1987 (4) SA 569 (A)], unless these provisions of the contract expressly and unambiguously permit an omission for the purposes of passing on work to another contractor,  an omission must be a ‘genuine’ one i.e. it may not be for the purpose of handing the work to another contractor.

As pointed out in the 10th Edition of Hudsons’ Building and Engineering Contracts, under normal circumstances, a contractor is entitled to perform all of the contract work and, if the employer prevents the contractor from so doing, the contractor will have a remedy.  In this case the remedy would be damages, such as the loss of profit suffered as a result of the omission.

Author: Michelle Kerr, senior associate

Winning at communication under a construction contract

Communication plays a very important part during any engineering and construction project. You need to understand the provisions under the contract and what this requires you to do.

A standard form construction contract provides for the form of communication as well as the delivery or the submission of these communications.

An example: Your contract might require that a notice may be given by fax or hand delivery only. If you then proceed and give a notice of your intention to claim by email, you run the risk that the opposition may say that you did not notify your claim in the proper form required and that your claim will not be entertained until the proper procedure is followed. In this case, a further risk might be that you are then too late to notify your claim as the period of notification expired. Always make sure that you notify timeously and with sufficient detail.

It is important that the parties to a contract, understand where and how any form of communication should be delivered with specific reference to the address and the office hours etc. If your address changes during the course of the project, you need to inform the other party.

Contractors can encounter various obstructions or issues on site and it is to your benefit to have a record when these occur – especially where it might cause a delay, loss or damage to the works or prevent you from doing your work. It is important to record it in some form of communication. You can never go wrong by building a paper trail of records throughout the project.

Communicate and inform the other party and provide proper details and clarifications as needed. This will then make it easier to communicate or negotiate a way forward. Include in your notice to claim for example, the time you have lost and the costs that resulted.

Follow the procedure and periods required, refer to the correct clauses of the contract and be thorough when providing your details. This will then reduce misunderstanding or confusion between the parties.

Author: Barry Herholdt, associate

The readiness of the South African infrastructure delivery sector to respond to the SIPs

The answer to this question is that industry is in bad shape. Most of the contracting major players have been over exposed to the Eskom contracts and this has placed tremendous pressure on their financial resources. These projects are a model for how not to set up and run construction contracts.

It is also true to say that the players to the industry are polarized and dysfunctional. The polarization is also the product of the traditional apartheid era industry structure.

Contracts in South Africa are traditionally administered on the basis of an adversarial model. The polarization, dysfunctionality and distrust that has been the product of such events as the Competitions Board Enquiry findings of collusive tendering and a misunderstanding of the Employer body’s insistence on the promotion of the BEE agenda has exacerbated this situation.

Many of these issues have been addressed by Manglin Pillay (the CEO of the SAICE) in his Civilution initiative where he advocates the bringing together of engineers from all sectors with each other and with government to actively try and understand what this new dispensation is all about and to seek solutions via dialogue.

The perception is that many employer bodies make their decisions for political rather than contractual and sound commercial reasons. One of the results of this approach has been interference by the employer on certain contracts in the employment conditions and remuneration levels of the work force. Whether this is for altruistic reasons or to enhance the political standing of the employer body is questionable. The result is the same,

the Contractors management have been emasculated and their ability to discipline labor and to achieve acceptable levels of productivity has undermined.

There can be no doubt in anyone’s minds that the labour/ contractor relationship is equally dysfunctional to that of the Contractors and Employers.

Jonathan Jansen, the Rector and Vice Chancellor of the University of the Orange Free State has observed that since Marikana, there has been a change in attitude from the Black work force. Where previously the perception was that to get ahead you needed education and training, the governments’ inability to deliver an acceptable level of education has now resulted in the work force deciding that to get ahead one needs to act collectively. Hence the emergence of more militant unions whose strategy is to strike and picket at the same time as they negotiate.

Most modern and in particular long duration Contracts are governed by some means (usually a formula) by which the price is escalated to compensate the Contractor for price increases experienced as a result of inflation. These formulae are dependent on the publication of indices by the Department of Statistics. The indices are calculated using the changes in price on a month by month of a basket of commodities. Obviously the performance of the indices is dependent on which commodities you choose for the basket of commodities.

The main driver for inflation in South Africa as in the rest of the world is the cost of fuel. This is price controlled in South Africa by the government and is not included as one of the commodities used for the basket on which the indices used in the formula are based.

The movement of the formula over the past three or so years must lead an objective observer to conclude that the basket of commodities does not include commodities that are sensitive to variations in the cost of fuel. Announcements from the Reserve Bank that inflation of our economy is operating within the target range of between 5.5 of 7 percent would also reinforce this impression.

There are two obvious consequences to this scenario. The first is that contractors are likely to lose money on the recovery of escalation. Secondly, their ability to pay salary and wage increases commensurate with the actual rate of inflation but in excess of the escalation recovery will be compromised.

From the labor movements perspective, the consequences of what can only be described as a misrepresentation by the government of the true inflation position (for whatever reason) is that what ever they ask for by way of wage increases will look like they are being unreasonable and greedy.

The project labor agreements implemented by the various employer bodies make no reference to productivity. The reality of our industry is that productivity is poor to non existent.

The combination of what appear (by reference to under reported inflation statistics) to be excessive wage demands and declining productivity is a sure road to ruin.

This situation cannot be resolved under the prevailing circumstances described above of a polarized and dysfunctional employer, contractor and labour relationships.

In this observers opinion, the thinking and momentum created by the Civilution initiative must be broadened. The time for inspired leadership is here. Leaders from the Contractor Employer and labour representative bodies with credibility and integrity need to intervene. Communication must be opened up and understanding and trust created and established. Adversarial contracting strategies must be avoided. People must be taught to work collaboratively.

The consequences of sitting tight and doing nothing are too awful to contemplate. We will lose our construction industry. The Infra structural growth that we need to allow the economy to grow will not happen. Our economy will die. The tax base will disappear, gone will be the government grants and gone will be the gravy train!

Author: Ian Massey – director

The Need for consulting engineers to take the lead on infrastructure development in the country

It has to be observed that for a variety of reasons, consulting engineers are not providing the service that we normally and traditionally expect of them. This invariably results in unsatisfactory outcomes during the contract execution. This article will identify and discuss some of these issues.

Very often the employer bodies that appoint the consulting engineers do not have the skill to administer the contracts or the decision-making ability that is necessary and in these circumstances the consultants are filling the void and fulfilling the role of the employer. The employer then performs simply a rubber-stamping role. This means that the checks and balances so important in the symbiotic relationship between the employer and his consultant just doesn’t perform and the project inevitably is compromised. It also means that consultant’s time and energy is diverted from their core activity.

Alternatively, for control reasons, Employer bodies fail to allow their consulting team to fulfill the role required on them by the various contract forms. The Project Manager, Principal Agent or Engineer become “lame ducks” and this has a detrimental impact on the project out comes.

Probably the most deleterious development of recent years insofar as successful contract implementation is concerned, is the tendency for employer bodies to require that consultants work on a lump sum fee. The net result of which is that very often, too little is allowed to do a proper job and the engineering and administration of the contract suffers as a result.

Any one who has driven between Johannesburg and Durban in recent years will have witnessed the effect that contractor led toll operators have on road maintenance. What decides the maintenance work to be carried out is not sound engineering practice but what the budget will allow. Given that there are an inordinate number of abnormal trucks on our roads but the continual maintenance that one witnesses that is constantly being undertaken would indicate in this observers opinion at least that a proper job is not being done.

The effect of the recession in the construction industry since the mid 1980’s is that a lot of skills have been lost and many of the operators have been inadequately or inappropriately trained. Training during the few boom periods that have been experienced (like around the 2010 soccer world cup and the G-FIP contracts) appears to have resulted in some bad practices being adopted and being hard wired into the system. So skills and bad practices (like for example the adoption of adversarial contracting strategies) is also an impediment to successful project implementation. Lump sum professional fees also results in little or no professional development of the consultants staff.

This skills deficiency in respect of contractual practices appears to have been recognized by certain employer bodies and they have resorted to using legal practitioners to assist in drawing up contract agreements. This results either in bespoke contract conditions (as apposed to using one of the standard forms recommended by the CIDB) or special conditions of contract attached to a standard form contract which are intended to make the contract more onerous towards the contractor. This is a very unwise and damaging policy.

There is no doubt that the traditional way that we have run our contracts, allocating risks in an even handed fashion and empowering the consultant to fulfill the roll envisaged by the contract form and remunerating him adequately, is preferable to the current situation. The Employer bodies must come to the party and make the right decisions at the right time for the right reasons.
The starting point should be to recognize the skills deficiencies that we have and to implement a programme to over come these. Secondly to recognize practices that work. Adversarial contracts stacked heavily in the favour of the Employer are a short sighted and unsound contract implementation policy. They are a recipe for disaster. The consulting fraternity should recognize this and make sure that employer bodies are properly advised as to how best to carry out their contracts.

South African Contractors Risk Management Abilities, are they up to standard?

The Risk Management Process involves identifying potential risks and deciding which risks should be managed on the basis of the likelihood of their taking place and the magnitude of their potential effect. Thereafter, measuring the effect of the risk and whether it is having the impact that you thought it would and having a risk response that you can implement to mitigate the effect of the risk.

Most contracts in Southern Africa are managed generically. In other words we do the same things to mitigate our risks no matter what risks are actually going to prevail on a particular contract. So although we are doing things that will mitigate the risks that might occur we are not specifically aware of these risks unless they are particularly severe and have a major delay or cost impact. Any special risks that might affect that particular contract are not identified and they come about as a surprise to us. In these circumstances the risks manage us rather than the other way around.

The reason that this is so can be traced to deficiencies in the contract documents that we use. Apart from the NEC contract and a half hearted attempt to introduce an early warning requirement in clause 8.3 of the FIDIC 1999 Red Book, there are no specific risk management tools and requirements in these contracts. The intention, it must be presumed is that in compiling the programme for the work, that risks will be identified and a risk response devised.

So here lies the rub. As a general statement and in an environment where skills are in any case in short supply, our planning skills and procedures are chronically bad! We have a surfeit of schedulers but a shortage of planners. Schedulers are the guys that know how the programming software works but don’t have the on site experience to understand things like construction methods and rates of production. The intention is that the site team that will carry out the work should provide this information to the scheduler. Either this is not done (and the scheduler works in isolation) or it is done in such a way as the risk identification process is either not done at all or it is done superficially.

In an environment where our skills are paper thin this is a really bad thing. We need to empower the people that we appoint to manage and carry out our contracts and the best way to do this is to identify the risks that they will in all probability have to deal with and to give them the tools and the support to manage the risk once they manifest themselves. This can only be done if a risk workshop is convened and fully experienced people are involved in the process.

As a general observation risk management is practiced at tender stage and at the inception of a contract but the effort tends to peter out as the contract progresses.
The management of construction contracts is the management of risk, so it is fundamental to the well being of our projects and our industry going forward that we start to manage risk proactively.

What developers and contractors need to know about their rights when it comes to building outside South Africa

With the present economic growth and extensive opportunity in Africa, many developers, contractors and consultants are finding work north of the Limpopo. Contracting in another country other than the one where you are resident brings with it a host of potential issues from taxes and customs to the impact of local employment legislation. In this article Euan Massey takes a broader look at the various laws which impact on your rights when contracting in another African country.

Contracts, and the rights and obligations which flow from them are influenced by four potential areas of law. These are the law applicable to the contract (or governing law), the law of the courts which have jurisdiction over the contract, the mandatory law and the law of the arbitration agreement (if applicable). Considering these four potential areas it is quite possible to have a contract between a South African developer and Brazilian contractor for the construction of a new development in Mozambique where the applicable law is that of South Africa, it is agreed that the English courts have jurisdiction, the mandatory law is that of Mozambique and the law of the arbitration agreement is Swiss. This potential minefield introduces a myriad of rights and obligations and requires extensive consideration before diving headlong into a new contract.

The applicable law is the law which is applied to the interpretation of the contract and the rights and obligations contained therein. It is always advisable when contracting in another country, or with a party from another jurisdiction, to agree on an applicable law with which you are familiar. There is a tendency to automatically choose the law of South Africa when contracting in another country, or with a party from another jurisdiction, but often this is not acceptable to the other party. This leads to the option to either accept the other party’s proposed applicable law or to propose a “neutral” applicable law. Accepting a law with which you are unfamiliar can have disastrous consequences. For example choosing French law, or a derivative of French law (such as the law of Mauritius), as the applicable law may have unintended consequences for at least one the parties. The Napoleonic code introduces decennial liability into construction contracts which is effectively a 10-year warranty period over the works furnished by the contractor.

Outside of having knowledge of the applicable law, it is usually advisable to select the law of one of the common law countries (on the basis that these laws will share common characteristics as ours). Countries like Kenya, Botswana and Ghana will have legal systems and laws similar to ours. “Neutral” jurisdictions such as England also provide well-recognised laws and a familiar legal system.

The issue of jurisdiction is vitally important. A number of jurisdictions present logistical challenges and legal hurdles when it comes to enforcing your rights under a contract. Even though you might agree to arbitration, you may still require the assistance of the courts to enforce your rights. An excellent example of this is where the parties to a building contract agree to refer disputes, in the first instance, to adjudication. No country in Africa has introduced a statutory adjudication system which allows for adjudicator decisions to be enforced through the courts. Despite this, the South African courts have illustrated a robust willingness to enforce adjudicator decisions on the basis of the parties’ contractual agreement (see Stefanutti Stocks v S8 Property [2013] ZAGPJHC 249). There is no similar certainty that a court in another country will enforce adjudicator decisions on the same basis, particularly in civil jurisdictions such as Angola. Again if you are unable to agree to the jurisdiction of the South African courts then it is advisable to consider agreeing to submit to a “neutral” jurisdiction such as that of England and Wales.

The mandatory law is the law where the works are to be executed. No matter what you agree in your contract, you are unlikely to avoid the obligation to comply with mandatory law. The mandatory law includes the laws relating to employment, health and safety and the environment. With most African economies become more sophisticated it is imperative for the mandatory law to be understood before concluding the contract.

The law of the arbitration agreement is the law which is applied to the arbitration process. In South Africa this law would be the Arbitration Act 42 of 1965. This piece of legislation, like many others in Africa, has fallen behind modern developments in international arbitration. The upshot of this outdated legislation is that it may allow the local courts to interfere extensively in the arbitration process and may limit the parties’ rights to interim and conservatory measures, thereby blunting the effectiveness of the agreed arbitration process. Where contracting outside of South Africa, parties should consider agreeing to an arbitration law which is likely to assist the arbitration process. Good options here include Mauritius (which has recently opened a satellite court of the London Court of International Arbitration) and England and Wales.

When contracting internationally, arbitration is still the “only game in town”. Despite the process being expensive and time consuming, the New York Convention ensures that the holder of an arbitration award can enforce such award in countries who are signatories to such convention. It is therefore important to ensure that the party with whom you are contracting is a signatory to the New York Convention. Notable omissions include Angola and Swaziland. The full list of contracting states can be found at http://www.newyorkconvention.org/contracting-states/list-of-contracting-states.

If the parties to an arbitration agreement do not expressly agree the law of the arbitration agreement then there are a number of possibilities which could apply. A court may decide that the law of the arbitration agreement is the same as the applicable law (Sonatrach Petroleum v Ferrell International [2002] 1 All ER (Comm) 627) or the law of the arbitration agreement may be the seat of the arbitration (Dubai Islamic Bank v Paymentech 1 Lloyd’s Rep. 65). It is therefore recommended that this be dealt with in the arbitration clause.

As is clear from this article, the legal considerations to be taken account of when contracting in Africa, as with any other country internationally, are vast and should not be lightly considered.

Author: Euan Massey, director

The importance of an informed client in helping to deliver infrastructure on time and in budget. How do we Bridge the skills Gap?

When considering the plethora of unhappy contracts currently under construction and how they came to be in this situation, it is apparent that poor decisions concerning project implementation have been taken by Employers. In many instances, Employers have been reliant on experts to guide them for example in the choice of the contract form to be adopted and the alterations to standard forms that should be made. In most cases, this has resulted in adversarial contracts being even more adversarial. As a result a great deal of energy that should be directed at getting the job done is focused on commercial issues and pursuing claims.

One would find it hard to identify better examples of this scenario, than the Eskom contracts currently under construction. It must be concluded that the decision making on these projects demonstrated very little wisdom or appreciation of the consequences of adopting highly adversarial contracting strategies.

Contractors involved in these contracts must also accept their share of the responsibility for an unsatisfactory out come, notwithstanding that the performance of most contractors is dependent on the environment created by the Employer.

In a skills scarce environment adopting a strategy that results in polarization of the parties to the contract simply does not make sense. We have to set our projects up so people all pull in the same direction. Collaborative contracting has to be the way to go.

The challenge is to persuade Employer bodies that what they are doing is inadvisable. No doubt they feel that they are in a comfort zone and that keeping contractors at arms length is a preferable approach particularly as anything that could be interpreted as being preferential treatment could be misconstrued as being “tenderpreneurial”.

We have written previously about the polarization between the various parties in the industry. There is mistrust and suspicion between employer, contractor and consulting bodies and this has to be overcome before common ground and an understanding that we actually have no choice can be achieved. The current situation is making the successful execution of projects an impossibility. The result is a lack of jobs and job opportunities and an environment where emerging contractors will inevitably founder. The established contractors are fairing no better. It would be a brave (not to say unwise) investor that put his hard earned cash into a construction company under the current circumstances.

So we need a forum for discussing these issues and breaking down the barriers of mistrust. Policies must be adopted whereby we set our selves by agreement, rather than by government statute what our objectives are for training, for job creation and job opportunities, for the creation of viable emerging contracting organizations. This must not be a “ band aid” approach it needs to be a well thought through strategy with established out comes against which we as industry participants can measure our success and achievements against this blue print.

It’s time for the industry to take control of its own destiny and to stop following the lead set by the unions and by government. We should be performing above and beyond anything that the government or a union can envisage for our businesses or for the people that we work together with in the industry. Who better to decide what is achievable or acceptable either from a business or moral perspective than we who have devoted our lives to the well being of the industry?

South Africa’s ability to compete effectively in cross border public sector jobs.

There has been a major change in the past twenty or so years in the attitude of South African construction workers to working across border and up into Africa. Where previously workers were reluctant to venture more than a days’ drive away from their home base there is now willingness to work on an ex pat basis through out Africa and the Middle East.

The decline in work availability commencing in the mid 1980’s necessitated that work should be found elsewhere. There was obviously a perception that South Africans would be in a good position and be competitive in environments that were perceived as being very similar to those found in South Africa, The major obstacle at this time to winning work in many African Countries was obviously the pariah status of South Africa during the last decade of the Apartheid government.

This all changed after 1994 and there was a major move to acquire work, particularly road work and mining related projects throughout Africa. The major lure being that many of the contracts were funded by international aid agencies and these were therefore “hard currency” contracts.

Prior to the strengthening of the Rand approximately ten years ago, super profits were available on contracts where the revenue was in Dollars or Euros and the costs were incurred in Rand’s or whatever was the local currency at the job site and both these currencies were gradually losing value relative to the currency of payment.

When the Rand strengthened this situation reversed and many of the South African construction companies (particularly those working on road contracts) lost some significant amounts of money. Just after this there was an upswing in work availability (mainly to do with the 2010 world cup) and many companies took policy decisions NOT to take on cross border work.

Notwithstanding recent statements concerning major infra structure improvement and development projects mooted by the South African government this has yet to translate into tenders and an improvement in contractors (and for that matter consultants) order books. The major players on the construction scene are therefore venturing back into Africa in order to keep resources busy and keep their order books ticking over.

The environment is a very different one to that experienced in the late 1990’s and early 200’s. Competition in the form of Chinese, Arab and European and in some instances American companies are now competing with South African contractors. Very often they are able to offer finance (and in some instances they are subsidized by their governments) for these projects and that puts South African at a disadvantage.

Notwithstanding this, our local contractors are making major commitments and efforts to secure this work, which in some instances represents the majority of the work load being undertaken by these contractors.

Given the benefits of relevant experience both with working conditions and cultures, the cost benefit of a weak Rand and logistic advantages South African contractors are well positioned to secure and carry out these cross border projects.

Author: Ian Massey – Director

How to prevent strikes from happening too frequently

There is, unfortunately, no short term answer to this dilemma.

A decent living wage for your staff must be the objective for any responsible employer. However, what happened to workers responsibility to produce good work at an acceptable level of productivity?

We have written before about the polarization of the construction industry. Where there is mistrust between the employer bodies, the professional organizations and the contractors. There is a perception amongst employer bodies that workers best interests are not being looked after by contractors. Hence the appearance of Project Labour Agreements such as those imposed at the Eskom contracts. These, in this commentators opinion, cause more harm than good. They undermine the contractors ability to manage his workforce and create unrealistic and unreasonable anticipations in the workers. When these expectations are not met the result is a strike.

It must also be true to say that remuneration levels at the lower end of the skill scale have not kept up with the cost of living that has run away from the control of the government largely due to falling Rand values and increases in fuel prices. Unions appear to have been fooled (generally by misstatements by the reserve bank and government) into thinking that the inflation was under control and that an annual adjustment of between 5 and 7,5% was an adequate increase when nearer 15% would have been more the order of the day. Hence the erosion of workers spending power and the rise in more militant unions.

Maybe all these things are just symptoms of a more sinister problem. Firstly that capitalism in the African environment where the wealth of the nation is concentrated in the hands of a few people. That it appears to be governments policy to enrich a select band of cohorts who will join the fortunate few. Further the, what appear to be, obscene remuneration packages that top executives reward them selves with.

The knee jerk reaction to these issues is to suggest nationalization of major industry and the mines and the adoption of a more socialist government model. Winston Churchill has been quoted as saying that “the inherent vice of capitalism is the unequal sharing of the blessings; the inherent virtue of socialism is the equal sharing of the miseries”, lets hope we don’t have to test this observation by personal experience!

What has happened to the Construction Industry is that wage levels and conditions of employment have become institutionalized. That is that the industry waits almost cap in hand awaiting the out come of the annual wage negotiations, these days invariably accompanied by a strike. The system therefore appears impersonalized and this just reinforces the mistrust and polarization between construction company management and the work force. This is the crux of the issue.

We need to get back to creating personal relationships with each of our workers. They need to be recognized as valuable human beings and that their involvement in the organization is vital to the success of the company. Everyone should have a career path and a means of moving up the ladder. We should reward good work, integrity and recognize by personal interaction the contribution that everyone makes from the lowliest to the highest echelon of worker.

We shouldn’t and can’t deny a persons access to collective bargaining but by rewarding people’s personal efforts and contribution regardless of what the industry minimum wage is, we should strive to making resorting to union intervention to give someone a reasonable remuneration unnecessary.

Lets ask our selves a simple question; is everyone’s job in my organization worth keeping? If you are honest you will admit that most of your workers would rather do something else if it was available. There’s your yardstick. Give your people dignity and a job worth fighting for and my bet is we wont have any need for strikes.

Putting together the right suite of training courses for a project.

The Engineering and Construction industries are very reliant on short (usually two days duration) public training courses to supplement commercial skills. These courses are of often of questionable quality. One thing they all have in common is that they are expensive but how do we choose the courses that will deliver a real benefit to our people deployed to a particular contract?

Lets start by discussing some fundamental issues.

Whilst we may disagree on many issues, the subject that there will be no dissention over is the lack of meaning full skills available to industry as a whole and the construction industry in particular.

Of course skills development starts with meaningful schooling and the Government have done society and industry no favors by down grading our educational standards. The closure of industry based technical skills development programmes (like apprenticeships) is equally a major blow to skilling up our industry.

The other dynamic that must be appreciated is that the industry demands and requirements have changed significantly in the past twenty or so years. The emphasis on what might be called “soft skills” has increased beyond all recognition and site managers can expect to expend 80% of their time immersed in sorting these HR, safety and environmental issues out and only the remaining 20% dealing with technical issues. The other important change is that the commercial skills necessary to properly manage a modern construction contract has increased dramatically.

So how has the industry responded to these changes? It is probably true to say that there has been no meaningful or coordinated response. Certain training companies have seen the gap and are providing training courses that vary from very poor to excellent. One feature that they all have in common however is that they are all expensive.

Some years ago , companies got a tax break for the training that they were doing. The training requirement was therefore top down (government) driven. Now that the benefits (tax at least) have been removed, training is driven by the individual skill development needs of each person or company. It is bottom up driven. This is a weakness and is counterproductive to making major changes and turning around the skills shortages at least in respect of commercial skills training.

Another feature of training programmes available is that people who already have a modicum of commercial skills are the ones we see on these courses. The people that really need the training (like the BBBEE contractors) are rarely if ever seen.

So what is missing? Well firstly, we need to identify the training needs of the entire industry not the training needs of the privileged (and monied) established contractors. Secondly we need standards. Standards for the course leaders and standards for the course material being presented. The present CPD arrangement does not assist the current varied and generally unsatisfactory quality of presenters and material alike. Anyone can present courses (and they do).

So the starting point for any project, whether we are talking about the actual construction of the Works or the training needs of the staff and labour to be deployed on the site is a risk analysis. Once we know the risks that have to be managed we can match or identify gaps between these risks and the experience and training of our people. This will identify the subjects and issues that need to be addressed.

This is a major shortcoming of most organizations operating in the construction environment. We don’t identify the specific risks that will be encountered. We run contracts generically. In other words we do the same things on all our contracts regardless of any specific risks that may be inherent in a particular contract. We “crank the handle”!

So the knee jerk reaction is give the guys a training course on the particular type of contract (i.e., JBCC, NEC, GCC 2010 etc.,) and hope for the best. We don’t say “ the NEC is an administration intensive contract” and respond by saying lets brush up our administrative skills.

Once we have decided what topics need to be dealt with we need to find the right training provider. Get out there, interview the people that will be presenting the course. Ask to see the material that will be presented and objectively decide which trainer and which course is going to result in the most benefit to your people.

The problem we have with this sort of training is that it usually only sensitizes people to the sorts of problems that they may encounter. It doesn’t give them the skill to deal with the issues. This will only come with experience and exposure. So make sure that the training provider is available to mentor your people and field calls whenever a problem arises and there is uncertainty of what to do. The better training providers will jump at the opportunity to maintain an involvement after the training work shop and maybe hold a follow up session to review and share experiences.

Author: Ian Massey – Directore

Articles for the contractor

The trend in modern construction contracts is to reimburse contractors for additional expenditure via the payment of the actual cost incurred.

Let’s test this proposition shall we?

Under the NEC contract, there is an option to use, by agreement, the rates or the lump sums (option A and B as for example at clauses 63.14 and 63.13) to quantify compensation events. The default position however is that payment for compensation events including variations involving additional work is to pay the contractor his defined cost.

In accordance with the GCC 2010, additional work is paid for using the billed rates or adjusted billed rates where there are differences in the work or where the circumstances under which the work is carried out (see clause 6.4). He gets paid his time related General items (clause 5.12.3) when the time for completion is granted. Otherwise the Contractor gets his “proven cost”, (see for example clauses 5.4.3, 5.9.6 and 5.10.1)

The 1999 FIDIC Red Book contract has a very similar arrangement for the evaluation of variations (see clause 12.3) and other costs are compensated as cost, where the cause of the additional expenditure is beyond either parties control (see for example clause 4.12) or cost plus a reasonable profit where the cause of the additional expenditure is something within the Employer’s control (see for example clause 1.9). This is the remedy available to the contractor also for extensions of time.

Under JBCC 2000, variations are quantified (see clause 32.2) much as they are under FIDIC or the GCC, where additional time is awarded the Contractor gets his Preliminaries (clause 32.12) but where an expense is incurred through no fault of the contractor and which is not recovered through the other rates he gets paid his expense and loss (clause 32.5).

It is also of interest to note that there is a trend to adopt Target Cost Contracts as the preferred contracting strategy in contracts in Europe and North America. These are collaborative type contracts and the Contractors remuneration is in the first instance on a reimbursable (i.e., a cost plus) basis.

So the payment of cost under all these contract forms is an important issue.

It needs to be made clear that these costs are not the “allowable cost” or indeed anything to do with the Contractors tender. They are the out of pocket expense incurred in actually carrying out the work.

How does a contractor proceed to deal with these circumstances?

Well, under the NEC he is well prepared. He has the Schedule of Costs Components (both the “longer” and “shorter” schedules) and he has had the opportunity to complete the Contract Data section of the tender document, section two “Data provided by the Contractor”. He is also entitled to rely on trade publications to establish the cost of hiring certain equipment. So if he has been diligent, he will be in good shape to substantiate what his defined cost will be.

All well and good. How about FIDIC, GCC and JBCC, how does he shape up here? The answer is, not very well. These documents generally speaking do not require that cost information or the acceptable source of such information be provided or stipulated. Even the question of cost adjustments and what constitutes a reasonable mark-up are not normally established at tender stage prior to award.

This puts the professional team at an enormous disadvantage. Their bargaining power is effectively compromised and they have no basis for comparison except perhaps from previous contracts.

So the Contractors are onto a winning streak and are going to come out of this with a handsome profit?

As much as you might think that this would be the situation, this is not, generally speaking, the case. Most contractors are all at sea the moment they have to produce proof of what their costs were. Their accounts departments are not equipped to save this type of information and find it difficult to provide the requisite substantiation of what costs were incurred.

It is, in addition, a lot of work. Some of the information is confidential (like salaries and other remuneration costs) and most information is saved in a manner that makes it difficult to allocate a particular cost to a particular event.

All these contributory factors make the substantiation and agreement of the cost of doing a particular piece of work particularly problematic. Trust is also an issue here and the professionals team are invariably suspicious of the contractors motives and integrity.

So what is the lesson learned? Practitioners who are committed to using contract forms other than the NEC should take a leaf out of the NEC’s book and include a section into the Contract Data which the Contractor is required to complete, which will empower the consulting team to manage the process whilst at the same time enabling the contractor to quantify his claims for cost using accepted known data.

Author: Ian Massey – Director

Best strategy for getting projects completed on time and within budget.

A commonly asked question is, 15 or so years ago, how many contracts finished late? How many of those contracts had delay damages applied?

The answer was very few and none.

If the question were asked of the contracts currently under way, the answer would be diametrically opposite, namely most of them are late and all of these have penalties levied.

By definition therefore, whether you look at things from an employer or a contractor situation, most contracts are late and by definition will be over budget (or looking at things from the contractor’s view point), he will lose money.

This is therefore a pretty depressing outlook and clearly a topic of general interest.

Lets first and foremost try and get to grips with what has gone wrong. Is this a contractor’s problem alone? Is this perhaps exacerbated by problems within the professional team for example, the requirement that professionals tender for their work and have too little money to do their job properly? Are low skilled, inexperienced and perhaps politicized employers make things more difficult by not making the correct decisions at the right time? How about the work force? Have unionized workers who are under motivated to achieve acceptable levels of production contributed to the overall situation?

The answer is that all the parties to the contracts are contributing the poor performance of modern contracts.

So what is to be done about this?

Well firstly we have to realize how destructive our standard form contracts are. These are commonly referred to as adversarial contracts and as the name implies a great deal of time is spent in conflict on these contracts. If you want an example of the sorts of things we are talking about look no further than the Eskom contracts adopted for the Kusile and Medupi power stations. These use the Fidic form of contract which, notwithstanding statements by Fidic themselves to the contrary, is not a particularly contractor friendly contract. This contract has been “spiced up” to make life interesting (and no doubt more difficult) for any contractor unfortunate enough to be awarded a contract on either of these sites. An enormous amount of time (and money) is being expended in promoting and defending claims. This is time and effort that would be better expended getting the job done.

Developments overseas in recent years have favored more collaborative contract execution strategies like target cost contracts. The intention is to play to the parties’ strengths, align the aspirations and objectives of the parties to get the job done as quickly and as inexpensively as possible. These form of contract also require fewer levels of hierarchy and in a skills scarce environment this should also be a strong motivator to adopting less conflict prone means of running a contract.

Collaboration also requires a team approach from the professional team. “Them and us” attitudes are inappropriate and unacceptable. A slick service from the professional team is a necessity and to do this he must be properly remunerated. He must be able to afford to deploy sufficient top class people to perform his function in such a way that the scope of the work, the employers requirements, the geotechnical information and as many of the unknowns that inevitably bedevil the proper execution of a contract are attended to and are known as near to or preferably before commencement of the work.

Employers must get their acts together too. Making decisions at the right time and for the right reasons is paramount. One of the benefits of collaborative forms of contracts is that the Employer can take a greater role in the actual execution of the contract and where employers have expertise in contract execution this can be of major benefit.

Ultimately, the objective is to create a trust relationship between the parties to the contract and this brings us conveniently to the question of the work force. Contractor work force relationships are, generally strained and it would not be inaccurate to say that the relationship is polarized. Bold industry wide initiatives must be adopted. Fair and equitable remuneration packages must be available to workers who perform from a production, safety and quality perspective. Career paths must be established for each member of the work force. Training must be provided (literacy and numeracy included) to enable individual workers to achieve their particular aspirations and to move up the ladder to better levels of remuneration and employment benefits and to escape the poverty trap.

All of the issues that we have addressed in this article are risks that are inherent in the construction environment albeit, much bigger issues than might normally be addressed. Like the day to day risks that are dealt with in the normal course of events they must be managed in an effective way so that they do not present insurmountable impediments to the satisfactory and successful completion of the contract.

Author: Ian Massey – Director