Contractor management guideline

CMG
CONTRACTOR MANAGEMENT GUIDELINES
101

CONSISTING OF
1 ESTABLISHING A CONSTRUCTION BUSINESS
2 OPERATING A CONSTRUCTION BUSINESS
3 EXECUTING A CONSTRUCTION PROJECT

The Construction Industry Development Board

SECTION 2
O PERATING A C ONSTRUCTION B USINESS

TOPIC CONTENTS
Securing • Money • Formwork and scaffolding suppliers

1
resources • Material supplies • People
• Equipment • Subcontractors

SECTION 2
Financial • Financing a construction business • Fixed assets and working capital

2
management
• Sourcing finance • Cash flow
• Keeping records and accounts • Invoicing and terms of payment

Marketing • Marketing concepts • A marketing plan

3 • Publicity
• Promoting a construction business
• Effectiveness of marketing campaigns

Tender • Identify the market segment • Analysing the requirements of the
considerations tender documents
• Identify competitors

4
• Analysing the opportunity for profit
• Finding work opportunities
• Clarification meeting
• Private and public sector tenders and
quotations • Making a tender submission
• Obtaining information on tender • Tender checklist
opportunities

Public Construction • cidb standard for uniformity in a call for expressions of interest
Procurement System construction procurement
• Standard conditions for the calling for
• Procurement procedures expressions of interest

5 • Structure of procurement documents
• Standard forms of contract
• Standard conditions of tender
• South African national standards
identified in the scope of work
• cidb code of conduct for the parties
engaged in construction procurement
• Structure of documents associated with


CONTINUED

TOPIC CONTENTS
Public Construction • The Promotion of Administrative • Prevention and Combating of
Procurement System Justice Act Corrupt Activities Act
Continued
• The Public Protector

• Requirements for public sector • Basis upon which the employer will
Tendering for public
construction procurement evaluate tenders
sector work

6
• Understanding the cidb standard
conditions of tender
SECTION 2

• Submitting a compliant (responsive)
tender offer

Pricing strategies • Understanding the pricing strategy • Activity schedules
of the tender

7
• Cost reimbursable contract
• Bills of quantities
• Target cost contract
• Example of a bill of quantities
• Standard pricing strategies for main
• Schedules of rates contractors
• Lump sum prices

Contractual • The fundamentals of a construction • Standard construction works

8
considerations works contract contracts and subcontracts
• Concluding a contract • Typical features of construction
works contracts for main contractors
• Concluding a contract using the
cidb procedures • Contractor’s lien

Pricing a tender • Building up a tender price • Pricing the equipment required for a
tender
• Estimating the quantum of work
involved • Pricing the plant and material
required for a tender

9
• Obtaining prices from material
suppliers • Pricing for general items
• Establishing equipment requirements • Allowances
• Pricing the labour required for a • Finalising the tender price
tender


SECTION 2.1: SECURING RESOURCES

MONEY
The owners of a construction business (contractor) may use their own money (equity capital), borrow
Most people go into
capital from the bank or other source to start a construction business (see section 2.2). This business to make
money/capital is used by the business to acquire resources, e.g. materials, labour, and plant. The money, that is, they
business owners need to use this money/capital effectively to obtain a good return on their investment, want to take money
otherwise they could invest their money/capital in other forms of investment products which will yield out of the business.
In order for money to
higher returns on their money. The profits made (retained profits) by the construction business should
be taken out of a
be ploughed back into the business to reduce the amount of money that needs to be borrowed from
business, there has to
banks or other sources. be money in the
business that is not
The most well-known lending institutions are banks, whose primary business is lending money to
owed to anybody.
individuals and companies by charging interest on the loan amount. Borrowing money from banks is The temptation to
expensive. In addition to the interest charged, banks add services fees for each service that they take money out of the
provide. For example, on cheque accounts, banks charge a minimum service fee per month for each business apart from
cheque issued. your salary, while the
business has debts,
A bank overdraft is a very useful source of income for the bank. Interest is calculated on the daily must be resisted.
balance on the overdraft amount, i.e. the amount of money owed to the bank. If on one day
R10 000 is owed and the overdraft rate is 20% the interest that will be charged on that day will be
10 000 x 20% x 1/365 = R5,48.

The banks add this interest charge to a construction business' account once a month. The interest is Construction
compounded every month. That is, the interest is added to the overdraft on a monthly basis and businesses should try
interest is then charged on the new total amount. In this way, interest is charged on interest. For to use their own
money and save the
example, if R10 000 is borrowed at a flat rate of 20% interest on January 1st and is repaid on
interest and bank
December 31st of the same year, the annual interest is R2 000. The same calculation if interest is
charges in order to
charged on interest (compound interest) the interest charges will be R2 213,35. remain competitive.

Other aspects that impact upon a construction business' cash flow and overdraft limits are:

• Prompt payment from clients for work completed.
Contractors need to:
• Limiting spending to the absolute minimum and paying as late as payment conditions permit, e.g.
payment to material suppliers and plant hiring companies. • Make sure that they
know exactly how
• Optimising ordering of material, i.e. don't order materials too early and order only that which is
much money is
required at that point in time. needed for a contract.

• Building up of cash reserves by resisting the temptation to spend. • Negotiate to get the
best possible interest
• Choosing not to tender for work where the contractor cannot be competitive due to the cost of
rate on borrowings.
money, e.g. where the client says in the tender "payment within 45 days” or “payment within
60 days” and the contractor has insufficient credit, such terms of payments could be extremely • Know how the interest
prohibitive. rate will be calculated
(per month, etc.).
Apart from the banks, there are other organisations such as Khula Enterprises Limited that can be
• Know what the bank
approached for support. Contractors should be extremely careful of money lenders as they are
charges will be.
permitted in terms of the law to charge a much higher interest rate than the banks.
• Make assumptions as
The contractor needs to consider the advantages of credit, as a slightly higher price with credit facilities to when a client is
may be a better option when procuring resources. Even if the price from a supplier looks good initially likely to pay.
it may not be the best deal.
• Calculate the cost of
money before
submitting a tender.

1

MATERIAL SUPPLIES
Contractors should procure materials of the right quality delivered on time at the cheapest price. All
three of these requirements are extremely important. There is no point in getting materials at a low
price if they are rejected once they are received, delivered to a site or built into the works. Materials
not delivered on time may delay the works and prove to be very costly. Contractors should accordingly
resist procuring on price alone. It is imperative that the required quality, quantity and time for delivery
are established and understood before approaching a supplier. At the same time these requirements
need to be clearly communicated to the supplier when ordering materials or obtaining a quotation for
tender purposes.

It should also be established whether or not the materials are to be delivered or collected and what
storage capacity is available to receive the materials. It may also be necessary to establish whether the
supplier is a VAT vendor, and it is important to know whether or not VAT is included in the quoted price.

Credit is not The most common credit period is 30 days. This normally means that payment is required 30 days
everything, but it is from the date on the statement. Suppliers usually deliver materials on a particular day and will invoice
extremely important immediately. Towards the end of that month the supplier sends out a statement with a summary of all
to obtain it providing
the invoices sent and all monies received from the contractor during that month. Thirty days credit
that the contractor
can manage it means that a contractor has 30 days from the date of this statement to pay, failing which they could
correctly. Credit well be charged interest by the supplier and lose the right to claim any discounts.
means that materials
can be ordered and Ideally, materials should be ordered so that they can be built into the project within a month of delivery.
only paid for after a This will allow the cost of the materials to be included in the payment certificate that is presented to
certain period of time the client for payment. It is even possible that the client will pay the certificate before the contractor
following delivery has has to pay the suppliers of the materials. Should this occur, the contractor will be able to buy materials
elapsed. without having to use or increase borrowings. In effect, the client's money may then be used as
bridging finance to fund the business. Contractors should be aware that if they order materials that
they are not able to build into the works within that month, then the payment from the client may not
cover the cost of those materials, and they may have to pay the supplier or risk losing the credit facility
from that supplier.

In addition to credit, suppliers should be asked for discounts. There are two main forms of discount:
trade discount and settlement discount. Trade discounts are granted to the contractor and settlement
discounts are granted if monies owed are paid on time.

Late payments may Trade discount is taken off the price to begin with. The suppliers often have a “list price”, which is
attract interest generally not confidential. What is confidential is the discount they give a contractor off the list price.
charges. In addition, The discount that suppliers will give depends on how the supplier rates the contractor as a client (i.e.
in the event of late what is the risk of non-payment), and how good the contractor is at negotiating. The supplier could
payment, the supplier
allow a contractor a settlement discount, which is normally 2,5% for payment within 30 days. The
could refuse to give a
contractor a credit discount is only allowed by the supplier if the contractor pays his account on time. The settlement
reference or could discount is then deducted by the contractor from the amount shown on the statement, provided
give a negative one. payment is made on time.

Positive credit references are needed to get more credit. Suppliers ask contractors for trade references
when credit applications are made. These are companies from whom a contractor has purchased
materials on credit in the past. It is a good idea to buy materials from different suppliers to build up a
list of credible references.

2

EQUIPMENT The leasing of
equipment allows it to
Equipment may be: be bought over a
period of time. At the
• Bought for cash, in which case the contractor owns, maintains and insures the equipment and
end of the lease
employs operators to use the equipment. period the ownership
is usually transferred,
• Leased in accordance with an agreement whereby the contractor pays a certain amount, normally
sometimes for a lump
monthly, towards the purchase price of the equipment, maintains and ensures the equipment and
sum (residual
employs operators to use the equipment (the contractor may own the equipment after the lease amount). The
period is completed). question of ownership
and the payment of
• Hiring/renting from a reputable equipment-hire company at an agreed hourly, daily, weekly or
residual amounts
monthly rate, with or without an operator, with the responsibility for maintenance lying with the hire need to be
company. understood before
entering into a lease
The factors that determine how equipment is acquired depends on various factors including the cost agreement.
(including maintenance and insurances), cash reserves, how long the equipment is to be used, the
availability of the equipment, the frequency of use and what deal is offered.

When hiring equipment, it is important to establish the following: Equipment should
always be hired from a
• The minimum number of hours that must be paid for per day where the hire is on an hourly basis. reputable equipment-
• Whether the hire rate includes the operator. hire company,
individual or
• Whether the rate includes fuels and oils (this is referred to as “wet” if it does and “dry” if it doesn't). organisation. A good
equipment-hire
• What tools are regarded as part of the equipment to be hired and what must be hired or purchased
company should be
in addition, e.g. when a compressor is hired, the attachments such as chipping hammers, clay able to provide the
spades, moil points, ground engaging tools (GET) and cutting edges must be hired or bought following:
separately.
• A good service (as they
• What will happen in the event of damage to the equipment, for example, damage to tyres, body often specialise in
damage, windscreen damage, etc. specific types of
equipment).
• What (if anything) is covered under the hirer's insurance.
• Well-maintained
• What happens in the event of injury or death of the operator, or injury and death caused by the equipment in good
operator, and damage to property caused by the operator if the contractor provides the operator or condition.
if the hirer provides the operator.
• Advice on the
• Whether the minimum daily hire time is applicable on rainy days. equipment required for
certain jobs, such as
• Whether the equipment can be booked off-hire for a period when it is not working on a site, or does size of loader, TLB, etc.
the hire company offer standing-time rates lower than the normal working rates. required, and whether
or not they should be
• What will happen in the case of the breakdown of the equipment, e.g. how long will the hirer take
tracked or rubber tyred.
to get it fixed or will the hirer supply replacement equipment.
• Excellent operators with
• How much is the cost of transport of the equipment to and from the site.
experience, skill and
• What the operator's overtime conditions are and whether or not accommodation and transport to knowledge.

the site is to be provided every day or when the operator does overtime or not at all.

• The notification time of putting the equipment off hire.

• What insurance should, or must, be taken out.

3

Remember, the clock FORMWORK AND SCAFFOLDING SUPPLIERS
is always ticking.
Keeping the Formwork and scaffolding suppliers are often able to assist a contractor with the preparation
formwork or of tenders if approached to do so. They should:
scaffolding for an
extra day costs • Determine the quantities of scaffolding that is required and the weekly hire costs based on the
money unless a deal drawings and the areas for which scaffolding is required.
has been made in • Assist with the planning of the work and provide a price for the most economical formwork solution
advance with the
for a project, based on the programme and drawings, including the time for re-use of the same
supplier.
formwork for different parts of the project.

It is often better on When hiring scaffolding and formwork, the following is important:
projects with long • Make sure that the formwork is checked on and off site as the contractor will be held liable if a piece
durations to buy the of equipment, frame, etc. is damaged or lost; this is especially important for small items such as
items that can
clips.
become consumables,
such as formwork • Consider asking your supplier to check that the formwork and scaffolding have been correctly
and wedges, as these assembled before casting concrete or putting a load onto it.
often get lost and
• Check that the supplier will deliver and collect the scaffolding and formwork.
buying them can be
more cost effective. • Make sure that allowance is made in tenders for overruns, damage and the costly cleaning of the
equipment, e.g. the shutter pans, props on which concrete has splashed, etc.
• Make sure that the price includes for the oiling of the boards and pans with shutter oil.
• Use of the correct oils on the shutter as incorrect oils can spoil the surface finish or cause the
concrete to stick to the shutter and require the surface to be plastered over.

PEOPLE
For small and micro enterprises, it may be possible to run an office from your home. In such a case,
the owner/member of the business is often responsible for office management, administration,
statutory and voluntary registrations, salaries and wages and a host of other activities associated with
a head office. There is nothing wrong with a managing member or business owner engaging specialist
individuals who are more technically, financially or administratively qualified than they are, conceivably
even earning more money for a given period than the managing member themselves.

Labour can be employed on construction sites as temporary employees on a contract basis for a period
of time on a particular site or permanent employees who are transferred from site to site. Staff needs
to be recruited and trained.

Appropriately qualified or competent technical and supervisory site staff needs to be employed or
engaged for all projects. No compromise on the quality of these human resources can ever be
accommodated, as the cost of re-work (including demolition and cartage, new materials and repeat
labour, overall downtime and extended time) is not provided for in any budget. The costs of rework
erodes the profit that has been provided for in a contract.

SUBCONTRACTORS
Building up good
relations with Subcontractors are an important resource and can provide a contractor with capabilities and
subcontractors is capacities that it may not possess. Instead of hiring people specifically to do the work, it is sometimes
important. easier to subcontract a company that specialises in that field to come and do the work for the
contractor.

4

SECTION 2.2: FINANCIAL MANAGEMENT

FINANCING A CONSTRUCTION BUSINESS
A successful contractor needs not only to have the necessary resources to perform construction works Money is the
but should also have access to sufficient money in order to run its daily operations. Money is needed lifeblood of a
to start up a business and more money is needed to run a business. The intention of any business business. It must flow
should be to take the initial investment (capital) and to use it effectively to bring in a return to the to keep the business
alive.
investor.

The business must make sure that the money invested is put to the best possible use to make as much
profit as possible. To do this, a business plan is used to identify how much money is needed and when.
Such a plan will enable the owner to predict with some certainty whether the business will make a profit
or a loss. Managing finances cannot be left to the contractor's appointed accountant - the decisions
made by the owner(s) on how the construction business operates will have a financial implication for
the business. The owners take the risk of losing that money if the construction business is badly
managed and are compensated for this risk by their share of the profits that are made. If the business
is sold, then they will want their share of the value of the business at the time it is sold.

SOURCING FINANCE
Once the owner has identified how much money is required, he will have to make sure that he can
The value of a
provide it at the right time. Usually, the owner does not have enough capital to cover the requirements,
business grows with
especially when starting out, and will have to find it. There are three basic sources of funds:
Retained Profits.
• Equity Capital - the money the owner or other interested party puts into the business when it starts
in order to get it going.
• Borrowed Capital - money that the owner borrows in order to increase the business’ ability to
perform construction projects.
• Retained Profits - money that the owner leaves in the business in order to grow its capacity to do
construction projects.

The owners of a business always bear the first share of the risk. This is money that the owners invest
in the business in return for a share in the profits that the business might make in the longer term. This
Equity Capital is made up of money put in by the owners of the business, as well as money that other
investors are prepared to put at risk in the belief that they will see a share of the profits of the successful
business in the long term.

Borrowed Capital normally comes in the form of a bank loan that is secured by the owners of the
business. This comes at a cost and the amount of interest that is due should be factored in when the Operating a business
estimates of the amount of money required are done. Bank loans and overdrafts are normally short to is risky. There are
medium-term loans that the bank reserves the right to ask for repayment of the entire amount with very many factors that
little notice. Long-term loans are offered by some of the development institutions in order to support impact on whether a
business survives or
smaller businesses in speeding up their growth. In all circumstances, there is a requirement for the
not.
borrowers (owners) to provide collateral for the amount that they borrow. This is often in the form of
the owners' personal assets, such as a house or other property, which the bank will take ownership of
Remember that the
and sell to cover the amount of the loan that is not repaid. Borrowing money is expensive and it puts
loan must be fully re-
the collateral at risk. paid, along with the
interest charged.
Retained Profits are the best way of growing a business. Instead of the owners taking out all the profits
for their own personal use, by leaving some of the profits within the business they are investing more
into the business, enabling the business to perform larger projects and growing its capability.

5

Advance payments Sometimes, clients will agree to advance payments for work that is to be performed on a project. These
can alleviate cash- mobilisation advances are essentially a short-term loan from the client, and mostly require the
flow problems, but contractor to obtain an advance payment bond from another institution such as a bank. The advance
they do not increase
payment is repaid out of the money that the contractor earns whilst doing the project, generally in
profits by themselves.
monthly instalments. All the advance payments are paid back in this way before the end of the
They save the
construction business contract.
money he would
have paid in interest
and the client will KEEPING RECORDS AND ACCOUNTS
want a saving to
A business must keep track of where its money comes from and what it is used for. It is essential that
facilitate this.
a business implements a proper accounting system, since it will indicate very quickly whether the

Record keeping and business is sound and in good health, and whether there is appropriate financial control over the
accounts is like business. When applying for loans this is the first thing that a bank will ask for.
feeling the business'
pulse. It is not just the business that needs to account for the money. Each individual project should have its
own financial system so that the construction business can keep control of costs as well as the income
A construction that will come from the project. Each project's accounts are combined with the office overheads to
business is made up produce the construction business' overall financial status. These financial control systems can be
of the sum of all the simple or complex, but must provide the information required to keep expenditure to less than the
projects it has on its income.
books plus the office
overheads.
FIXED ASSETS AND WORKING CAPITAL
Fixed assets have a relatively long life and are permanent in nature. Fixed assets are items such as land

It is essential to keep and buildings, plant and machinery. It is important not to tie up too much of the business' capital in
a balance between fixed assets, since there will not be enough available to perform the work.
requirements for
working capital and Working capital is the money that flows through the business. This is money that is used to buy the
investment in fixed materials or equipment, or pay wages and salaries or subcontractors' invoices until such time as the
assets. client pays the contractor for the work that has been completed. This is the money that is used to run
the business . The business must have sufficient working capital to ensure that the work can continue
until the client pays for the work that has been done. Very often a late payment by the client can cause
the business to run out of money to pay wages, pay suppliers for materials and other commitments,
and eventually stopping the work.

CASH FLOW

Cash flow is king! Cash flow is the term used to describe the amount of working capital that a business has at any point
Without cash the in time. This is a reflection of the changing balance in the business' bank account. Contractors should
business cannot evaluate a client's payment record, and allow for any delays in payment in their calculations for
survive. working capital on a project.

Project cash flow is calculated from the project costs compared to the project income. The net cash
flow is the difference between the two figures. The contractor's cash-flow requirement is simply the
cash-flow requirements of all the different projects added together, plus the overhead costs for the
office premises and support staff. By keeping this up-to-date, the contractor can forecast how much
working capital will be needed to fund the operations, as well as the ability to repay loans or when
they will be able to buy new equipment. The cash-flow analysis is essential to operating a construction
business. Without cash to pay for wages, materials, equipment hire, etc. the contractor is out of
business.

6

Example of cash flow for a typical six-month contract for R372 460
MONTH ACTIVITY/ PROJECT PROJECT COST HIGHER INCOME HIGHER NET CASH
MILESTONE COST INCOME THAN INCOME THAN COST FLOW
R R R R R
August Establish site 27 250 27 250 -27 250
and start-up

September 67 520 67 520 -94 770

October 68 760 68 760 -163 530

November Receive 69 980 32 640 37 340 -200 870
first payment

December Substantially 46 270 68 300 22 030 -178 840
complete

January Finish Snag 36 220 71 420 35 200 -143 640
list

February 76 140 76 140 -67 500

March 74 840 74 840 7 340

April Receive 15 260 15 260 22 600
last payment

May 22 600

June Receive 1st 16 930 16 930 39 530
retention
release

July 39 530

August 39 530

September 39 530

October 39 530

November 39 530

December Receive 16 930 16 930 56 460
final retention

Total 316 000 372 460 56 460

This cash flow shows the following:
There are many
• The client will pay between 30 and 60 days from date of invoice. factors that affect
• The project will take six months to perform. cash flow. One late
payment can cause a
• Retention is 10%, with half of the retention being paid on occupation by the client and the other half
construction business
at the end of the contract. to go out of business.
• The project will have a profit of R56 460 (or 18%).
• The contractor will require a maximum of R200 870 working capital.
• The contractor will be out of pocket for seven months
• The final profit will only be received 17 months after the project started.

Cash-flow forecasts become even more important when more than one project is being worked on at
any point in time.

Example of three contracts running simultaneously (no retention amounts)

CONTRACT PERIOD VALUE ANTICIPATED PROFIT
1 9 months R1 000 000 R100 000
2 6 months R80 000 R12 000
3 5 months R75 000 R5 000

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The projected cash flows for the projects are as follows:

CONTRACT 1
Month 1 2 3 4 5 6 7 8 9

Payments
made by 50 000 75 000 100 000 135 000 150 000 135 000 100 000 90 000 65 000
business

Income 30 000 60 000 100 000 140 000 170 000 150 000 135 000 100 000 115 000
received

Net income -20 000 -15 000 0 5 000 20 000 15 000 35 000 10 000 50 000
per month

Net cash -20 000 -35 000 -35 000 -30 000 -10 000 5 000 40 000 50 000 100 000
flow

CONTRACT 2
Month 1 2 3 4 5 6

Payments made 12 000 12 000 12 000 12 000 12 000 8 000
by business

Income 5 000 15 000 15 000 15 000 15 000 15 000
received

Net income -7 000 3 000 3 000 3 000 3 000 7 000
per month

Net cash flow -7 000 -4 000 - 1 000 2 000 5 000 12 000

CONTRACT 3
Month 1 2 3 4 5

Payments made 15 000 20 000 20 000 10 000 5000
by business

Income 5 000 15 000 20 000 20 000 15 000
received

Net income -10 000 -5 000 0 10 000 10 000
per month

Net cash flow -10 000 -15 000 -15 000 -5 000 5 000

This appears to be a fairly healthy order book.

If Contract 1 starts in January, Contract 2 starts in February and Contract 3 starts in April, the
net cash flow for the contractor will look like this:

JAN FEB MAR APR MAY JUN JUL AUG SEP

Contract 1 -20 000 -35 000 -35 000 -30 000 -10 000 5 000 40 000 50 000 100 000

Contract 2 -7 000 -4 000 -1 000 2 000 5 000 12 000

Contract 3 -10 000 -15 000 -15 000 -5 000 5 000

Net cash
flow for -20 000 -42 000 -39 000 -41 000 -23 000 -5 000 47 000 55 000 100 000
the busi-
ness

The contractor has a bank overdraft facility of R65 000, making the contractor's financial situation
favourable. The client for Contract 2 does not pay the R5 000 in February, but arrange to pay
R20 000 (R5 000 for February and R15 000 for March) in March, which the contractor accepts. The
contractor's expenses for February will rise to R47 000. This amount is still within the contractor's bank
overdraft limit of R65 000.

8

At the end of March however, the client says that his mortgage bond has not yet come through and
payment will be made in a few days. The amount of money that the contractor has to borrow in
March will now increase from R39 000 to R59 000, which is of concern as Contract 3 is scheduled
to start.

When the Contract 2 client doesn't pay for the work in April, the contractor is in serious financial
trouble. Costs have remained the same and the business has paid out R36 000. The Contract 2 client
is still saying that the bond is going to be paid next week. The amount that the contractor has to borrow
has now risen to R76 000, i.e.exceeding the bank overdraft limit. This can cause a business to fold.

JAN FEB MAR APR
Contract 1 -20 000 -35 000 -35 000 -30 000

Contract 2 -12 000 -24 000 -36 000

Contract 3 -10 000

Total -20 000 -47 000 -59 000 -76 000

The situation could have been managed had the contractor told his client that he would accept the
R5 000 at the end of March along with the March payment and if the bond had still not come through,
the work will stop until such time that the bond came through. Alternatively the contractor could have
advised the client that if he did not pay within 14 days the work will stop. (Whatever is said must be
put into writing).

Had this been done, the cash flow would have looked like this: Failure to ensure a
healthy cash flow is
JAN FEB MAR APR MAY JUN JUL AUG SEP the most common
cause of business
Contract 1 -20 000 -35 000 -35 000 -30 000 -10 000 5 000 40 000 50 000 100 000
failure. This occurs
even if people are
excellent at what they
Contract 2 -12 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000
do. No money, no
business.
Contract 3 -10 000 -15 000 -15 000 -5 000 10 000 10 000

Total -20 000 -47 000 -39 000 -44 000 -29 000 -14 000 31 000 56 000 106 000

A profit of R106 000 would have been made instead of R117 000. The business would have, however,
survived.

INVOICING AND TERMS OF PAYMENT
Cash flow is the life blood of any business. It is therefore absolutely essential that all invoices are The terms of payment
submitted promptly and the claim for payment is followed up with clients to ensure that the payment have a serious effect
on a construction
is received.
business' cash flow.
It is also important to understand and agree to the terms of payment, e.g. seven, 14 or 30 days from
receipt of invoice before a contract is concluded. Where possible, quotations should include the terms
of payment, e.g. within 14 days of invoice.

9

SECTION 2.3: MARKETING
MARKETING CONCEPTS

Marketing can make Construction is both a service and a product. A contractor provides a service by satisfying the client's
a difference to a requirements and delivers a product on completion of a project. A contractor's reputation is dependent
contractor's on clients being satisfied with both the service and the product. This is a team effort and requires every
profitability. employee to play their part in promoting the capabilities of the contractor and the quality of its product.

The question “where are next year's profits coming from” should be far more important to a contractor
than “what was last year's profit”. The service rendered during a project and the quality of the product
can be marketed to secure future work.

A client's decision to appoint a particular contractor, particularly a private-sector client (or a main
contractor when appointing a subcontractor), is based on many factors. Price is not the only factor.
Expertise, experience and a track record of satisfied clients can sway a client's decision to award a
contract.
Marketing is often
confused with selling - Business strategy focuses on the understanding of the forces that shape the construction industry and
they are related but winning contracts in a competitive environment. Marketing focuses on interpreting the environment in
very different. Selling
terms of client requirements and satisfying those requirements. Marketing is all about promoting a
focuses on
distributing the contractor to the extent that a client moves from being unaware of the contractor to contracting with
product or service the contractor on a regular basis.
that the business
offers, whilst If clients do not know that a contractor exists or what services it offers, they will never engage with them
marketing focuses on or contract them to deliver those services. It is essential for a contractor to let the market know that
knowing what the they are there and that they mean business. Marketing is a very varied topic that extends from the
client needs and glossy media adverts to word-of-mouth.
providing the product
or service that is Marketing can take many forms, from word-of-mouth to door-to-door canvassing, printed flyers,
needed. construction signboards, radio or television adverts, sports sponsorships, billboards and adverts on
taxis or just a plain brochure and company profile.

PUBLICITY
Always ensure that Publicity can take on many forms and there are many different media to use to get the
potential clients can message across. The important information that should be incorporated includes:
contact you.
• The name of the business.
• What the business does (and any specialties).
• Where the business is located.
• How the business can be contacted.
• What the business has done in the past.
• What the business is currently busy with.
• Recommendations from previous clients reflecting that the business is the best at that work.
• Why the client should be contracting with this business rather than another one.

It is essential that any information provided is totally accurate. If the client finds something wrong with
the promotional material, they will not trust the contractor to perform the work or believe what the
contractor claims it can do.

10

PROMOTING A CONSTRUCTION BUSINESS
GENERAL CONSIDERATIONS
The marketing of a construction business is very different from the marketing of a supermarket or a Remember, a client is
product line. Contractors offer a specialised and complex service and therefore need to let their clients only a contractor's
know that the service they can deliver is the best or at least better than their competitors. This can take client when the first
payment is received.
any form, from photographs of work that they have finished, to references from satisfied clients, to glossy
brochures which give an overview of the projects they have completed, to videos that describe the
problems the contractor overcame in completing a challenging project.

The purpose of promotional activities is to seek out prospective clients and to convert them into actual
clients. Advertising can move prospective clients through the stages from “unawareness” to “awareness”
and “comprehension”. Personal selling is usually required to move from “comprehension” to
“conviction” and ultimately “action” and the signing of a contract.

ADVERTISING AND CORPORATE IDENTITY
The intensity and nature of advertising activities are very dependent upon the following: Choose an advertising
method and media
• The nature or type of business. • The competitiveness of the market. that is appropriate
and will reach the
• The stage of the development of the business. client effectively.

For example, a newly established contractor that supplies and installs roof trusses needs to advertise its
services and products to a large potential client base that is unaware of the services and products of Increased market
share invariably results
such a contractor. Advertising for such a business needs to focus on competence and other competitive when a contractor's
advantages to attract an initial set of clients in the form of enquiries. reputation as a
“quality” contractor
More established contractors would need to focus their advertising on the range of their services and spreads.
products to maintain “top of mind” awareness.

Advertising costs money. From simple business cards to television adverts, each advert costs the
contractor money. In each business' marketing plan there must be a budget set aside for marketing that
can be used to determine what type and extent of marketing can be used. It is also important to identify
what the benefit of a particular advertising campaign might be and a benefit-cost ratio should be
worked out for each form of advertising. It is pointless to spend money on advertising if it will not help
bring in more work opportunities.

IMAGE BUILDING
Once the market has been identified and there is a positive action plan in place to support the
contractor's goals, the contractor should then promote their image and make it known. Image building
is a form of advertising and it manifests in company colour schemes and logos on letter heads, vehicles, Image can be
described as how
promotional material, signboards and site signage. clients and others
perceive a
Image building is a relatively easy way to increase a contractor's exposure. A contractor whose name is construction business.
familiar will be more likely to secure work than one that is unknown.

Signage that reflects and complements a contractor's image should be:

• Strategically positioned to ensure maximum exposure. • Compliant with local by-laws.
• Constructed from durable materials. • Level, plumb and in good condition.

Visual image is also a powerful marketing tool. Neatly dressed staff projects a positive image. The
attitude and behaviour of staff affect a person's impression of how the contractor will handle situations
that could lead to enhancing the contractor's image.

Worker performance (productivity, quality and health and safety) can also project a positive image.

11

The factors that harm a contractor's image include:

• Accidents. • Late completion.
• Lack of concern for the environment. • Untidy sites.
• Poor productivity. • Rework.

Interestingly, these factors also directly affect the profitability of the contractor.

PUBLIC RELATIONS AND CLIENT RECOMMENDATIONS

Client recommendations The contractor's profits over the next year and the next few years depend on client satisfaction, which
are one of the most in turn is dependent upon how well the contract is managed and executed and if it is successfully
powerful promotional completed on time and to the required quality.
tools available and
need to be nurtured at Probably the most effective marketing tool is word-of-mouth. Once a contractor has successfully
all costs. performed on a project, they can ask the client to refer them to other clients. Where a new client is
found, the contractor can provide references from their previous clients. It is also important to identify
Good references are
the most effective way potential sources of work and this is often done by talking to potential clients and seeking out new
of marketing a clients.
contractor.
Other contractors are very often also future clients. Where a contractor secures work that they do not
normally do, they subcontract to other contractors. This is a good source of future work and if the
contractor performs well as a subcontractor, then the main contractor will call on them to do similar
work in the future or refer them to others where similar work is required.

PERSONAL SELLING
The owners, members or company directors need to market the construction business. They are in the
best position to do so. They know the construction business' strengths and weaknesses as well as the
limitation in capability and what their likely capacity is for new work.

A MARKETING PLAN
A critical element of successful marketing is the preparation of a marketing plan.

When a contractor has determined the sector they wish to operate in, and the clients they wish to
provide services to, and what those clients' needs are, he can start planning how to become more
visible, attractive and competitive. The marketing plan is similar to the business plan but focuses on
how to portray the work, resources, skills and successes of the contractor.

The marketing plan should contain at least:

• The business' present situation. • The resources available to the business.
• The business' problems and opportunities. • The actions to be taken.
• The business' objectives. • The budget for marketing.

One way of doing this is by doing a SWOT analysis - identify the business' strengths, weaknesses,
opportunities and threats, and then determining what actions are best for improving the good points
and removing or mitigating the poorer areas.

EFFECTIVENESS OF MARKETING CAMPAIGNS
Learn from each The effectiveness of any marketing campaign must be measured. Work opportunities should be
campaign how to do measured before and after the campaign has been implemented so that the benefit can be measured
better in the next
against the cost of the campaign.
one.

12

SECTION 2.4: TENDER CONSIDERATIONS

IDENTIFY THE MARKET SEGMENT
A construction business needs to first identify what market segment they want to operate in and which Public sector and
other construction businesses they will have to compete against. This will be dictated by the skills and private sector clients
operate differently.
resources that the construction business has at its disposal, its strengths, as well as an analysis of where
Construction
the gaps in the market lie (geographic location, type of work and size of contract).
businesses should
choose which sector
The construction business must also determine whether it will operate in the private sector, the public
they wish to operate
sector or in both. Any construction business is offered the opportunity to compete for public sector in, (or both) and
projects provided that they are registered with the Construction Industry Development Board (cidb) in position themselves
an appropriate contractor grading designation (see section 1.5). Tenders are normally evaluated on a accordingly.
points scoring system in terms of which points are awarded for price and points are awarded for
preference. Sometimes, points are also awarded for the quality (functionality) offered by the
construction business. In the private sector, however, clients most often choose who they wish to invite
to submit tenders or with whom they wish to negotiate subcontracts.

There is no point in spending enormous amounts of time, cost and effort in setting up a business or in
submitting a tender for work in a market where there is an oversupply of construction businesses
competing for work or in a market where a client is likely to prefer to do business with a better-known
construction business.

There may be barriers to operating in certain sectors that the construction business must overcome in
order to be allowed to work, such as the requirements for registration with the Electrical Contractors'
Board of South Africa in order to be an electrical contractor, or registration with the NHBRC in order
to build new homes (see section 1.5).

Know your market
IDENTIFY COMPETITORS means:

It is important for a construction business to understand who their competitors are, so that the business • Know your client's
can offer better or different services and thereby secure work ahead of their competitors. If there is a needs.
gap in the market, where there are very few other construction businesses, there will be less
• Know what your
competition and more opportunities for work. Where there is a market in which there is plenty of work, competition offers.
a construction business may get a share despite the high levels of competition. A construction business
should investigate this before contemplating starting up a new business.

FINDING WORK OPPORTUNITIES
Construction businesses have many avenues to pursue to find work opportunities. If they decide to Construction
operate in the public sector, they can look for opportunities in the Government Tender Bulletin, businesses can look
newspapers, the cidb I-Tender service on the cidb website (www.cidb.org.za) or check their local for opportunities in
the Government
municipality's tender notice board. Talking to other construction businesses is also good, since
Tender Bulletin,
information on work that one construction business does not want to do can be very useful to another newspapers, the cidb
construction business. This also opens up subcontracting possibilities. I-Tender service on
the cidb website
(www.cidb.org.za) or
PRIVATE AND PUBLIC SECTOR TENDERS AND QUOTATIONS check their local
municipality's tender
There are differences between the rules that govern the private and public (national and provincial
notice board.
governments, municipalities, public entities, state-owned enterprises and municipal entities) sector in
procuring goods, services and works.

The private sector is not required by law to follow any rules relating to procurement (buying) of goods,
services or works. They generally choose the lowest price out of all the tenders they receive and will

13

Look for work choose a higher price only if they do not feel confident that the company with the lowest price can do
opportunities as well a proper job. They are also free to negotiate contracts or to invite a limited number of construction
as opportunities to businesses to submit tenders or quotations based on whatever criteria they choose.
promote the business
for the future. The public sector has many rules that govern the way in which they can procure goods, services or
works. The constitution requires that any procurement by a public sector client must be fair, equitable,
transparent, competitive and cost effective (see sections 2.5 and 2.6).

The documentation used to invite quotations and tenders in the public sector is very similar; the
differences in the two processes being how they are advertised and who is authorised to award the
contract. Construction businesses are required to submit tender offers on the form of offer and
acceptance (see section 2.5) whenever quotations or tenders are called for and written contracts are
entered into with a public sector client.

The cidb promotes a uniform procurement system. Some private sector clients, particularly those that
are publicly listed companies, follow some of the public sector rules. Most contractors will either
negotiate subcontracts with subcontractors or invite the construction businesses that they consider able
to deliver the required service to submit quotations.

Procedures in the private sector where the cidb Standard for Uniformity in Construction Procurement is
not applied (see section 2.5) are much less formal with the differences between the calling for quotations
and tenders being very different. Typically tenders are invited in terms of a standard form of contract,
scope of work, form of tender and stated conditions of tender and only a brief scope of work is provided
where quotations are sought. Quotes are accepted verbally or in writing by the issuing of a letter of
acceptance.

Construction businesses are advised to stipulate that their quotation is conditional upon the client
entering into a written contract based on a specified standard form of contract. Construction businesses
should stipulate on their quotations for how long the quotation is valid (e.g. one month), after which the
business reserves the right to review the price.

To be successful, a construction business must know the procurement rules of their clients and
prospective clients and abide by them in order for their tender submissions to be evaluated and to be
awarded contracts.

OBTAINING INFORMATION ON TENDER OPPORTUNITIES

Tender documents are The Notice and Invitation to Tender (first page of a tender document prepared in accordance
normally available with the requirements of the cidb Standard for Uniformity in Construction Procurement (see
from the time they section 2.5)) should contain at least the following information:
are advertised until
the day the tenders • A reference number.
are due. It is • The name of the employer.
important to collect
procurement • The title of the proposed contract.
documents as soon as • A brief description of the supplies and services or engineering and construction works which are required.
possible to allow as
• The closing date and time for the submission of tenders.
much time as possible
to prepare the tender • The date, time and place of the compulsory clarification meeting, if any.
offer. • The time and place for collecting the procurement documents.

This notice may also:

• Contain the name and contact particulars of a person to whom queries in relation to the tender may be
directed.
• Establish the cidb contractor grading requirements.
• Briefly describe any eligibility criteria, deposits payable for procurement documentation and preferences,
if any, that are offered.
14

Tender advertisements in the media contain some or all of the above information. This information The Construction
enables prospective tenderers to make informed decisions regarding the tender opportunity. Industry Development
Construction businesses should not pursue tendering opportunities outside of their cidb contractor Board Act, 2000,
prohibits the award
grading designations (see sections 1.5 and 2.6) or where they don't satisfy any stated eligibility criteria.
of a public sector
If they do so, the employer will not evaluate their tender. Estimates of these requirements are provided
construction works
in the Tender Notice and Invitation to Tender. Eligibility criteria are stated in Clause F.2.1 of the Tender contract to an
Data where use is made of the cidb Standard Conditions of Tender. unregistered
contractor.
An employer is not permitted in terms of the Construction Industry Development Regulations to award
a public sector construction works contract to a construction business that does not satisfy the required
cidb contractor grading requirements (see sections 1.5 and 2.6).

When collecting a tender document, it is important to sign and fill in the construction business' contact
particulars in any register that the employer may have. This will allow the employer to inform the
construction business if the closing date for the tender is extended or to issue addenda (changes to the
tender document).

ANALYSING THE REQUIREMENTS OF THE TENDER DOCUMENTS
It is important to
A construction business should read through the entire tender document as soon as possible after the
establish at the
documents have been collected from the client or the client's agents. Documents formatted and earliest possible stage
compiled in accordance with the requirements of the cidb Standard for Uniformity in which documents
Construction Procurement have a standard structure of component documents with standard need to be submitted
contents and are divided into three basic components (see section 2.6): with a tender. Failure
to do so may mean
• Tendering procedures that contain only information that pertains to the submission and evaluation that the tender
of the tender in terms of the cidb Standard Conditions of Tender. cannot be completed
• Returnable documents that the tenderer (construction business) is required to complete. by the closing date
for tender
• The draft contract that sets out the terms and conditions of the contract that will ultimately be submissions.
concluded with the successful tenderer.

The construction business should carefully read through the documents and make notes of deadlines
for submission, documents that must be provided with the tender (tax clearance certificates, CVs,
company profiles, etc.) and make sure that what the client wants is clearly understood.

The returnable documents include the pricing section as well as forms that request certain specific
information, such as those relating to preferences, resources to execute the contract and previous work
experience.

The draft contract needs to be understood - the rights, risks and obligations (see section 2.8) as well
as the manner in which the contractor is to be paid (see section 2.7).

ANALYSING THE OPPORTUNITY FOR PROFIT
The construction business should confirm whether or not it is able to perform the work that is required
by the client, and if so, easily or with difficulty. Experience in work of a similar nature should provide
the answers to these critical questions.

However, work that is easy is not always profitable. The construction business also needs to evaluate
whether or not it will be more competitive than its competitors in performing the work while still making
a reasonable profit after the contract is finished.

An accurate estimate of what the likely cost of the works might be needs to be made before a tender
offer can be made (see section 2.9). Estimating is the process of predicting the costs of carrying out
the work. Tendering is the subsequent commercial process of making an offer based upon these
estimated costs, plus an element of profit and if necessary, risk.

15

The drawings and The estimate should take into account the methods of building or construction to be used and all the
specifications provide circumstances that may affect the carrying out and completion of the work. A reliable estimate can
estimators with how only be achieved by analysing each operation into simple elements and estimating the cost
the job is to be built
methodically and accurately (see section 2.9).
and what resources
are required. On larger projects, it may be necessary or prudent to draw up a preliminary programme or bar chart
in order to get a better understanding of the sequences and timing of operations.

The estimator must be aware of important project specific aspects as they may affect the
estimates. These include:

• Commencement and completion dates.
• Client requirements for phasing or staging completion.
• Other requirements regarding the sequencing of work.
• Work to be carried out by others.
• Work to be subcontracted.
• Site conditions.
• Key items or materials requiring firm delivery arrangements.

The scope of work, which includes the specifications and drawings, will indicate the following:

• The required quantity of work.
• The required quality of the finish and standard of workmanship.
• If operations are repetitive.
• If excessive or detailed setting out is required.
• The required degree of accuracy and tolerances.
• If the design is intricate or straightforward.
• If special skills will be needed.
• If any special construction sequence is necessary.
• If the operation:
• is within the experience of the existing employees;
• requires special instruction or training; and
• will require the employment of additional trained personnel.
• The accessibility of the site.
• Height or depth of work.
• Any double handling of material.
• Restrictions in working, e.g. occupational health and safety requirements, requirements for
subcontracting portions of the works, employment of local labour.

A review of the scope The tender programme, if produced, will indicate the following:
of work, the tender
• The time available for activities on the site.
programme and a
visit to the site may • If work will be continuous or intermittent.
indicate that the
• The degree of interdependency of activities, trades and operations.
contract is
unattractive to the • The relative proportions of supervisory, skilled and unskilled employees that are required and the
construction business, size of work teams.
in which case the • The timing and extent of equipment that needs to be sourced or provided.
should decide not to A visit to the site and its surroundings will provide an indication of:
submit a tender.
• The travelling costs that are likely to be associated with the site.
• Physical conditions and any restrictions likely to be encountered.

16

• Site layout, storage and unloading facilities.
• The likely skill, experience and availability of local labour.

Once the construction business is satisfied that it can provide the client with what the client requires,
the risks associated with the contract need to be assessed, e.g. rain, heavy traffic, labour disputes,
material suppliers not delivering, etc. Each of these risks needs to be evaluated in order to arrive at an
informed decision as to whether or not to submit a tender (see section 2.9).

The construction business needs to take into account all of the above when estimating what the cost
of the works is likely to be and what level of risk allowance should be made.

Construction businesses should not tender for work where the business is:

• Unlikely to make a profit.
• Not confident that it can perform the works.
• Unlikely to be competitive.

CLARIFICATION MEETING
Many clients provide a clarification meeting (site inspection or briefing session) before the closing of
tenders. All tenderers are required to attend compulsory clarification meetings failing which their tender
submission will not be evaluated by clients. The tender advertisements and tender documents provide
details of the time and place where these meetings are to be held and indicate whether or not the
meeting is compulsory.

Clarification meetings that take place on site (site inspections) allow prospective tenderers to familiarise The purpose of a site
themselves with the site conditions and gives the client or the clients representative the opportunity to visit is to find out as
inform tenderers of particular client requirements, site conditions, ground conditions, where waste may much as possible
be dumped, materials may be borrowed or camps and offices may be established, as well as about the conditions
on site and how they
environmental issues, such as sensitive wetland areas or access to the site.
may affect the
Site inspections provide the construction business with an opportunity to obtain answers to construction process.
This allows the
questions such as:
• Where is the site? to assess their risks
and to make an
• What are the site conditions?
informed risk
• How can the site be accessed? allowance in the
• What are the soil conditions on the site? tender offer.

• What services (water, electricity, etc.) are available on the site?
• Where can unwanted or surplus soil, rubble and rubbish be disposed of?
• What are the arrangements for site security, if any?
• What are the local conditions relating to labour and the supply of materials?

A briefing session will generally cover issues that do not necessarily have to be discussed on site or
where the site is not accessible for some reason. These issues are normally discussed at the client's
premises and give tenderers an opportunity to clarify any points that they are not completely
comfortable with.

When the site inspection or briefing session is compulsory, it is essential that the construction business
either records its presence on the register that the client passes around or gets the client's
representative to sign the form provided for this purpose in the tender documents. Without this clear
confirmation, a construction business' tender will become invalid, even if it did attend the meeting,
since there is no way for the client to remember each person at the meeting. The onus lies on the
construction business to provide the proof of attendance.

17

MAKING A TENDER SUBMISSION
A construction business should carefully read the conditions of tender and observe the
following when submitting a tender offer:

• Confirm that the eligibility criteria are complied with.
• Attend the clarification meeting, if any.
• Follow the instructions for:
• pricing the tender offer;
• submitting a tender offer; and
• submitting alternative offers.
• Ensure that the tender offer is received by the employer before the closing time for tenders.

Section 2.6 provides further information where the cidb Standard Conditions of Tender are used and the cidb
Register of Contractors is applied in the procurement.

The construction business must complete all the documents that the employer requests. Where documents
have been formatted and compiled in accordance with the cidb's Standard for Uniformity in Construction
Procurement, the list of returnable documents lists all the documents that have to be completed or submitted.
This list is a useful checklist. Construction businesses should study this list carefully and ensure that everything
that needs to be completed is filled in and signed and that everything that needs to be submitted is included
in the tender submission.

The construction business should draw up its own checklist of documents that have to be completed where
documents are not formatted and compiled in accordance with the cidb Standard for Uniformity in
Construction Procurement.

T2.1 LIST OF RETURNABLE Often the client will base his evaluation on a construction business' experience in performing work of a
DOCUMENTS similar nature and will require descriptions of the work that a construction business has previously done
The tenderer must complete and who the previous clients were, along with contactable references that allows the client to confirm
the following returnable how the construction business actually performed.
documents:
This information may be used to demonstrate a construction business' capability of performing the work.
1. Returnable Schedules required
for tender evaluation purposes Alternatively it may be used in the scoring of tender submissions where quality forms part of the score.
Construction businesses are advised to provide comprehensive submissions where the information is
2. Other documents required for
tender evaluation purposes used to score tenderers as the evaluators can only score the information that is provided to them in the
3. Returnable Schedules that will tender submissions.
be incorporated into the
contract The construction business should also confirm how many copies of documents and which certificates
4. Other documents that will be need to be included in the tender submission. These requirements may be found in the following
incorporated into the contract clauses of the Tender Data where the cidb Standard Conditions of Tender are used:
5. C1.1 Offer and acceptance
• Clause F.2.13.3 - number of copies.
6. C1.2 Contract Data (Part 2)
• Clause F.2.20 - securities, bonds and guarantees.
7. C2.2 Bill of quantity • Clause F.2.23 - certificates.

Construction businesses, may in their tender offers, propose deviations to the client's requirements or exclude
some of the client's requirements by qualifying their tender offers in order to remove unacceptable or onerous
requirements. Such deviations and qualifications may, however, not be acceptable to the client. The cidb
Standard Conditions of Tender in Clause F.3.8.2 only permit deviations and qualifications which:

• Don't detrimentally affect the scope, quality or performance of the works.
• Significantly change the client's or construction business' risks and responsibilities under the contract.
• Affect the competitive position of tenderers complying with the client's requirements.

Construction businesses must be cautious when proposing deviations and qualifications in their tender offers.

Copies of the tender submission should be made so that any queries raised by the client or his agents during
the evaluation of tenders may be answered.
18

TENDER CHECKLIST

One of the most important aids that a construction business (intending to contract either as a main
contractor or subcontractor) can have at tender stage is a tender checklist. The purpose of such a
list is to act as a reminder to tenderers of particular issues for consideration when preparing tenders.

1. Work: What is the nature and extent of the work that the tenderer is required to undertake?
• Is the tenderer responsible for any portion of the design of the work?
• Is the location, start date and probable duration of the project known?
• Can this contract be undertaken given the construction business’ current and foreseeable
contractual commitments, resources and work load?

2. Form of contract: Is the contract a standard form of contract or subcontract recommended by the
cidb (see section 2.8) or are there any amendments or variations to the standard conditions of
contract?
• What is the risk associated with signing an “unknown” form of contract or an extensively
modified form of contract on issues such as payment terms, administrative procedures,
procedures relating to practical and final completion, resolution of disputes, claims
procedures, interest on overdue payments, the contractor's right to suspend the works for
default on payment, claims for extension of time, recovery of costs due to client delay, etc.

3. Tender period: Can the tenderer prepare and submit a tender in the time allowed?

4. Client: Is the client an acceptable credit risk? Is the client known to be slow in making payments?

5. Scope of work: What are the works that are to be provided and any other requirements and
constraints relating to the manner in which the contract work is to be performed?
• Are the specifications clear and comprehensive?
• What are the acceptance criteria, if any, for the works and components thereof?
• Do the drawings that are provided clearly establish what is required?
• How difficult is it to comply with the constraints relating to the manner in which the works are
to be performed, e.g. program constraints, local resource requirements quality management
systems, etc.?
• Can the works be constructed in accordance with the drawings and specifications?
• What is the quality of the information provided in the scope of work?
• How complete is the information?

6. Payment terms and pricing strategy:
• Are the pricing strategy or payment terms attractive?
• Can the construction business finance the works within the required pricing strategy, payment
terms and levels of retention monies at the various stages of the contract?
• Is there sufficient compensation for late payment by the client?

7. Performance bonds: Is a performance bond required?
• What is the amount of the performance bond?

8. Price escalation: Is the contract price subject to adjustment to allow for price inflation?
• Are the formula for and the indices relating to price adjustment known?

9. Insurance: What are the requirements for insurance that will affect the tendered price?

10.Dispute resolution: If a dispute arises, what is the method of resolution? Mediation, adjudication,
litigation, arbitration, etc?

11 Penalties for late completion: What are the penalties for late completion and are they
excessively high?

19

SECTION 2.5: PUBLIC CONSTRUCTION
PROCUREMENT SYSTEM
There is a great
difference between cidb STANDARD FOR UNIFORMITY IN CONSTRUCTION PROCUREMENT
the rules that govern
Public sector procurement is regulated through the Constitution of the Republic of South Africa (Act 106
the private and public
of 1996), the Public Finance Management Act of 1996, the Municipal Finance Management Act of
sector in procuring
goods, services and 2003, the Preferential Procurement Policy Framework Act of 2000, and a number of other pieces of
works from the legislation. The Constitution requires that any procurement by a public sector client (employer) must be
public. fair, equitable, transparent, competitive and cost-effective.

• The private sector is Public sector clients (national and provincial departments, municipalities and state-owned enterprises)
not required by law to
are required in terms of the Construction Industry Development Board Act, 2000, to procure
follow any rules
construction works in accordance with the cidb Standard for Uniformity in Construction Procurement.
relating to
procurement (buying)
Private sector clients are not required to procure construction works in accordance with the Standard for
of goods, services or
Uniformity in Construction Procurement. Many private sector clients, however, choose to do so.
works other than the
cidb Code of Conduct
This Standard for Uniformity in Construction Procurement establishes minimum requirements
for the Parties
engaged in
that:
Procurement. They • Promote cost efficiencies through the adoption of a uniform structure for construction procurement
generally choose the
documents and standard component documents, and generic and uniform solicitation procedures.
lowest price out of all
the tenders they • Provide transparent, fair and equitable procurement methods and procedures in critical areas in the
receive and will solicitation process.
choose a higher price
• Ensure that the forms of contract that are used are fair and equitable to the parties to a contract.
only if they do not
feel confident that the • Enable risk, responsibilities and obligations to be clearly identified.
company with the
lowest price can do a
proper job. PROCUREMENT PROCEDURES

• The public sector is, The Standard for Uniformity in Construction Procurement establishes a number of standard procurement
however, governed by procedures that enable clients to contract with the contractors. The procedures that are commonly
many rules that encountered in construction works are:
govern the way in
which they can • Open procedure.
procure goods, • Qualified procedure.
services or works.
• Quotation procedure.

cidb registered In the open procedure an employer advertises a tender using the cidb I-Tender service (see
contractors, www.cidb.org.za) and, if necessary, in the Government Tender Bulletin (www.treasury.gov.za or
depending upon their
www.info.gov.za/documents/tenders/index.htm) or in other media such as newspapers. Contractors who
grading designation,
are registered with the cidb in the required contractor grading designation (see section 1.5 for
either get an SMS or
e-mail notification of information on the cidb contractor grading system), or are capable of being so registered by the time
tenders invited in the that tenders are evaluated, may submit tenders in response to this invitation.
contractor grading
designations that they In the qualified procedure, an employer advertises a call for expressions of interest using the cidb I-
are registered in. Tender service (see www.cidb.org.za) and, if necessary, in the Government Tender Bulletin
(www.treasury.gov.za or www.info.gov.za/documents/tenders/index.htm) or in other media such as
A searchable
newspapers. Contractors who are registered with the cidb in the required contractor grading designation
database of all
tenders invited (see section 1.5 for information on the cidb contractor grading system), or are capable of being
through the I-Tender registered not later than 21 days after the closing date for submission, may make submissions in
system is available on response to this invitation. The employer evaluates submissions in terms of the evaluation criteria stated
the cidb website. in the submission data. Thereafter only those that qualify or are shortlisted to submit tenders in terms of
the stated evaluation criteria, are invited to submit tender offers.

20

Contractors are not required to submit financial offers where expressions of interest are called Contractors may either
for. They are usually invited to submit their credentials so that they may be: download the
Government Tender
• Prequalified to submit a tender. Bulletin from the web
• Admitted to an electronic database which is used to nominate those who will be invited to submit or receive it through
the post at a nominal
tenders.
cost.
The qualified procedure is usually used in large and complex projects or on projects that require a
high degree of specialised inputs or where skills and expertise are not readily available. Calls for expressions of
interest when used to
In the quotation procedure, tender offers are solicited from not less than three tenders in any manner
pre-qualify or shortlist
the organisation chooses, subject to the procedures being fair, equitable, transparent, competitive and tenderers, provide the
cost-effective. The quotation procedure may only be used by national and provincial departments, market with an
municipalities and municipal entities where the value of the contract including VAT is estimated to be advance warning of a
less than a value determined by National Treasury. tendering opportunity
and give respondents
Quotations are usually advertised in local media. Alternatively contractors that are registered on a time to become
database (prequalified listing) are invited to submit quotations. compliant with any of
the prequalification
Sometimes, a negotiated procedure is used to obtain a tender from a single tenderer. This criteria. This
usually occurs under the following circumstances: procedure ensures
that:
• An emergency has arisen that is so extreme as to warrant the negotiated procedure being pursued.
• Tenders are only
• The service or works being procured are largely identical to works previously executed by that received from tenderers
contractor and it is not in the public interest to solicit other tenders. who potentially have
• Only one contractor is identified as possessing the necessary experience and qualifications or the necessary
capabilities and
products to provide the required service or works.
capacities to perform
Private sector clients frequently negotiate contracts with the contractor of their choice where long-term the contact.

relationships exist. Alternatively, in order to obtain competitive prices, they make use of the open, • A manageable number
qualified or quotation procedure. of respondents are
invited to submit tender
offers (usually not less
Employer solicits tender than five).
offers

The negotiated
Tenderer compiles tender procedure may be
offer and submits it to the used where the
employer following are present
or imminent:

• Human injury or death.
Employer compiles contract
after evaluating tender offers • Human suffering or
deprivation of human
rights.

STRUCTURE OF PROCUREMENT DOCUMENTS • Serious damage to
property or financial
Procurement documents are used to solicit tender offers and form the basis for a contract.
loss.

The Standard for Uniformity in Construction Procurement provides a series of standard headings of • Injury, suffering or
component documents based on an “offer” and “acceptance” process. death to livestock or
other animals.
Procurement documents comprise several component documents dealing with different topics
grouped together in a logical sequence. The first cluster of documents contains only those • Serious environmental
damage or
documents that are relevant to the tender stage:
degradation or
interruption of essential
services.

21

Tender documents may
CONTENTS FUNCTION AND BROAD OUTLINE OF CONTENTS
be compiled in three
parts: NUMBER HEADING

• T1: Tendering procedures. Part T1: Tendering procedures

• T2: Returnable T1.1 Tender Notice Alerts tenderers to the nature of the supplies, services and engineering and
documents. and Invitation construction works required by the employer and should contain sufficient
to Tender information to enable them to respond appropriately.
• C: Draft contract.
T1.2 Tender Data States what the applicable conditions of tender are and where they may be
In this approach, the found. Tender data also provides the variables for standardised conditions
of tender.
employer will compile
the contract using some Part T2: Returnable documents
of the returnable T2.1 List of Returnable Ensures that everything the employer requires a tenderer to
documents and the draft Documents submit with his tender is included in, or returned with his tender submission.
contract. T2.2 Returnable Contains documents that the tenderer is required to complete for the
Schedules purpose of evaluating tenders and other schedules which upon acceptance
Alternatively, the become part of the subsequent contract.
employer may structure
the document as follows The second cluster includes those documents that relate to the contract that will be created
in a single document: upon the acceptance of the tender.
• T1.1 Tender Notice and
Invitation to Tender. CONTENTS BROAD OUTLINE OF CONTENTS
• T1.2 Tender Data. NUMBER HEADING
• T2.1 List of Returnable Part C1: Agreements and contract data
Documents.
C1.1 Form of Offer Formalises the legal process of offer and acceptance.
• T2.2 Returnable and Acceptance
Schedules.
C1.2 Contracts Data States the applicable conditions of contract and associated contract specific
• C1.1 Form of Offer and data that collectively describe the risks, liabilities and obligations of the
Acceptance. contracting parties and the procedures for the administration of the contract.
• C1.2 Contract Data. Part C2: Pricing data
• C1.3 Forms of Securities. C2.1 Pricing Provides the criteria and assumptions that it will be assumed (in the
• C1.4 Forms for Instructions contract) that the tenderer has taken into account when developing his prices
Adjudicators Appointment or target in the case of target and cost reimbursable contracts.

• C2.1 Pricing Instructions. C2.2 Activity Records the contractor's prices for providing supplies/services/engineering
Schedule/Bill and construction works that are described elsewhere in a specification
• C2.2 Activity Schedule/ of Quantities within the Scope of Work section of the contract.
Bill of Quantities.
Part C3: Scope of work
• C3 Scope of Work.
C3 Scope of Work Specifies and describes the supplies, services, or engineering and
• C4 Site Information. construction works that are to be provided and any other requirements and
constraints relating to the manner in which the contract work is to be
The document that is performed.
issued for tender
Part C4: Site information (engineering and construction works contracts only)
purposes becomes the
contract once the C4 Site Information Describes the site as at the time of tender to enable the tenderer to price his
employer complete the tender and to decide upon his method of working, programming and
risks.
acceptance portion of
the Form of Offer and
Acceptance. The Standard for Uniformity in Construction Procurement requires that these headings be used with
procurement documents (tender and contract).

Procurement documents capture the choices made by the client for the conducting of the process of
offer and acceptance in the tender data. They capture the allocation of risks, liabilities and
obligations of the parties, the procedures for the administration of the contract and the manner in
which disputes may be resolved in the contract data. They also provide the basis for the
following:

• Paying the contractor in the pricing data.
• Specifying any measurable, tangible, verifiable outcome, result or item that must be produced or
completed (deliverable) and the constraints in doing so in the scope of work.

22

• In the case of construction works, communicating the outcomes of surveys to tenderers in the site The commonly
information, e.g. soil and ground conditions, the location and state of buildings or facilities that encountered pricing
contractors may be expected to use or may be affected by the contractor's activities, environmental strategies include:

conditions, the number and location of people who may be affected by the works, availability of • Lump sum.
materials, etc. • Activity schedules.

Contractors who are familiar with the standardised procurement documents of an organisation will • Bills of quantities.
only need to read the project specific sections for any specific project in order to know what the • Cost reimbursable.
organisation requires. On the other hand, contractors who are not familiar with an organisation's • Target cost.
standardised documents can quickly locate information that they may require if they have a working • Schedules of rates.
knowledge of the framework for the formatting and compilation of procurement documents provided
in the Standard for Uniformity in Construction Procurement. (See section 2.5.)

STANDARD FORMS OF CONTRACT
Standard forms of
The conditions of a contract establish the risks, liabilities and obligations of the contracting parties and contract may be
the procedures for the administration of the contract. They can be either purpose written for a purchased from the
particular project (bespoke contract) or they can be standardised in such a manner that they can be following
applied to a wide range of projects through project-specific data (form of contract). organisations:

Standard forms of contract that are published by industry-based organisations were negotiated over
several years between different stakeholders and are fair to both the parties who have signed the JBCC:

contract. The Standard for Uniformity in Construction Procurement limits the range of forms of ASAQS (011) 315 4140
contract in use in the public sector in South Africa to the following: MBSA (011) 805 6611
and regional offices
• FIDIC (French Initials for International Federation of Consulting Engineers) (1999) (Short contract
and Red, Yellow and Silver Books). SAIA (011) 486 0684
and regional offices
• General Conditions of Contract for Construction Works (GCC).
CESA (011) 463 2022
• JBCC Series 2000 (Principal Building Agreement and Minor Works Agreement).
• New Engineering Contract (NEC3) (Engineering and Construction Contract and Engineering and
Construction Short Contract). GCC2004:
CESA (011) 463 2022
Purpose written and other forms of contract are not permitted.
SAICE (011) 805-5947

SAFCEC (011) 455-1700
STANDARD CONDITIONS OF TENDER
The cidb Standard Conditions of Tender contained in the Standard for Uniformity in Construction
FIDIC:
Procurement standardise the procurement processes, methods and procedures from the time that
tenders are invited to the time that a contract is awarded. They are generic in nature and are made CESA (011) 463 2022
project specific through choices that are made by the employer in developing the Tender Data SAFCEC (011) 455-1700
associated with a specific project.

CLAUSE NUMBER NEC:
SAICE (011) 805-5947
The conditions of tender are the Standard Conditions of Tender as contained in
Annex F of the cidb Standard for Uniformity in Construction Procurement. ECS (011) 803 3008

The Standard Conditions of Tender for Procurement make several references to
the tender data for details that apply specifically to this tender. The tender data
shall have precedence in the interpretation of any ambiguity or inconsistency
between it and the standard conditions of tender.

Each item of data given below is cross-referenced to the clause in the standard
conditions of tender to which it mainly applies.

F.1.1 The employer is ...

23

These conditions of tender establish a tenderer's obligations in submitting a tender and the employer's
undertakings in soliciting and evaluating tender offers. They establish the rules from the time a tender
is advertised to the time that a contract is awarded and require employers to conduct the process of
offer and acceptance in terms of a set of standard procedures.

The conditions of tender also do the following:

• Bind the employer and tenderer to behave in a particular manner.
• Establish what a tenderer must do to submit a compliant (responsive) tender.
• Make known to tenderers the criteria by which the tenderer will be evaluated.
• Establish the manner in which the employer will conduct the process of offer and acceptance.
• Provide the necessary feedback to tenderers on the outcomes of the process.

STRUCTURE OF DOCUMENTS ASSOCIATED WITH A CALL FOR
EXPRESSIONS OF INTEREST
An expression of The groups of documents where expressions of interest are called for should comprise those
interest is a request documents that are relevant to the admission to an electronic database or to those required to shortlist
for tenderers to or pre-qualify (or both) tenderers so that they may be invited to submit tender offers in respect of a
register their interest
particular procurement.
in undertaking a
specific contract or to
participate in a CONTENTS FUNCTION AND BROAD OUTLINE OF CONTENTS
project or programme
NUMBER HEADING
and to submit their
credentials so they Part E1: Submission procedures
may, in terms of the E1.1 Notice and Alerts respondents to submit their credentials in order to be admitted to an
organisation's invitation to submit electronic database or to be invited to submit tenders should they satisfy
procurement an expression stated criteria. This document should contain sufficient information to enable
procedures, be of interest them to respond appropriately.
invited to submit a E1.2 Submission data States what the applicable conditions for the calling for expressions of
tender offer should interest are and where they may be found. Submission data also provide the
they qualify or be variables for standardised conditions for the calling for expressions of
interest.
selected to do so.
Part E2: Returnable documents
E2.1 List of returnable Ensures that everything the employer requires a respondent to include in his
documents submission is included in or returned with such a submission.
E2.2 Submission Contains documents that the respondent is required to complete for the
schedules purpose of evaluating submissions.
Part E3: Indicative scope of work (where appropriate)
E3 Indicative Indicates to respondents what the contract is likely to entail so that they can
scope of work make an informed decision as to whether or not they wish to respond and if
so, to structure their submission around the likely demands of the project.

STANDARD CONDITIONS FOR THE CALLING FOR EXPRESSIONS
OF INTEREST
Standard Conditions for the Calling for Expressions of Interest are provided in Annex H of the cidb
Standard for Uniformity in Construction Procurement to standardise the procurement processes,
methods and procedures where calls for expressions of interest are made.

These conditions establish the rules from the time a call for an expression of interest is advertised to
the time that any submission is evaluated. They are generic in nature and are made procurement
specific through Submission Data in much the same way that the Standard Conditions of Tender are
made tender specific through the Tender Data.

24

SOUTH AFRICAN NATIONAL STANDARDS IDENTIFIED IN THE SCOPE
OF WORK
The scope of work specifies and describes the construction works which are to be provided and any
other requirements and constraints relating to the manner in which the contract work is to be
performed. Many of these requirements can be standardised and are covered in South African
National Standards. Procurement documents establish requirements for the construction and
management of the works by simply making reference to them, e.g. the masonry wall shall be
constructed in accordance with the requirements of SANS 2001-CM1.
Copies of these
national standards
cidb CODE OF CONDUCT FOR THE PARTIES ENGAGED IN may be purchased
from Standards South
CONSTRUCTION PROCUREMENT
Africa's head office in
The cidb Code of Conduct for the Parties engaged in Construction Procurement requires that Pretoria (Tel: 012 428
the parties in any public or private construction-related procurement should comply in their 7911) or from their
regional offices.
dealings with each other as follows:
Alternatively they can
• Behave equitably, honestly and transparently. be purchased and
downloaded in
• Discharge duties and obligations timeously and with integrity.
electronic format from
• Comply with all applicable legislation and associated regulations. the SABS Standards
• Satisfy all relevant requirements established in procurement documents. Web store - see
www.sabs.co.za
• Avoid conflicts of interest.
• Not maliciously or recklessly injure or attempt to injure the reputation of another party.

The Board is empowered by the Construction Industry Development Board Act to enforce this code of
conduct. The Board may fine those who breach the code of conduct in an amount not exceeding
R100 000 or remove their names from the Register of Contractors for a period of time.

THE PROMOTION OF ADMINISTRATIVE JUSTICE ACT
Decisions made in the public sector regarding actions taken in the evaluation and award of a contract
is an administrative decision, and as such is subject to the Promotion of Administrative Justice Act,
2000 (Act 3 of 2000). The Act gives effect to the rights provided for the Bill of Rights in Section 33 of
the Constitution (Act 108 of 1996), namely that everyone has the right to administrative action that is
lawful, reasonable and fair and must be furnished with written reasons where their rights have been
adversely affected by administrative action. The Constitution also provides for the review of
administrative action by a court, or where appropriate, an impartial tribunal, and imposes a duty on
the state to give effect to the rights provided for.

The Act establishes fair administrative procedures, permits those affected by unfair administrative
action to request written reasons for such administrative action within 90 days of, or when they became
aware of, such actions and requires administrators to respond within 90 days of receipt of such
requests. Administrative actions are presumed to be taken without good cause where an administrator
fails to respond within the prescribed period. The Act also provides for procedures for the judicial
review of administrative actions and remedies in proceedings for judicial review including the
prohibition of an administrator from acting in a particular manner, setting aside the administrative
action, correcting the defective action and the ordering of the administrator to pay compensation.

Contractors accordingly have the right to challenge decisions made by officials and their agents
regarding any aspects of procurement in terms of this Act should they have reason to believe that such
a decision is biased, unfair, contrary to the conditions of tender or incorrect.

25

THE PUBLIC PROTECTOR
The Public Protector Act (Act 23 of 1994) permits the public to raise issues and empowers the Public
Protector, acting as an ombudsman, to investigate, report on and take the necessary remedial action on
any conduct in state affairs or in the public administration, which is alleged or suspected, to be improper
or to result in any impropriety or prejudice.

PREVENTION AND COMBATING OF CORRUPT ACTIVITIES ACT
The Prevention and Combating of Corrupt Activities Act, 2004 (Act No. 12 of 2004), which is applicable
to both the public and private sector, makes corruption and related activities an offence.

Corrupt activities giving rise to offences include the following:

• Improperly influencing in any way the promotion, execution, procurement or retention of any contract.
• The fixing of the price, consideration or other monies stipulated or otherwise provided for in any
contract.
• Manipulating by any means the award of a tender.
• Manipulating by any means the outcome of an auction.
• Public officers having a private interest in a contract connected with the public body that employs them
except where the interest is in a stock exchange listed company or their conditions of employment do
not prohibit such involvement in a contract.

The direct or indirect offering or receiving of gratifications underlies the above-mentioned
corrupt activities. Gratification in terms of the Act includes:

• Money, whether in cash or otherwise.
• Any donation, gift, loan, fee, reward, valuable security, property or interest in property of any
description, whether movable or immovable or any other similar advantage.
• The avoidance of a loss, liability, penalty, forfeiture, punishment or other disadvantage.
• Any office, status, honour, employment, contract of employment or services, any agreement to give
employment or render services in any capacity and residential or holiday accommodation.
• Any payment, release, discharge or liquidation of any loan, obligation or other liability whether in
whole or in part.
• Any forbearance to demand any money or money's worth or valuable thing.
• Any other service or favour or advantage of any description, including protection from any penalty or
disability incurred or apprehended or from any action or proceedings of a disciplinary, civil or criminal
nature, whether or not already instituted, and includes the exercise or the forbearance from the
exercise of any right or any official power or duty.
• Any right or privilege.
• Any real or pretended aid, vote, consent, influence or abstention from voting.
• Any valuable consideration or benefit of any kind, including any discount, commission, rebate, bonus,
deduction or percentage.

The Act also makes it an offence to be an accessory to or after the above-mentioned offences as well
as to attempt, conspire or induce another person to commit such offences.

Persons convicted of an offence may be fined or imprisoned. The Act also allows the courts to impose
an additional fine equal to five times the value of the gratification, and in the case of offences in respect
of corrupt activities relating to contracts and the procuring and withdrawal of tenders, to order that the
particulars of the convicted person or firm be put on a Register of Tender Defaulters that will be open
to the public. In terms of the Act, National Treasury must determine the period of restriction (not less
than five years and more than 10 years) and may in addition terminate any agreement with the person

26

or enterprise concerned. Clients must disqualify and ignore all tenders received from such persons and
enterprises.

The Act places a duty of care on accounting officers and accounting authorities to report known or
suspected cases of corruption to a police officer, failing which, they are guilty of an offence.

SECTION 2.6: TENDERING FOR PUBLIC SECTOR WORK

REQUIREMENTS FOR PUBLIC SECTOR CONSTRUCTION PROCUREMENT
Public sector procurement is regulated through a number of pieces of legislation. Construction
procurement in the public sector, apart from being regulated in terms of general legislation
governing public procurement, is also regulated through the following cidb prescripts that
have been issued in terms of the Construction Industry Development Board Act of 2000:

• cidb Code of Conduct for the Parties engaged in Construction Procurement.

• cidb Standard for Uniformity in Construction Procurement.

These prescripts are applicable to all organs of state, i.e. all national and provincial departments,
constitutional institutions, public entities, municipalities and municipal entities (see section 2.4).

UNDERSTANDING THE cidb STANDARD CONDITIONS OF TENDER
The cidb Standard Conditions of Tender contained in the Standard for Uniformity in Construction
cidb Code of Conduct
Procurement standardise the procurement processes, methods and procedures from the time that
for all Parties
tenders are invited to the time that a contract is awarded. These conditions of tender establish a involved in
tenderer's obligations in submitting a tender and the employer's (client's) undertakings in soliciting and Construction
Procurement
evaluating tender offers. As such, they establish the rules from the time a tender is advertised to the
time that a contract is awarded and require employers to conduct the process of offer and acceptance • Behave equitably,
honestly and
in terms of a set of standard procedures (see section 2.4). transparently.

Remember that: • Discharge duties and
obligations timeously
• Contractors are bound to act in accordance with the cidb when preparing and submitting tenders and with integrity.
and engaging with the employer during the tender process (see Clause F.1.1 of the cidb Standard • Comply with all
Conditions of Tender). applicable legislation
and associated
• The contractors may only communicate with the employer's agent who is named in the Tender Data regulations.
during the tender process associated with a particular tender (see Clause F.1.4).
• Satisfy all relevant
• Communications between the contractor and the employer are to be in writing and in English (see requirements
Clause F.1.4). established in
procurement
• The employer will usually not pay for any of the costs associated with the preparation of tenders (see documents.
Clause F.2.2). • Avoid conflicts of
• It is the contractor's responsibility to check that the documents are complete. (The Tender Data interest.

entered against Clause F.1.2 will list the documents comprising the tender. Check that all the • Not maliciously or
sections have been included in the tender document and each section has no missing pages). recklessly injure or
attempt to injure the
• The contractor is responsible for the following: reputation of another
party.
• Making use of the latest versions of the conditions of contract, specifications and standards that
are referenced in the tender documents when preparing a tender (see Clause F.2.5).
• Acknowledging the receipt of any addenda (amendments) to the tender document issued by the
employer (see Clause F.2.6).

27

• Requesting clarifications from the employer regarding the intent and meaning of the tender
documents (see Clause F.2.8).
• Obtaining advice on the adequacy of any insurance cover provided by the employer (see Clause
F.2.9).

• Alterations made by the contractor to the tender to correct errors in completing the submission must
be initialled by the person responsible for signing the offer portion of the Form of Offer and
Clause F.2.1
(eligibility) allows the Acceptance (see Clause F.2.11).
employer to set • The contractor must ensure that all the information or data that is requested is submitted in the form
criteria in the Tender that is required (see Clause F.2.14).
Data relating to a
tenderer's capacity • The contractor must provide clarifications and other material that has a bearing on the tender offer
and capability to in response to requests raised by the employer within the time frames stated by the employer (see
perform the contract. Clauses F.2.17 and F.2.18).
Only those tenderers
• The employer may negotiate the final terms of the tender with the contractor that is identified in terms
that satisfy such
of a competitive selection process (see Clause F.2.17).
criteria are permitted
to submit a tender
offer.
SUBMITTING A COMPLIANT (RESPONSIVE) TENDER OFFER
The activities that are associated with the submission of a compliant (responsive) tender are:
1. Confirm that the eligibility criteria are complied with (Clause
DESCRIBING CONTRACTOR GRADING F.2.1)
DESIGNATIONS
Contractors must satisfy the eligibility criteria that are stated in the Tender
Two letters depicting the class of construction works Data in order to have their tenders evaluated.
(general building, civil engineering, electrical engineering,
mechanical engineering or specialist category) in which the Eligibility criteria are frequently highlighted in the Tender Notice and
contractor is registered. Invitation to Tender. Contractors are advised not to obtain tender
Designates potentially
emerging status, if documents if they are not in a position to satisfy eligibility criteria as there
}

applicable.
is no point in spending time and energy on preparing and submitting a
tender if the business cannot satisfy the eligibility criteria.
All public sector tenders for construction works require that only those

5 CE PE contractors who are registered with the cidb in an appropriate contractor
grading designation are eligible to have their tenders evaluated. The
Tender Notice and Invitation to Tender gives an indication of the grading
}

requirements while the Tender Data states the exact requirements.
The Construction Industry Development Regulations disallows the
evaluation of tender offers from registered contractors who tender above
Single number representing a registered contractor's
capability to undertake a contract in a particular class of their designated tender value range (except where the margin by which
construction works within a specified tender value range. the tender value range is exceeded is reasonable) and are not registered
in the required class of construction works.
TENDER VALUE RANGE OF TENDER VALUES
What this regulation means is that a contractor must be registered in the
RANGE
GREATER THAN LESS THAN OR
class of construction works stipulated in the Tender Data. They should
DESIGNATION
EQUAL TO
tender an amount inclusive of VAT within the limits of the tender value
1 R0 R 200 000 range associated with their contractor grading designation in order to
2 R 200 000 R 650 000 ensure that their tender offer is evaluated. They may tender above their
tender value range, but are not guaranteed that the employer will
3 R 650 000 R 2 000 000
evaluate their tender offer unless the margin by which they exceed the
4 R 2 000 000 R 4 000 000
limits is very low (say 5 to 10%).
5 R 4 000 000 R 6 500 000 This regulation accordingly provides the employer with some discretion to
6 R 6 500 000 R 13 000 000 evaluate tenders that are just above the threshold associated with a
7 R 13 000 000 R 40 000 000 contractor grading designation and to award a contract to a contractor
outside of its tender value range provided that the employer is satisfied
8 R 40 000 000 R 130 000 000
that the contractor has the capabilities and capacity to perform the
9 R 130 000 000 No limit contract.

28

The Construction Industry Development Regulations permit employers to evaluate tender offers The contractor
received from unregistered contractors who are considered to be capable of being registered in the grading designations
required contractor grading designation prior to the evaluation of tenders. What this means is that that are shown in the
Tender Notice and
contractors must have made an application that is complete in all respects to the cidb for
Invitation to Tender
registration in a contractor grading designation by the time that employers start comparing tender
provide an indication
offers. The contract will, however, not be awarded to a contractor unless it is registered. of what the likely
The regulations do allow a registered potentially emerging enterprise to be awarded a requirements are.
contract in one contractor grading designation higher than they are registered, provided They are usually on
the low side so that
that the employer:
eligible contractors
• Is satisfied that the contractor has the potential to develop into and qualify for registration in a are not unfairly
higher grade. excluded due to
estimates being
• Ensures that financial, management or other support is provided to that contractor to enable the
inaccurate or where
contractor to successfully execute the contract. the estimated value is
Employers must indicate whether this provision will be applied in the Tender Notice and Invitation to close to a tender
Tender and in the Tender Data. value range
threshold.
Joint ventures need not be registered with the cidb if all the partners
in a joint venture are registered with the cidb and the lead partner DEEMED CONTRACTOR GRADING DESIGNATIONS IN JOINT VENTURES
is registered in the required class of construction works. The
JOINT VENTURE DESIGNATIONS OF REGISTERED CONTRACTORS
contractor grading designation of such a joint venture is calculated DESIGNATION (PARTNERS) IN JOINT VENTURE
by using the calculator on the registers section cidb website 3 3 partners in designation 2
www.cidb.org.za. The “effective” contractor grading designation
4 3 partners in designation 3
calculated by the calculator is the contractor grading designation of
5 2 partners in designation 4 or
the joint venture.
1 partner in designation 4 and 2 partners in
Alternatively, the table for deemed contractor grading designations designation 3
for joint ventures may be used. Higher contractor grading 6 2 partners in designation 5 or
designations may in some instances be obtained from the cidb
calculator. designation 4
7 2 partners in designation 6 or
2.Attend the clarification meeting (Clause F.2.7)
The employer may make the clarification (site) meeting compulsory designation 5
for tenderers to attend. Failure to attend a compulsory clarification 8 3 partners in designation 7
meeting will result in a tender not being considered. It is important
9 3 partners in designation 8
for a contractor to attend any compulsory clarification meeting if it
Note: Lead partner must be registered in required class of work
intends submitting a tender offer.
Details of the place and time of the clarification meetings are to be
found in the Tender Notice and Invitation to Tender.

3.Follow the instructions for pricing the tender offer (Clause F.2.10)
The contractors must base their price on all duties, taxes (other than VAT) and any other levies
Clarification or site
payable as they were 14 days before the closing time for tenders. VAT must be shown separately.
meetings provide
The prices must be fixed (not subject to price adjustment due to inflation or increases or decreases tenderers with an
in the prices of certain commodities), unless the Contract Data makes provision for price adjustment. opportunity to raise
points of clarity with
The prices tendered must be in Rand unless otherwise specified in the Tender Data.
the employer. Such
4.Follow instructions when submitting alternative offers (Clause F.2.12) meetings enable
employers to obtain
Unless otherwise stated in the Tender Data, an alternative tender offer may only be submitted if a the names and
fully compliant tender offer that satisfies the requirements of the procurement documents is also addresses of potential
submitted. Accordingly, a contractor must be prepared to construct the works in accordance with the tenderers. It provides
specifications provided in the procurement documents, if it wants to submit an alternative tender. tenderers with an
opportunity to see
The Tender Data may prohibit the submission of any alternative offer. Alternatively the Tender Data who they are likely to
may permit the submission of an alternative offer provided that it complies with specified criteria be tendering against.

29

A contractor should without having to submit a tender based on that specified in the scope of work of the procurement
carefully study the documents.
Tender Data that
deals with the 5.Follow instructions in submitting a tender offer (Clause F.2.13)
submission of an
Contractors must ensure that they comply with the following:
alternative tender
before considering • Submit an offer for the whole of the works unless the Tender Data state that this is unnecessary.
the submission of an • Return all returnable documents after they have been completed in their entirety either
alternative tender. electronically or in black ink.
• Submit the number of copies stated in the Tender Data.
The List of Returnable • Sign the original and all copies of the tender offer.
Documents that is
• State which of the signatories in a joint venture is the lead partner who may be held liable for the
found in Part 2 of the
tender offer.
procurement
documents indicates • Seal the original and each copy in a package marked as “original” or “copy”.
which documents are • State their names and addresses as well as any specific information stated in the Tender Data on
to be completed and
each and every package that is submitted.
which certificates are
to be submitted as • Seal the original tender and copy packages in an outer package that states the employer's address
part of the tender and identification details as stated in the Tender Data.
submission.
6.Ensure that the tender offer is received by the employer before the closing time for tenders
(Clause F.2.15)
Tenders received after the closing time for tenders will be returned unopened even if they are one
minute late!
Employers may be requested to extend the closing time for tenders should they issue addenda to
allow tenderers to take into account any changes in requirements. Contractors should consider
requesting an extension to the closing data should the employer issue addenda that significantly
change requirements within one week of the closing date.

7. Consider extending the tender validity period (Clause 2.16)
The conditions of tender hold tender offers valid for an acceptance period stated in the tender data
(normally eight weeks and in exceptional circumstances up to 12 weeks). If the employer has not
awarded a contract during this period, the employer may request tenderers to extend this period as
it is unfair to hold a tenderer for lengthy periods without providing them with an opportunity to
withdraw their tender.
Contractors are not obliged to extend the validity period and are permitted to make such extension
subject to price escalation being provided for the extended validity period if such provisions are not
already provided for. (Most contracts use the month during which the tenders closed as the base
month to calculate price escalation.) It must, however, be remembered that any price adjustment will
be reflected in the evaluation of the competitiveness of their tender offer.

30

BASIS UPON WHICH THE EMPLOYER WILL EVALUATE TENDERS
Employers will process and evaluate tenders in accordance with the conditions of tender. Employers will accordingly:
1. Open and record tender offers received
i) Open tender offers immediately after the closing time for receipt of tender submissions in the presence of tenderers' agents and announce and
record pertinent data, if (see Clauses F.3.4 and F.2.13):
• submitted in sealed envelopes;
• annotated with the required particulars; and
• placed in the nominated tender box or delivered to the specified place for receipt of tender submissions.
ii) Make available name, price and preferences claimed to interested parties who request such information.
iii)Return unopened tenders that are (see Clauses F.3.3, F.3.8 and F.1.5):
• received late;
• by a method other than the prescribed method; or
• only one tender submission is received and the employer decides to call for fresh tender submissions.
iv) Consider declaring as non-responsive tender offers not received in the form required (see Clause F.2.14).
v) Reject all tender offers submitted by telegraph, telex, facsimile or e-mail, unless stated otherwise in the tender data (see Clause F.2.13).
2. Determine whether or not tender offers are complete
i) Compare tender submission against list of returnable documents (document T2.1) contained in the procurement document and identify schedules
and component documents that have not been returned or are incomplete (see Clauses F.3.8, F.2.13, F.2.14, F.2.18, F.2.6).
ii) Request tenderers to complete incomplete documents (only if such information does not change or effect the competitive position of a tenderer)
within a reasonable period of time so that their tenders are capable of being evaluated. (Tenderers may not provide additional information that
is integral to the tender offer, i.e. amend their financial offer (methods 1 to 4), preferences claimed (method 2 or 4) or quality offered (method
3 or 4).)
iii)Record what is incomplete in each tender offer, i.e. what is incomplete regarding the financial offer, quality offered and preference claimed.
iv) Confirm that tenderers took account of any addenda that is issued (see Clause F.2.6).
3. Determine whether or not tender offers are responsive
i) Confirm compliance with all the requirements of the Standard Conditions of Tender, i.e. that:
• Eligibility criteria are complied with (see Clause F.2.1).
• The tenderer attended compulsory site/clarification meetings, if any (see Clause F.2.7).
• The tenderer has observed pricing instructions (see Clause F.2.10).
• Alteration, if any, comply with instructions (see Clause F.2.11).
• Conditions attached to alternative tender offers where alternative tenders have been submitted, have been met (see Clause F.2.12).
• The tender offer covers the scope of work contained in the procurement document and, where applicable, meets the performance or functional
requirements of the specifications or is equivalent in performance to that specified.
• The tenderer has signed the form of offer and acceptance (see Clause F.2.13).
• Access to premises for inspections, tests and analysis as provided for in the tender data was provided (see Clause F.2.19).
• The securities, bonds, guarantees, policies and certificates of insurance required have been submitted (see Clause F.2.20).
• The required certificates have been submitted (see Clause F.2.23).
ii) Identify areas of non-compliance with the terms, conditions and scope of work, and determine if any deviation is material using the test for
material deviation provided in Clause F.3.8.
iii)Review all qualifications made to the offer and determine if any of them are material using the test for material qualification provided in Clause
F.3.8.
iv) Declare tender offers non-responsive and reject them as such should they (see F.3.8):
• Fail to comply with the requirements of i) above.
• Fail to provide additional information that is requested by the due date (see clause F.2.18).
• Not have a signed and completed form of offer and acceptance.
• Contain material deviations or qualifications.
v) Record reasons for declaring a tender to be non-responsive.
4. Evaluate tender offers (see Clause F.3.11)
i) Identify parameters included in the returnable documents that have a bearing on the financial offer, e.g. life cycle costs, contract period,
requirement for price escalation, etc. and quantify their impact on the financial offer.

31

ii) Reduce all tender offers to a common base, i.e. to comparative offers.
iii) Judge the reasonableness of financial offers and reject all tender offers with unrealistic financial offers.
iv) Confirm that tenderers are eligible for the preferences claimed in the preference schedule or the reasonableness of any tendered contract
participation goal (or both). (No preferences may be granted to incomplete claims for preferences.)
v) Score the financial offer of all responsive tender offers received to two decimal points using the appropriate formulae. (Score incomplete quality
submissions in so far as they may be scored.)
vi) Score quality for each of the categories stated in the tender data and calculate the total score for quality and record score.
vii) Eliminate tender offers that do not score the minimum number of points for quality stated in the tender data.
viii)Award tender evaluation points for the category of preference or in proportion to the tendered contract participation goal to each eligible
tenderer (or both), in the manner described in the relevant Preferencing Schedule.
ix) Total tender evaluation points in accordance with requirements in the Tender Data and rank tenderers.
5. Determine if there are any grounds for disqualification (see Clause F.3.7)
Determine whether or not the highest ranked or scoring tenderer has been engaged in corrupt or fraudulent practices and if so, instantly disqualify
the tenderer.
6. Determine acceptability of preferred tenderer
i) Confirm that the highest ranked or scoring tenderer (preferred tenderer):
• Is not under any restrictions, or has principals who are under any restrictions from participating in public procurement.
• Can demonstrate that the tenderer possesses the necessary professional and technical qualifications, professional and technical competence,
financial resources, equipment and other physical facilities, managerial capability, reliability, experience and reputation, and the personnel to
perform the contract.
• Has legal capacity to enter into a contract.
• Is not insolvent, in receivership, bankrupt or being wound up, or has its affairs administered by a court or a judicial officer, has suspended its
business activities, or is subject to legal procedures in respect of any of the foregoing.
• Satisfies legal requirements.
• Does not have conflicts of interest that may impact on the tenderer's ability to perform the contract in the best interests of the employer.
ii) Review financial offer of the preferred tenderer and correct discrepancies between totals and calculations or summations in accordance with the
provisions of F.3.9.
iii)Perform a risk analysis on the preferred tenderer to ascertain if any of the following, as relevant, present an unacceptable commercial risk to
the employer:
• unduly high or unduly low tendered rates or amounts in the tender offer;
• contract data provided by the employer; or
• the contents of the tender returnables that are to be included in the contract.
iv) Approach tenderer to amend any part of the tender submission that presents an unacceptable commercial risk, if relevant (see also Annexure
D).
v) Clarify any matter that could give rise to ambiguity in a contract arising from the tender offer
FORM OF OFFER AND ACCEPTANCE
(see Clause F.3.10).
vi)Recommend highest ranked tenderer or tenderer with the most evaluation points for the award
of the contract or if found to be unsatisfactory, undertake an analysis on the next highest
ranked tenderer and so on until such time as a tenderer satisfies the risk assessment (see Offer
Clause F.3.11).
A recommendation will be made to a tender committee who will review the evaluation and the
reasons for overlooking a tender and make a recommendation regarding its award. The person
Signed (tenderer)
designated by the employer in terms of the Supply Chain Management policy will then sign the
acceptance portion of the Form of Offer and Acceptance on the tender that is to be awarded the
contract.
Acceptance
By signing the acceptance portion of the Form of Offer and Acceptance, the Employer enters into
a contract with the successful tenderer. The contract commences once the tenderer, now the
Contractor, receives a signed copy of the Form of Offer and Acceptance.
Signed (employer)
Changes to the contract are only binding, once it has come into effect, if made in writing and are
agreed to by both parties. The Form of Offer and Acceptance expressly states that no amendments
to the tender documents are valid unless they are included in the Schedule of Deviations attached
to the Form of Offer and Acceptance. As a result, nothing that was discussed or agreed during Schedule of deviations
clarifications will be binding on the parties unless it is included in the Schedule of Deviations.

32

SECTION 2.7: PRICING STRATEGIES

UNDERSTANDING THE PRICING STRATEGY OF THE TENDER
The pricing strategy is the method that an employer (client) uses to obtain a price for construction works The different pricing
and to pay the contractor for work completed. There are a number of different pricing strategies. strategies place more
or less risk on the
The employer or his professional team usually decides on which pricing strategy to use for a particular contractor, depending
project. The procurement documentation state what pricing strategy will be used. on how involved the
client is in the
The contract sets out what the employer's and the contractor's risks are. The contractor prices for all his management and
risks and is entitled to claim costs associated with events that are the employer's risk. execution of the
project.

BILLS OF QUANTITIES
Bills of quantities are the most common form of pricing strategy used where the contractor undertakes
construction on the basis of full designs issued by the employer. The employer arranges for the bills of
quantities to be prepared, usually in accordance with a standard system of measurement. These bills of
quantities break the work down into a number of items that the contractor is required to price. The
contractor is paid an amount for work completed based on the rate in the bills of quantities multiplied
by the quantity of work completed.

EXAMPLE OF A BILL OF QUANTITIES

ITEM REF. DESCRIPTION UNIT QTY. RATE OR % PRICE

Total for section carried forward to the summary of Bill

SCHEDULES OF RATES
Schedules of rates are used where employers are unsure of the exact quantities that will be required
during the contract. Schedules of rates identify the items that will probably be constructed. The
contractor is required to submit rates only for each item and is paid an amount for work completed
Prices may be fixed
based on the rate in the schedule of rates multiplied by the quantity of work completed.
or be subject to price
adjustment to take
account of
LUMP SUM PRICES fluctuations in the cost
Lump sum prices are used where the employer pays the contractor a lump sum upon the completion of labour, equipment,
fuel and materials.
of the contract. (Interim payments are often provided for based on a reasonable estimate of the value
of the work completed.)

33

ACTIVITY SCHEDULES
Activity schedules are used where the employer or the contractor identifies particular activities that
are to be performed during the contract, based on a construction programme and the scope of the
work. These activities are captured in an activity schedule. The contractor submits a price for each
activity and is paid the amount for an activity when the activity has been completed. (The total of the
activity prices is the total price for the contract work.)

COST REIMBURSABLE CONTRACT
In a cost reimbursable contract the contractor is paid an agreed percentage fee to cover his
overheads and profit and is reimbursed at market related rates for predefined cost items.

Target cost (initial) Target cost (initial) TARGET COST CONTRACT
Target cost (final) Target cost (final)
In a target cost contract, the contractor is paid his costs as defined
adjusted for variations adjusted for variations
in the scope of work in the scope of work in the contract, based on his tendered cost parameters and at the
Contractor's final cost Contractor's final cost end of the contract, the contractor is paid (or pays) his share of the
difference between the agreed target cost and his cost according to
an agreed formula. If the final cost is less than the target cost, the
contractor is paid his share of the saving. If the final cost is greater
than the target cost, the contractor pays his share of the difference.
This motivates the contractor to control costs.

The target price is usually agreed at the time that the contract is
concluded.
Rand

Rand

Contractor's Contractor's
gain (share of pain (share of STANDARD PRICING STRATEGIES FOR MAIN
savings) cost overrun) CONTRACTORS
The JBCC Principal Building Agreement (PBA) and JBCC Minor
Works Agreement (MWA) allow tenders to be based on either a
lump sum amount or on bills of quantities. Contractors are
Contractor's gain Contractor's pain
required to price the bills of quantities in order to arrive at a
TARGET COST CONCEPT
contract sum. The rates in the bills of quantities are used as the
basis for paying for additional work that may be required. Alternatively, contractors are required to
provide a lump sum for the works and to complete a schedule of rates that provides a basis for paying
for any additional work that may be required. Where work is not covered by these rates, new rates with
a markup of 10% have to be agreed or the actual cost plus 10% is paid.
The JBCC PBA and
MWA require that the The JBCC PBA makes provision for interim payments in lump sum contracts, based upon a reasonable
rates in the bill of estimate of the works completed and allows bills of quantities to include prime cost amounts (amount
quantities be adjusted included in the contract sum for the delivery cost of materials and goods obtained from a supplier as
where additional
instructed by the employer's principal agent) and budgetary allowances (sum of money included in the
work or work
identified as being contracts for work intended for execution by the contractor, the extent of which is identified but not
provisional is not of a detailed). Contractors are required to price their overheads and profit on prime cost amounts but not
similar character or for budgetary allowances as these items are treated as additional work.
executed under
similar conditions. The General Conditions of Contract for Construction Works (GCC) (2004) allow for any pricing
strategy that is described in the pricing data. It does contain standard provisions for bills of quantities
and the measurement of variations in a similar manner to the JBCC agreements. Where work is not
covered by the rates, payment may be made in terms of day works rates and a percentage allowance
for overheads and profit tendered and accepted by the contractor.

34

The FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by GCC 2004 allows the
the Employer (Red Book) contains standard provisions for bills of quantities and the measurement of general items (items
variations in a similar manner to the JBCC agreements and GCC 2004. These conditions, however, in the bills of
quantities that relate
permit a new rate to be determined where items are not specified as “fixed rate items”, e.g.:
to general
• The measured quantity for an item is increased or decreased by more than 10%. obligations, site
services and facilities)
• This change in quantity multiplied by the rate for the item exceeds 0,01% of the Accepted Contract
to be adjusted if the
Value. final contract price
• This change in quantity directly changes the cost per unit quantity of the item by more than 1%. before any
adjustment for
The FIDIC Short Form of Contract, on the other hand, makes provision for payment to be made in escalation exceeds
terms of a lump sum, a lump sum price with schedule of rates, a lump sum with bill of quantities and the contract price
remeasurement of the tender bill of quantities. Variations are, as appropriate, based on a lump sum when the contract
was awarded, less
agreed between the employer and contractor, at rates in the contract or based on rates in the contract,
any contingency
new agreed rates or at the day work rates provided for in the contract.
amounts, by 15% or
more.
The NEC3 Engineering and Construction Works Contract provides for the following options:

A: Priced contract with activity schedule.
B: Priced contract with bill of quantities.
C: Target contract with activity schedule.
D: Target contract with bill of quantities.
E: Cost reimbursable contract.
F: Management contract.
Schedule of cost components
The NEC3 contract deals with all changes in the scope of work in terms of
a compensation procedure. Compensation events are events that are at # COMPONENT AMOUNT
(RANDS)
the employer's risk under the contract and entitle the contractor to an
1 People R
assessment of the effect the event has on the prices and the completion
2 Equipment R
date. Contractors are required to submit a quotation for compensation
events based on the contractor's forecast on their impact upon the cost in 3 Plant and materials R

carrying out the works at the time the event is assessed. Use is made of a 4 Charges R
cost component schedule with tendered fees and parameters to develop a 5 Manufacture and fabrication R
quotation. 6 Design R
Cost of works not subcontracted R
In option A, the contractor takes the bulk of the financial risk while the
employer carries some risk through the compensation event procedure. Cost of works not subcontracted x direct fee percentage
Option B transfers a little more of the risk to the employer who takes a risk = R………….…….Fee 1
of his quantity assessment being changed in final construction. (Any
Subcontracted amount x subcontracted fee percentage
increase or decrease in the bills of quantities is a compensation event if it
= R………….…….Fee 2
causes the cost per unit of quantity to change and the rates for the item
Amount due
multiplied by the final total quantity of work is more than 0,5% of the total
of prices at the start of the contract.) Options C and D allows for a spread = defined cost + subcontracted amount + Fee 1 + Fee 2

of risk between the priced and cost reimbursable extremes. Adjusting the
target share between the employer and contractor will vary the risk between one principally carried by
the employer to one principally carried by the contractor, and to any stage in between those extremes.
In option E the employer takes the bulk of the risk but has complete flexibility. The contractor does,
however, carry some risk as he has to allow for the “disallowed costs”. Option F is a cost reimbursable
contract as the contractor is paid costs plus a percentage fee; the cost being the cost of works
subcontracted to others and the fees for his management services.

The NEC3 Engineering and Construction Short Contract makes provision for activity schedules and
bills of quantities. Quotations are submitted for compensation events, based on market-related costs
and the percentages for overheads and profit tendered by the contractor.

35

SECTION 2.8: CONTRACTUAL CONSIDERATIONS

In construction works
THE FUNDAMENTALS OF A CONSTRUCTION WORKS CONTRACT
contracts, an
employer (client) A contract is an agreement between two or more people that is enforceable by law. In construction it is
enters into a contract an agreement between an employer (client) and a contractor to construct, repair or renovate something,
with a contractor. The in an agreed time, for an agreed price and to agreed standards.
contractor may in
turn enter into a The contractor may undertake all the work himself or subcontract a portion of the work to others (see
contract with a
section 1.2). The agreement made between the contractor and a subcontractor is called a subcontract.
supplier or service
(The main or prime contract is between the contractor and the employer.) In this case, the contractor
provider or elect to
subcontract work to a promises to pay for the part of the work done by the subcontractor and the subcontractor promises to
subcontractor, in do that part of the work that is specified in the subcontract.
which case the
contractor becomes Sometimes there are others involved to assist the employer. These persons are not parties to the contract
the employer. but are agents of the employer. Agents ensure that the contract is properly carried out and some may
give instructions to the contractor.

A right is an entitlement. The employer has a right to have the work done properly, for the agreed price
The employer is
responsible for and in the time promised. The contractor is entitled to be paid the agreed price for doing the work. A
making payments to responsibility is a duty or an obligation. The employer has a responsibility to pay the contractor for doing
those entities that are the work. The contractor has a responsibility to do the work properly for the agreed price and in the time
contracted to provide promised.
supplies, services or
works. One party's right creates a responsibility for the other party. When a party does not comply with his
responsibilities, it is said that he is in breach of contract. Rights and responsibilities in a contract are
enforced by law. This may be either by the courts or by arbitration, depending what is written in the
contract.

Sometimes the parties wish to change their rights or responsibilities in the contract. This can only be
done if both parties agree to the change and if the change is recorded in writing and signed by both of
them. However, when the contract states that an agent can instruct the contractor to do additional work,
leave out certain work or change what has to be done, the contractor has to obey that instruction but
The manner in which will get paid extra and be given extra time to do so if the instruction causes him additional cost and
a contract comes into delay, and if it was not issued because of the fault of the contractor.
existence depends on
how the offer and
acceptance is made. CONCLUDING A CONTRACT
Sometimes the
A contract may, in terms of South African law, be entered into in a number of ways. These
existence of a
include:
contract may well be
“ i mplied” by the • Verbal offers. • The signing of a formal contract.
actions of the parties.
• Exchange of letters.
For example, a
contractor may give
For a contract to be legally valid certain conditions have to be met:
a client a quotation
for certain work to be • The parties must be legally able to make a contract.
done and then be
• There must be consensus (a meeting of the minds), i.e. the offer by one party and an unambiguous
given access to the
and unconditional acceptance by the other.
site by the client.
Even though the offer • There can be no force or coercion on either party in making the contract as a contract may be set
has not been formally aside if acceptance has been induced by misrepresentation, mistake, duress or undue influence.
accepted, the action
• The object of the contract must be physically and legally possible.
of the client indicates
the existence of a • Each party is contributing something to the contract; the contractor through offering to do the work
contract. and the client in agreeing to pay for it.

A contract therefore comes into existence once an offer has been unconditionally accepted.

36

CONCLUDING A CONTRACT USING THE cidb PROCEDURES
The following steps typically lead to the formation of a contract between the employer and the
contractor where the cidb procedures are followed:
When a contractor
1) The employer invites tenderers to submit tender offers using procurement documents compiled in signs any legal
accordance with the requirements of the cidb Standard for Uniformity in Construction Procurement document it is bound
and using a standard form of contract (see sections 2.5 and 2.6). by the terms and
conditions of the
2) Tenderers complete and sign the offer portion of the Form of Offer and Acceptance and make a
document that has
tender submission in accordance with the requirements of the Tender Data. Generally, the
been signed. This
contractor is required to price for all the works described in the tender documents. applies even if the
3) The employer or his agent opens the tenders and usually makes known the names of the tenderers business has not read
who submitted tenders and tender prices to interested parties. the terms. “Let him
who signs take
4) The employer or his agent evaluates the tender in accordance with the provisions of the Tender Data care . ”
and confirms that tenderers have the capability and capacity to perform the contract (see section
2.6).
5) The employer or his agent clarifies any outstanding issues with the successful tenderer and compiles
the contract. Any amendment agreed to in the process of offer and acceptance is included in the
contract, typically in the schedule of deviations contained in the Form of Offer and Acceptance. FORM OF OFFER AND
6) The employer completes and signs the Acceptance portion of the Form of Offer and Acceptance. ACCEPTANCE

The employer's acceptance concludes the contract between the parties. The contract commences once
the tenderer receives a signed copy of the Form of Offer and Acceptance. Changes to the contract are Signed (tenderer)
only binding once it has come into effect, if made in writing and are agreed to by both parties. The Form
of Offer and Acceptance expressly states that no amendments to the tender documents are valid unless
they are included in the Schedule of Deviations attached to the Form of Offer and Acceptance. As a
Acceptance
result, nothing that was discussed or agreed during clarifications or the finalisation of the contract will
be binding on the parties unless it is included in the Schedule of Deviations.

Signed (employer)
STANDARD CONSTRUCTION WORKS CONTRACTS AND SUBCONTRACTS
A construction works contract needs to record what the employer and contractor agree to. The
contract needs to address issues such as: A construction
contract should in its
• The rights, risks and responsibilities of the parties. simplest form
• The administrative procedures relating to all aspects of the works. describe the
following:
• The role and authority of any agent that is appointed by the employer.
• A definition of the contract period, when work will start and when it must be completed. • What will be done.

• Progress payments, how often the payments will be made, who will do the assessment, as well as the • How long it will
terms of payment including such things as retention money, if any. take to complete.
• Whether or not the contractor will be paid for price escalation due to inflation. • How much and
• How the contract price is to be adjusted in response to changes in the scope of work made after the when the employer
contract has been concluded. will pay.

• Conditions under which the contract may be terminated. • What will be done
• Conditions under which the completion date may be extended. if there are changes
and delays in the
• How disagreements are to be settled. work.

These items can be recorded in a standard contract prepared by an industry association or professional • What work
body. The employer can then choose a standard form of contract that is suitable for the construction methods and
works that he wants to be constructed and has administrative procedures that fits in with the way he quality will apply.
wishes the works to be managed and administered. The contractor can then tender with confidence if
he is familiar with this form of contract. Each of the parties and any agent appointed by the employer
all know what they have to do.
37

Conditions of contract The cidb requires that the public sector use one of the following standard forms of contract
for subcontracts differ when contracting with main contractors:
widely. Ideally, the
conditions of • FIDIC (French Initials for International Federation of Consulting Engineers) (1999) (Short contract and
subcontract should be Red, Yellow and Silver Books).
similar to that of the
• General Conditions of Contract for Construction Works (GCC).
main contract. This is
only possible where • JBCC Series 2000 (Principal Building Agreement and Minor Works Agreement).
the NEC3 and JBCC • New Engineering Contract (NEC3) (Engineering and Construction Contract and Engineering and
forms of contract are Construction Short Contract).
used.
The cidb promotes the use of the following standard forms of subcontract:

• BIFSA Non-Nominated Subcontract for use with the JBCC Series 2000 Principal Building Agreement.
The conditions of
contract should not • BIFSA Standard Subcontract Agreement 1995 edition (Amended 2000), for use with Principal Building
be more onerous Agreements other than the JBCC Principal Building Agreement.
than that of the main
• BIFSA Labour-only subcontract.
or prime contract.
• Construction Industry Development Board's Standard Subcontract (labour only).
• The Joint Building Contracts Committee (JBCC Series 2000):
• Nominated/selected Subcontract Agreement.
• Engineering General Conditions.
• New Engineering Contract (NEC3):
• NEC Engineering and Construction Subcontract.
• NEC Engineering and Construction Short Subcontract.
• SAFCEC General Conditions of Subcontract (2003 edition).

Each of these forms of contract contains generic general conditions that are made project specific
through contract data, i.e. a document that states what the variable and project specific information is
and clauses which vary, amend or add to the requirements of the general conditions of contract.

The forms of contract that are promoted by the cidb are fair and equitable in the assigning of rights and
obligations to the parties. Contractors need to carefully consider what are their risks, liabilities
and obligations before signing contracts that contain the following:

• Purpose-written conditions of contract.
• Standard conditions of contract that have been developed by the client.
• Standard forms of contract that are not promoted by the cidb.
• Clauses in the contract data that substantially vary from the general conditions of contract in a
standard form of contract.
• Additional conditions in the contract data.

A contractor should give particular attention to conditions of subcontract as the business may frequently
be in a weaker position when working as a subcontractor than when working as a main or prime
contractor.

In a subcontract, the
role of the
T YPICAL
FEATURES OF CONSTRUCTION WORKS CONTRACTS FOR MAIN
“ e mployer” is CONTRACTORS
performed by the GENERAL
contractor and the
role of the All standard forms of contract have clauses that deal with the following:
“contactor” is
• Definitions and interpretation. • Time. • Risk and insurance.
performed by the
subcontractor. • The obligations of the employer. • Testing and defects.
• The contractor's main responsibilities. • Payment.
38

The employer's main obligation is to pay the contractor and to provide the contractor with access to and
with use or possession of the site. The employer is also obliged to answer any queries raised by the
contractor. The employer may delegate obligations to an agent or employee. The employer may not,
however, delegate the obligations to pay the contractor.

The contractor's main obligation is to complete the work in terms of the contract in accordance with the
scope of work described in drawings, specifications and the like.

Whether specified in the contract documents or not, it is the contractor's responsibility to provide the
works in accordance with all laws, regulations, statutes and by-laws (see Compendium of Legislation
affecting construction stakeholders on www.cidb.co.za).

When one goes to a café and asks for a glass of Coca Cola with ice, the assumption is made that one
will get a drink that is fizzy, that the glass will be clean before your drink was poured into it, and that the
ice cubes will be made from water that was fit for drinking purposes. These assumptions are reasonable
assumptions to make and are known as “implied terms”. The same is true when a client procures
construction works - it is implied that the contractor will execute the work in a workmanlike manner and
that the materials incorporated into the works will be in accordance with the specifications, and where
there are no specifications, of a reasonable quality and fit for purpose.

Breaches by either party to the contract may result in the contract being cancelled. For example, if the
employer does not pay, the contractor is entitled to cancel the contract. On the other hand, should the
contractor fail to provide the work in accordance with the provisions of the contract, the employer may
cancel the contract.

PERFORMANCE GUARANTEES
Performance guarantees are issued by financial institutions such as a bank and provide for payment of
money by the financial institution to the employer should the contractor fail to complete the contract,
e.g. should the contractor be in breach of contract and the contract is cancelled or the contractor
becomes bankrupt. Most construction works contracts require performance guarantees that pay the
employer when the contractor has been in breach of contract and the contract has been cancelled or
the contractor has become bankrupt.

INTERIM (MONTHLY) PAYMENTS
A contractor has to make regular payments for labour, materials, equipment and subcontractors during
the construction period. To enable him to do this, a construction contract usually provides for “interim
payments” to be made each month, based on the estimated amount of work done for that month and
materials that the contractor may have bought and that have been delivered to site but not yet built in.

The contractor, in some forms of contract, is required to provide information to the employer's agents to
enable him to draw up an “Interim Payment Certificate” that shows the amount to be paid to the
contractor by the employer for that month. The employer must pay the contractor the amount shown in
the Interim Payment Certificate after the certificate has been issued. If the employer does not pay the
amount shown in time, he will be in breach of contract and will have to pay interest to the contractor.

If the employer still does not pay the contractor after the contractor has written to him demanding
payment, the contractor may cancel the contract. This however should be done according to the
cancellation clauses stipulated in the contract.

VARIATIONS AND PAYMENT MATTERS
The manner in which payments are made arising from changes to the scope of work needs to be
understood as this is a fertile ground for disputes if not properly dealt with and can lead to a loss of
money. On the other hand, an understanding of how compensation is made can improve the
profitability of a project.

39

If the contractor Most standard forms of contract permit the employer or the employer's representative to order increases
contracts to provide or decreases in any portions of the work, changes to the details of the work or additional work of a
the entire works for a similar nature. The empowerment to omit work cannot be used to take away items of work for which the
lump sum, he is
contractor has tendered and then to be contracted to another contractor.
obliged to carry out
any works which are Most standard forms of contract prescribe how the contractor is to be compensated for changes in the
indispensably
scope of work. Some standard forms of contract require that the contractor tender fee percentages,
necessary for
completion, even if labour rates and equipment hire rates to enable the changes in prices associated with changes in the
not specifically scope of work to be evaluated (see section 2.6).
referred to in the
contract documents. RETENTION
Many contracts make provision for retention monies to be withheld from interim payments. Such money
is held by the employer to offset costs which may arise from the contractor's failure to fully comply with
the contract, including the making good of any defective work.

Typically a percentage of the progress payment is retained up to a stated limit and the total sums
retained are released in two stages. The first stage is when the contractor completes the works so that
the employer may use the works as intended and the second when the defects liability period expires.

RISK AND INSURANCE
Risk is the chance of something happening that will impact on the outcome of the contract. A contractor
faces many risks in a construction works contract. However, by being aware of the risks, understanding
the rights and responsibilities contained in the contract, proper planning and making sure the work is
done properly the first time, the contractor will be successful and can make a profit.

Insurance is compensation that will be paid by an insurance company to the person or persons who
have taken out the insurance if the risk event happens and causes loss. The consequences of a certain
risk event happening will be the responsibility of either the employer or the contractor, depending on
what the contract states.

It is important to remember that the person who takes out insurance is not always the person who is at
risk. This means that, if the employer takes out works insurance, but the contract states that the
contractor is responsible if a certain risk event happens, the contractor will have to pay for any loss or
damage caused by the risk event that is not compensated for by the insurance payout. Because of this
the contractor must satisfy himself that he has proper insurance to cover his risks if the contract states
that he is to take out insurance and if the contract makes insurance the employer's responsibility, the
employer has taken out sufficient insurance. If the insurance is not sufficient, the contractor must take
out additional insurance to ensure that he will be properly covered. The contractor is in no position to
“second guess" the additional insurance that could be required.

COMPLETING A CONTRACT
One of the important things that has to be agreed in a contract is when the work has to be finished.
When the work has been completed so that, although a few small things remain to be done, the
employer can use the works as he intended, the work is said to be “practically complete”. When this
happens, the employer or his agent typically issues a certificate indicating that the works have reached
this stage of completion and provides the contractor with a list of the few small things that still have to
be done.

The contract must specify when the work must be practically completed. Should the contractor not
complete the contract by this due date, he will be in breach of contract and may have to pay penalties
to the employer.

The contractor is required to provide a programme of the works at the start of the contract to the
employer as part of the contract.

40

The programme is important for both the contractor and the employer, because the contractor uses it
to plan his work so that he can be sure he will finish the work in time and the employer's agents use it
to check the contractor's progress and to take action if the contractor falls behind so that the work is
finished by the due date.

When the contractor has finished the work as stipulated in the contract, the works are complete. The
contractor is then responsible for fixing any defects that are found for the period stated in the contract.
At the end of this period, the contractor is paid all outstanding amounts that are due.

RESOLVING DISAGREEMENTS
The contract will stipulate which form of dispute resolution mechanism will be used in an event of a
disagreement/dispute between the parties, i.e. the employer and the contractor. The dispute resolution
specified in the contract may be one of the following: mediation, arbitration, adjudication or litigation.

When the contractor disagrees with the employer or an agent (or when they disagree with him), they try
firstly to solve the problem themselves. If this fails, either a mediator or adjudicator is called in to settle
the dispute. If no agreement is reached, the disagreement is settled by a court of law or by an arbitrator
who acts in terms of the South African laws governing arbitration.

A mediator's job is to get the parties to settle their differences and reach agreement. He may use any
means to do so and may meet separately with the parties or with both parties. He may help them
understand what the problem is and may offer advice to the parties on a solution that may be
acceptable to both parties. If agreement is reached, the parties record in writing what they have agreed.
If no agreement is reached or it appears to the mediator that the parties cannot reach agreement, a
court of law or an arbitrator is requested to settle the disagreement.

An adjudicator's job is to obtain information from both the parties, examine it in terms of what the
contract says and make a ruling on it. The adjudicator is required to make the ruling within the time
stated in the contract and follow the procedures described in the contract. The contractor and employer
have to do what the adjudicator says. If the adjudicator's ruling is that the employer must pay the
contractor, then the employer must pay the contractor. If one of the parties does not accept the
adjudicator's rulings, he may, after doing what the adjudicator tells him to do, ask a court of law or an
arbitrator to finally settle the disagreement.

A lien can be a
CONTRACTOR'S LIEN
trump card when
When one takes a car to a garage to get it repaired, one hands over your keys to the garage. When demanding payment.
the car has been repaired and you have paid your money for the repair, the garage gives you your keys
back. The garage does not have to give you your keys back until you have paid for the repair in full.
The garage has the right of retention, right to hold one's property (i.e. the car), which is also known as The fundamental
a lien, by law until it has been paid. requirement to ensure
that the lien can be
A lien, or right of retention, is a right conferred by law upon a person who has put money, or money's exercised is to ensure
worth, into a property of another or retaining such property in his possession until he has been paid. In that full possession of
the site is maintained.
a construction works contract, the employer hands over the site to a contractor.

The contractor is obliged to restore possession of the site to the employer after the completion of the
works. However, if the contractor has not been paid, the contractor may by virtue of a lien, remain in
possession of the site until such time as the amount due has been paid in full. This only applies if the
contractor has not waived his right of lien.

A subcontractor who has not been paid by the main contractor is, however, under normal circumstances
not entitled to exercise a lien over the property. The subcontractor's only recourse is to claim payment
from the main contractor.

41

SECTION 2.9: PRICING A TENDER

BUILDING UP A TENDER PRICE
The pricing of a Tender prices can be built up by considering a number of components including:
tender is dependent
on the way in which General items: Being the items to cover the charges for compliance with contractual obligations (i.e.
a business is run and insurance; performance guarantees; provision of accommodation, equipment and support for the
operated. A
employer's staff or agents; samples, shop drawings and testing of materials; temporary works; and
contractor may:
supervision) and the provision, maintenance and removal of site facilities (accommodation and
• Do the work with own buildings, services, communications and equipment).
resources.
Construction (work) content: Being the price of all the items that are to be constructed or built.
• Subcontract all the
work. Overheads: Being the operating (every day) expenses incurred in the upkeep of the business and its
offices that are not attributable to individual contracts including total cost of office personnel (salaries,
• Buy materials,
subcontract the labour allowances, medical aid contributions, pension fund contributions, etc.), office costs (rentals or
and hire or purchase ownership expenses, building maintenance, telephone, photocopying, etc.), vehicles (ownership costs,
equipment. hire costs, maintenance, fuel, licensing, etc.) and finance charges.

The type of project Risk allowance: Being an allowance (contingency) to cover the perceived risk associated with poor
also plays a part in
estimates of the cost of general items and construction content, inflationary increases in materials,
which method will be
plant, equipment, labour and fuel covered in the contract, bad weather, construction difficulties,
used.
community difficulties, delays in payment, poor workmanship, poor tender documentation,
completeness of drawings and details, tolerances required, ground conditions, time allowed for
Profit
completion, etc.

Overheads Profit: Being the amount of profit that is added on by a business that does not include any of the
above.
Risk allowance
The construction content can in turn be broken down into work performed using own resources and
General items work using subcontractors.

Prices may be fixed for a period of time or subject to price escalation, i.e. linked to inflation.
Construction content
Contractors need to gather data from their previous projects, manufacturers of products and
equipment, trade associations and technical publications to enable prices for construction activities to
be developed.

ITEM NO DESCRIPTION UNIT OF MEASURE QUANTITY RATE TOTAL

General item
or
Construction content - labour, Overheads Risk allowance Profit
materials, plant and equipment
or
Subcontracted work
Typical breakdown of a tendered rate

Rates are built up by It is more important to get the total price for a project correct rather than the individual rates where
looking at what bills of quantities are used. The rates in bills of quantities should, however, be a realistic estimate of
makes up the item. the price for an item as any increase or decrease in quantities will affect the total amount paid by the
employer, and depending upon the form of contract that is used, form the basis for assessing the
variations to the contract price arising from any changes to the scope of work.

42

ESTIMATING THE QUANTUM OF WORK INVOLVED

The establishment of the quantity of work involved in a contract is a critical activity. The starting point In most contracts less
is to summarise all the similar types of work and to calculate from the drawings or obtain the quantity than 20% of the items
account for more
of work required from the bills of quantity, e.g. move 100 000 cubic metres, construct 10 000 square
than 80% of the cost.
metres of office buildings, or construct 5,6 km of secondary water mains. This gives a good idea of
what the contract involves and how much work is required to complete the contract within the required
contract period.

The next activity is to break these items down into the different materials, trades or types of
work that are required to construct the item. Each of these items should be broken down into
the following four main components:

• Labour needed to construct the works.
• Materials (bricks, concrete, pipes, etc.) and plant (machinery, generators, boilers, etc.) which needs
to be incorporated into the works.
• Equipment (scaffolding, TLBs, graders, etc.) needed to construct the works.
• Work, if any, to be subcontracted to others.

The amount of labour and equipment for each of these items needs to be estimated and the required The contractor
quantity of materials and plant quantified from the drawings, specifications and bill descriptions should try to visualise
contained in the procurement documents. what will be required
to do the work and
Equipment manufacturers have information on the typical productivities of their equipment, e.g. see how the works will be
constructed. There is
Caterpillar Performance Handbook. This information enables estimates of the working time required
an art to estimating.
to be made. Estimates of the standing time need to be made from a programme for the activities that
require the use of such equipment, based on the proposed method of work.

The establishment of realistic production rates is a major consideration. There is no substitute for Great caution must
comprehensive data and feedback from previous work of a similar nature to the work being priced. It be exercised when a
is important to remember that the cost of output depends upon many variables. It is therefore particular type of
important to consider the conditions that prevailed at the time that the particular recorded cost of work is being
considered for the
output was noted as adjustments need to be made to accommodate the expected conditions that will
first time where
apply to a site (see section 2.4).
reliance is placed on
information obtained
When each item has been broken down into these elements, the contractor should consolidate all the
from sources external
materials into a summary, so that prices for materials and plant may be obtained. Thereafter, the costs
to the business.
of its own workforce and equipment need to be estimated, quotations for plant hire and subcontracted
works obtained. Finally, the supervision, personnel, services such as electricity, water and telephones
and facilities required to store the materials, secure the equipment when not in use, maintain the
equipment in working condition and manage the works need to be identified and costed.

43

ACTIVITY RESOURCE APPROXIMATE DAILY
(EXCLUDES TOOLS) (8 HOUR) OUTPUT
Excavation (manual) in soft material 1 x General Worker 2 - 4 m3
Excavation (mechanical) in soft intermediate material Tractor/Loader/Bcktr (TLB) 100 - 200 m3
Excavation (mechanical) in hard material (rock) Excavator with Woodpecker 50 - 100 m3
Carting away within 150 m 1 x General Worker 2 - 5 m3
Loading on tipper 1 x General Worker 2 - 4 m3
Clearing and grubbing including carting away 1 x General Worker 15 - 20 m2
Gabions (fixing and packing) 1 x General Worker 1 m3
Backfilling including manual compaction per 200 mm 1 x General Worker 3 - 6 m3
Erect or dismantle scaffolding 1 x General Worker + 0,3 x semi-skilled 3 - 5 m2
Ordinary single-skin (90 mm) brickwork, open runs 1 x Bricklayer + 1,5 x assistants 10 - 12,5 m2
Ordinary 90 mm brickwork, with corners, rebates, reveals 1 x Bricklayer + 1,5 x assistants 5 - 7 m2
90 mm brick facings with pointing 1 x Bricklayer + 1,5 x assistants 3 - 5 m2
Timber formwork to beams, lintels and walls up to 3 m 1 x Carpenter + 1 x Carpenter's assistant 5 - 10 m2
Decking formwork including propping and ramps 1 x Carpenter + 1 x Carpenter's assistant 10 - 20 m2
Mass concrete batching, placement and tamping 3
1 x 0,10 - 0,20 m Mixer + Vibrator
1 x Charge Hand + 8 x G/W s 7 - 10 m3
Reinforced concrete batching, placement and vibration 3
1 x 0,10 - 0,20 m Mixer + Vibrator
1 x Charge Hand + 8 x G/W s 5 - 7 m3
Steel reinforcement fixing to beams and columns 1 x Steel Fixer + 1 x Fixing assistant 50 kg
Steel reinforcement fixing to floors and slabs 1 x Steel Fixer + 1 x Fixing assistant 100 kg
Plaster/screeds 1 x Tradesman + 1,5 x assistants 5 - 10 m2
Kerbing, including excavation, concrete haunching, backfill and compact 1 x Tradesman + 2 x assistants 40 - 60 m

NUMBER OF MASONRY UNITS AND VOLUME OF MORTAR REQUIRED

MANUFACTURING DIMENSIONS NUMBER OF UNITS MORTAR VOLUME (CUBIC METRE/SQUARE METRE WALL AREA)

PER SQUARE METRE OF MANUFACTURING WIDTH OF THE UNIT (MM)

LENGTH (MM) HEIGHT (MM) SINGLE LEAF WALL AREA 190 140 90 106
390 190 12,5 0,015 0,011 0,008 -
390 140 16,7 0,017 0,013 - -
390 90 25 0,025 0,019 0,013 -
290 90 33,3 - - 0,013 -
190 90 50 - - 0,013 -
222 72 51 - - - 0,018
Notes:
1) Wastage on masonry units depends on the nature of the exposed faces and the methods of handling. Generally a figure of 10% is appropriate.
2) The volume of mortar should be increased by a factor of 2,5 for brickwork and 1,75 for block work to allow for bulking, poor handling,
storage, mortar droppings, etc.
3) Approximately six 50 kg pockets of cement and 1,3 cubic metre of sand is required to produce 1 cubic metre of class II mortar.

OBTAINING PRICES FROM MATERIAL SUPPLIERS
In many instances the When pricing a tender it is important to identify which material suppliers will be used, based on price,
most obvious choice proximity to the site, delivery times and discounts offered. Always try to obtain at least three quotes for
of a material supplier the materials required and use the prices from the supplier that will best suit the project.
is not the cheapest or
most effective for a When getting prices from material suppliers, the contractor should also bear in mind the
contract.
following factors that will influence the cost of materials:

• Whether or not the materials will be delivered • Stock levels maintained at the suppliers.
or will have to be collected.
• Returns of unused materials.
• Bulk discounts (combining similar materials
• Minimum order sizes and any cost premiums
from multiple contracts).
associated with the ordering of small quantities.
• Payment terms (accounts that only need to be
• Trade discounts.
settled sometime after the materials are
delivered). • Delivery periods.
• Existing relationships with material suppliers.
44

A successful track record with material suppliers is a great asset and allows the contractor to benefit There are many
from certain cash flow advantages relating to having accounts with the material suppliers and bulk and benefits to
early settlement discounts that might be offered when accounts are settled on or before time. This establishing a
relationship with
relationship is based on the confidence that the supplier places in the contractor to settle bills in full
material suppliers.
and on time. Should the contractor default on a single payment or be substantially late in paying bills Contractors that do
to one supplier, it may become more difficult to obtain these advantages from other suppliers. In so may enjoy a
addition, other suppliers might decide to withdraw these privileges and require the upfront payment competitive
for materials. advantage over their
competitors.
Contractors that don't have a relationship with their supplier must have sufficient start-up capital to be
able to pay for materials up front and still continue the works until their payment certificate is settled
by the client (see sections 2.1 and 2.2).

Larger material suppliers may provide contractors with better prices than smaller material suppliers Material
since they are able to purchase the materials from the manufacturers in bulk. This bulk discount is often manufacturers
concentrate on the
passed on to their customers. Larger material suppliers will also generally always have the required
manufacturing
stock and are as such able to deliver immediately. They may also have specials on tools and process and are
equipment. Smaller material suppliers, on the other hand, are generally geared to providing a very generally more
wide variety of materials and equipment. They are generally more expensive as their storage costs are difficult to deal with.
higher due to a lower turnover in stock.

Very often construction materials are only available directly from the manufacturer. Manufacturers
provide materials in bulk to their customers and may not be prepared to offer smaller quantities that
may be required for a particular tender. They are also not always geared for deliveries and often
require that the materials are collected.

In many instances there will be special items that have to be manufactured to be built into the works.
This is where the contractor has to approach the manufacturers to ensure that these items have been
correctly priced.

ESTABLISHING EQUIPMENT REQUIREMENTS
The nature and quantities of equipment required for a project can only be identified and listed after
the contractor has identified the methodology for doing the work. This is achieved by means of a
method statement. Decisions must then be made regarding the hiring or purchasing of the required
equipment (see section 2.1).

Contractors should first assess their current inventory of equipment to see CONSIDERATION BETTER BETTER
what is suitable for the project. Questions such as the following need to be TO HIRE TO BUY

asked: Cannot afford to buy
Item will only be used
• Is it suited for the work? occasionally
• Will it provide the productivity required to finish the work on time? Item will be used often

• Will it break down and cause undue delay to the works? It will be possible to hire
out the item when it is not
• What will it cost to repair it, if it is not in perfect order? being used

• How long will it last? For the duration of the contract? (If not, new equipment An up-to-date model is
needed
might have to be purchased or hired at greater cost part of the way through the
An older model will work
contract.) just as well
• What will it cost to maintain or service? What facilities are required to service Maintenance and repairs
are complicated or costly
the equipment?
The item is low maintenance
• Has it been fully paid for? (If not, the repayments and depreciation costs need
A skilled operator is needed
to be worked out.)
Special equipment is
needed to move it around
Hiring equipment eliminates the need for a large capital outlay. Hired equipment (e.g. lowbed)

45

is immediately available and is often serviced and maintained by the hire company. Usually the
Although the hire
costs may be slightly equipment is provided with operators (see section 2.1).
more expensive than
Choosing the hire company may be difficult and prices can vary considerably. It is always advisable to
purchase and
ownership costs, the hire from reputable companies that have been established for a period of time, since they have a
hiring of equipment reputation to maintain, and will generally have a large inventory of items to choose from.
allows the contractor
to concentrate on Purchasing equipment must be carefully considered before this option is followed. Where a job
other aspects of their requires a specific item of equipment that can be used on many other projects, it may be a good idea
works as the hire to purchase equipment. The decision to purchase must not be taken lightly because it can become a
company is most large financial commitment if future projects are not secured or if there is no use for the item on other
often responsible for
projects.
routine maintenance
and the costs of Where a special item of equipment is needed to complete the works and is not available for hire, the
repairs.
contractor may have to include the cost of purchasing it in the tender. The cost to the contract in this
case will be the full cost of the equipment, less the expected selling price once the contract has been
completed.

The contractor is advised when purchasing equipment on a once-off project basis to obtain quotes
that are valid for the tender period and to ascertain the delivery times for such equipment. If this is not
done, the equipment may be more expensive to purchase and, particularly when the equipment is
made to order, might arrive too late.

PRICING THE LABOUR REQUIRED FOR A TENDER
It is important when
calculating the labour Labour costs can constitute a large proportion of the costs for performing the works. Labour
cost to take into costs need to be accurately estimated in terms of the following:
account annual and
sick leave that will be • The cost of the wages, salaries and fringe benefits.
due to full-time • Payments for bonuses and incentives, overtime, working in special circumstances, special allowance,
employees or higher absence due to sickness and holidays and severance.
rates for contract
workers. It is also • Payments made in relation to travel, subsistence and lodging, relocation, medical examinations and
important to make protective clothing.
allowance for • Payments for meeting the requirements of the law (e.g. Unemployment Insurance Fund
overtime rates, the
contributions), pensions and life assurance, death benefit, occupational accident benefits, medical
time that the labour is
aid, vehicle and safety training.
not engaged in
productive work for • The number of persons involved in the task.
whatever reason and
• Production rates.
for severance pay.
• Redundancy of labour on critical tasks.
• Sharing of labour between tasks that are not concurrent.
• Training costs.
• Supervision costs (these are normally priced separately in the contract under the general items).

A charge to cover overheads for staff working on the site should also be considered. Such a charge
should include payments for the provision and use of equipment, supplies and services relating to
catering, medical facilities and first aid, recreation, sanitation, security, copying, telephone, fax, radio,
surveying and setting out, computing and hand tools not powered by compressed air.

It is often easier to draw up the way in which each task will be performed and to allocate categories
of labour to perform the work and cost this on a team basis.

The cost of transporting labour to and from the site should be included in the costs for general items.

46

PRICING THE EQUIPMENT REQUIRED FOR A TENDER Equipment comprises
items provided by the
Equipment costs need to be accurately estimated not only in terms of the items of equipment that are construction business
required but also in terms of materials, fuels and other consumables that may be required to operate to provide the
or use the equipment. construction works.
Such items are not
Pricing the equipment required for a tender can be viewed in many different ways, depending on incorporated into the
whether it is owned, purchased for the project or hired. In all circumstances, there will be mobilisation construction works.

costs involved to bring the equipment onto site and to take it off again. There will also be standing
time, when the construction business is engaged on critical tasks and cannot use the equipment, even
though an equipment hire company may still be charging for its use.

Allowances may also need to be made for the following:

• Delivery, erection and removal charges, if applicable.
• Fuel costs, if applicable.
• Operator costs, if applicable, the effect and cost of maintaining the equipment in good working
order.
• Any special provisions for unloading and loading.
• Any temporary access roads or temporary works associated with the use or operation of the
equipment.
• Any special insurances that may be needed.
• Any supporting equipment needed to operate the equipment, e.g. hoses, breakers and bits
associated with a compressor.
• Safety measures that may be required.

The estimator must decide if the equipment is to be allocated to unit rates or against equipment costs
in the General Items in the Pricing Data. Equipment is usually allocated against unit rates where such
equipment is specific to an activity, e.g. excavation. Equipment such as concrete mixers and hoists,
which are used in several activities and for different trades, should be allocated to General Items.

PRICING THE PLANT AND MATERIAL REQUIRED FOR A TENDER
When pricing the work to be performed it is important to price plant and materials correctly. Plant and materials
are items intended to
One major component that is often misjudged is the issue of waste. A reasonable allowance for waste be included in the
needs to be included in the price for materials as it is virtually impossible to perform certain types of works.
construction works without waste. Savings in the cost of construction can be made if the actual waste
is below the allowance provided in the tender.
The allowances for
The main causes of wastage are: waste should be
based on experience
• Off cuts. • Substandard materials.
gained in previous
• Demolition of work completed due to: • Breakages in handling and offloading. contracts. Data given
in publications and
• Faulty workmanship or poor quality control. • Incorrect storage of materials on site (damage
information supplied
by the weather).
• Setting out errors. by manufacturers
• Malicious damage. should be used with
• Not understanding quality requirements
caution.
established in the scope of work. • Pilfering and theft.
• Not working within the specified tolerances. • Poor control of stocks in stores.
• Over excavation of excavations and trenches.
• Construction inaccuracies.
• Work methods.

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The price for plant and material should also include delivery to the site, providing and removal of
packaging, as well as samples and tests. Costs relating to removal of materials surplus to requirements
should be included in the costs for general items.

PRICING FOR GENERAL ITEMS
SITE ESTABLISHMENT AND DE-ESTABLISHMENT
Both electricity and Site establishment is an important part of the tender. This cost is normally provided for within the bills
water are usually of quantities or the activity schedules and constitutes the amount that the construction business requires
only provided at one
to establish itself on site.
connection point each
on a site and it is the Examples of items that might be included in site establishment are:
contractor's
responsibility to lay • Accommodation for own staff (offices, stores, storage yards, accommodation, etc.).
cables and pipes to • Accommodation for the client's principal agent's or project manager's or engineer's representative.
the points of use.
• Rooms for meetings.
• Notice boards.
• The cost of bringing personnel and equipment to site.
• The cost of providing adequate access roads to the site (if necessary).
• Connections to electricity, water, sewers and telephone lines.
• Ablution facilities (water closets and wash hand basins and possibly urinals and showers).
• The provision of fencing or hoarding around the site.

There is similarly a cost for de-establishment where all temporary accommodation, material and plant
surplus to requirements are removed from site. Often tenders will contain two items, namely one for
the establishment and one for the removal of items from site. However, if there is only one item, then
both establishment and de-establishment need to be priced for under establishment.

Careful thought is required, since this is a direct cost to the contractor and can influence the overall
tender price quite substantially if it is not properly calculated.

An aspect that is often overlooked in tenders is the cost of transport. All personnel, plant and
equipment need to be brought to site and removed again when their function has been completed.
Where the labour will be accommodated on site, transport will not be a significant cost factor.
However, if the contractor is not going to provide accommodation, then a transport strategy needs to
be developed to make sure the workforce is at work on time.

Contractors often price their tenders on the basis that they will provide their labour with transport to
and from work between the site and a designated central place. Alternatively, the labour is provided
with a transport allowance as part of their wages and it is their responsibility to get to work on time
and home again.

CONTRACTUAL REQUIREMENTS
Contractors need to price for the provision of a performance guarantee or bond and insurances in
accordance with the requirements of the contract (see sections 2.4 and 2.8).

HEALTH AND SAFETY REQUIREMENTS
Construction businesses need to price to do all things necessary to comply with the requirements of
the Construction Regulations issued in terms of the Health and Safety Act (see section 3.3).

48

TIME-RELATED (RECURRING) ITEMS
Time-related charges relate to the costs of running a construction site that are not included in
the price for producing something. Items that need to be considered include:

• The costs of cell phones, faxes, internet and • Site staff salaries and wages (site agent,
telephones. foreman, surveyor, clerks, storemen, night
watchmen, drivers, etc.).
• Electricity and water consumption.
• Maintenance of survey and office equipment.
• Site security.
• Site vehicles.
• Cleaning and maintenance of facilities.
• Access to temporary roads.
• Removal of rubbish.
• Consumables (groceries, fuel, photographs,
cutting discs, etc.).

START-UP CAPITAL

The critical task for any contractor is to maintain a positive cash flow position, i.e. the cash that flows
in is more than the cash that flows out (see section 2.2). This is an ideal position that is seldom realised
in the early part of a contract.

In almost every contract, the contractor is required to finance all costs until such time as the first
payment is received. This is the most difficult time for any contractor when resources are being
mobilised. Most often, the costs will have to be carried through either an overdraft facility at the bank,
extended credit periods from suppliers or from cash loans. In all of these cases, there will be interest
charged to the contractor on the loaned amount or the overdraft. This is a cost that has to be included
in the price for a contract.

ALLOWANCES
Allowances can be applied either differently to individual items or uniformly to all items. Often the
profit mark-up is applied in a combination of these two approaches.

RISK
Risk is encountered in all aspects of construction (see section 3.10). A risk allowance enables a A contractor may
contractor to reduce its loss exposure should an event occur. reduce its risk
exposure by carefully
The contractor needs to identify whether there is an extraordinary risk attached to any particular activity choosing its projects,
that should be priced in the tender, and if so, what the likelihood is that this risk event will take place. clients and staff.
If it is decided that this item is highly likely to occur and that there will be a cost attached to this, a risk
allowance should be applied to that activity.

Contractors have been known to have won projects with anticipated high risk at good margins and
have found that the risks were not as bad as anticipated and made good money. Conversely, many
contractors have not won tenders because they have overestimated the risks involved.

OVERHEADS
High reward, high
Overall mark-ups to cover costs that cannot be attributed directly to a project are applied generally
risk. Low reward, low
during the finalisation of the tender just before submission. These mark-ups can be done to allow for
risk.
overhead costs imposed by the costs of running a head office or some other reason, e.g. costs relating
to head office support staff such as company payroll administrators, bookkeepers, tendering staff and
messengers and costs of computers and software that are common to all contracts.

These overall mark-ups need to be calculated from the experience that the contractor has built up over
the past contracts.

49

Overheads can be estimated by considering what the contractor is going to be doing for the next year
and what the likely turnover will be. If the same overheads are to be charged to each contract, the
average overhead percentage will be proportional to the ratio of the contract divided by the likely
turnover.

There is no magic There is no certainty, particularly in a growing business that the estimate of the likely turnover will be
formula for setting reached. As a result, it may be advisable to consider a higher overhead than the estimated average.
the profit margin. In It must be borne in mind that the higher the percentage overheads, the less competitive the contractor
bad times, contractors
is in being awarded contracts. Overheads need to be kept as low as possible.
have priced at “ c o s t ”
to remain in business
whilst in good times,
PROFIT
the percentage profit Profit is profit. It should not include any costs or payments such as salary for the owners of a
may well be in double construction business.
figures.
Once all costs and the risk allowance have been decided upon, the profit margin should be looked
One formula is the at, based on what price the contractor thinks that the market can sustain or what price the client will
Haylett Escalation be prepared to pay. Too high a profit margin may result in the tender being awarded to another
Formula where the contractor.
contract is divided into
“ work groups”. Each PRICE ESCALATION
work group is
The Rand cost of labour, plant and materials all increase over time. An hour of labour is an hour of
assigned an index
with the base index labour, but wages increase over time. Statistics South Africa reports on the inflation rate of a range of
being the index commodities every month and as a year-on-year figure.
applicable at the time
that tenders closed. These figures are important as a contractor is required to agree prices for plant, material, equipment
Each month these and labour at the start of a contract. The actual costs to the contractor when these resources are
indices are updated required may be higher than those estimated at the time that the contract was concluded.
and a new index
figure given. The The contract may provide for price escalation, in which case, the contractor will be compensated for
increase in price is price inflation in terms of a formula that is stated in the contract. This compensation, particularly in
based on the ratio of boom periods, may not be sufficient to cover the increases. Where this is believed to be the case, an
the applicable
allowance for under recovery should be made in the risk mark-up.
monthly index and the
base index.
In some contracts that are typically shorter than one year, the contract may require the contractor to
tender a fixed price, i.e. the rates tendered by the contractor must include for price escalation. Where
Alternatively, the this is the case, the contractor needs to estimate the effect of price inflation on costs based on the
contract will provide
projected inflation rate.
coefficients for labour,
equipment, materials
and fuel and specify FINALISING THE TENDER PRICE
an index that applies A decision as to what the tender price submitted to a client should be can only be undertaken
to each of these items.
when estimates of all costs, the risk allowance, the allowance for price escalation, if any, and
The increase in price is
profit has been established. The finalisation of a tender requires consideration of the
based on the ratio of
the applicable following:
monthly index and the
• Knowledge of the marketplace.
base index multiplied
by the relevant • The market prices for the type of project that is being tendered for and the costing that has been
coefficient. determined in the build-up of the tender price.
• The risks involved in executing the tender.
The importance of • Other commitments within the contractor's organisation.
having the work must
be balanced by the • Availability of resources.
risk involved in getting • How badly the work is needed to keep the workforce employed.
the contract and being
successful in In the last analysis, the tender price that is submitted is a business decision that is based on knowledge
completing the of the market, knowledge of the contractor's likely competitors and what the effect of being awarded
contract with a profit! the contract will have on the business.
50

Contractor management guideline

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