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Public Procurement Bill paves way forward for new sub-contracting model

There can be no dispute that our current procurement systems help facilitate corruption. Every single day we read of fraudulently awarded contracts with millions of rands being paid to contractors who abscond with the project only partly completed and, in some instances, not even started. 

In light of the above, a single Procurement Bill which replaces a myriad of prior procurement legislation, and which seeks to address corruption is welcomed.

However, in its current format, the Bill gives Ministers and Departments the discretionary authority to establish their own empowerment criteria and targets. In addition, regulations which underpin the Bill must still be developed and published. The Bill also needs to comply with the provisions of the Constitution which stipulate that a procurement system must be equitable, transparent, competitive and cost effective. As with all legislation, the devil is in the detail, and it remains to be seen whether the Bill will pass constitutional muster when challenged.   

Meaningful transformation is one of the key principles of the Public Procurement Bill. Once signed into law it will regulate and prescribe public procurement practices.

Public procurement will be targeted specifically at uplifting black-owned small, medium and micro enterprises (SMMEs) that sub-contract to principal contractors, especially those at the lower rungs of the Construction Industry Development Board’s (CIDB) Register of Contractors. According to the CIDB, there are sufficient construction SMMEs across all the wards, districts and provinces to work alongside principal contractors on small construction projects. However, the availability of black sub-contracting skills and experience decline significantly as projects become more complex. This demonstrates a real need to develop black-owned sub-contracting capacity. This can only be done by extending the definition of “value for money” when contracting construction services. It should also encompass meaningful transformation, which includes building black-owned sub-contracting capacity to participate in the anticipated “tsunami” of government infrastructure projects in the pipeline.

However, in order to achieve the level of transformation required, it is important to reassess the way in which sub-contracting is largely being undertaken in the country. This is considering that issues, such as late and non-payment, undermine transformation.

“While an important means of empowering previously disadvantaged contractors and transforming the construction industry, a vibrant sub-contracting sector is also crucial to the sustainability of the construction industry. This business practice enables principal

contractors to deal with uncertainties in the construction market and reduce operating costs and, in this way, improve their competitiveness. It impacts across all spheres of the construction industry, including division of labour, employment, productivity, quality and health, safety and environmental practices,” says, Vaughan Hattingh, an Executive Member of the Construction Adjudication Association of South Africa (CAASA) and Director of MDA Construction & Technology Attorneys.

Via CAASA, the industry has already taken a major step towards providing some measure of protection to sub-contractors that previously had no or very limited recourse in the case of abuse, including late or non-payment by principal contractors. CIDB Grade 1,2 and 3 contractors are especially at risk when they are paid up 120 days after delivering construction services. Many of them then leave the industry indefinitely to find more sustainable livelihoods in other sectors.

CAASA’s Rules for Low Value Dispute Adjudication (LVDA) provides a growing band of emerging contractors and sub-contractors with a cost-effective means of dispute resolution. The LVDA fixes an hourly rate to the adjudicator’s fee, capping it to a specified maximum amount which is linked to the low-value dispute amount claimed. In this way, certainty is provided to the parties as to how much the adjudicator will be paid for making the decision and the period within which it will be published. Moreover, the LVDA attempts to limit the amount of documentation and material that parties are allowed to submit to further streamline the process.

While a solid start, Hattingh believes that a significant paradigm shift is necessary in the way in which procurement entities, principal contractors and sub-contractors engage.

At present, employers only have contractual relationships with main contractors which, in turn, engage sub-contractors. This leaves construction SMMEs vulnerable to dire and shameful practices, the most common of which is late or non-payment.

These practices persist despite the Construction Industry Development Board’s (CIDB’s) Best Practice Guideline D1: Sub-contracting Arrangements that was published as early as 2004.

In this document, the CIDB notes that sub-contracting is an important method of ensuring participation of SMMEs in public-sector procurement activities. Yet, state procurement organs only have a contractual relationship with principal contractors. Sub-contracting issues are the least of their concerns which they pass onto the principal contractor to manage. A case in point are standard forms of contracts used by state-owned entities that increasingly shift responsibility further down the responsibility chain. 

As early as then, the board identified a need to address shortcomings in sub-contracting arrangements, especially with regards to engineering and construction contracts. To ensure that sub-contractors are engaged in terms of fair conditions that are recorded in writing, it recommends that sub-contracts be regulated in public sector procurement.

This requirement for transparent and fair public procurement practices, enshrined in the South African Constitution under Section 217, is also echoed in the Draft Public Procurement Bill. “Therefore, I believe that it is time to revisit Section 217, considering the prevalence of ‘outlawed’ practices that compromise the sustainability of sub-contractors and SMMEs, despite concerns being raised over these practices for many years now,” Hattingh says.

These “outlawed” practices to which he refers are outlined in the CIDB guideline. They include “paid-when-paid’ or “no-pay-if-not-paid” clauses; and a right of setoffs in favour of the principal contractor that are not provided for in the law. This is in addition to authoritarian rights afforded to main contractors or their agents with no recourse given to adjudication in the event of a dispute with a sub-contractor. The CIDB is also a staunch proponent of alternative dispute resolution procedures, such as CAASA’s LVDA, that provide construction SMMEs with an efficient and cost-effective way of resolving disputes. It is opposed to the common practice by main contractors of insisting on only using formal proceedings, such as arbitration and litigation, which are often beyond the reach of construction SMMEs and emerging contractors. Further practices that stifle the development of emerging contractors is the retention of unreasonable percentages after a contract has been completed and conditions in sub-contracts that are more onerous than those of the principal contractor.

The guideline also references the fair and transparent principles in the Master Builders South Africa (MBSA) and the South African Forum for Civil Engineering Contractors’ (SAFCEC) series of sub-contract. This includes that sub-contractors observe, perform and comply with principal contract provisions as so far as they relate to the sub-contract and are not inconsistent with the provisions thereof. Moreover, MBSA and SAFCEC note that sub-contractors have similar rights, powers and responsibilities as the principal contractor when interpreting the provision of the main contract when they relate and apply to the sub-contract. Moreover, they prohibit privity between the employer and the main contractor. Lastly, the terms of the contract as they apply to the sub-contractor and the terms of the sub-contract that influence the price and assessment of risk should be clearly and concisely stated at tender stage.

This seldom happens in the majority of cases in which Hattingh is involved with sub-contractors. He attributes this to the perceived safety in passing obligations and liabilities

towards the employer through to sub-contractors. This approach can be a convenient means of transferring risks and obligations down the chain of responsibility and, thus, essential for large and complex projects. However, so-called back-to-back schemes are being abused, and their inadequate drafting is giving rise to disputes which are particularly complex to resolve.

In many instances, sub-contractors agree to these unfair conditions because they simply do not understand basic forms of construction contracts. This is a challenge that the Joint Building Construction Committee is addressing by providing site-specific basic training in construction contract law to construction SMMEs.

Certainly, Hattingh anticipates more examples of under-handed sub-contracting practices to surface as CAASA’s LVDA gains traction in the industry.

This is especially considering the indefinite shelving of the proposed Draft Prompt Payment and Adjudication Regulations because they were deemed ultra vires. Therefore, they would not pass the constitutional validity threshold if challenged. Hattingh and CAASA were extensively involved in commenting on the draft standard and regulations, which were regarded by many experts as a sound step in the right direction and which have had significant success in other countries where adjudication is mandatory .

The issue of late and non-payment is also adequately addressed in the CIDB’s Best Practice Project Assessment Scheme: Standard for Minimum Requirements for Engaging Contractors and Sub-contractors on Construction Works that was issued in 2018.

According to the CIDB, the date on which payment to the sub-contractor becomes due and payable is the date determined in the contract. However, this may not be later than 30 days after the date on which the sub-contractor has submitted the statement for payment according to the contract. It also suggests the manner of recourse to be taken by sub-contractors if they have not been paid within this period. They can request in writing that the employer confirm in written correspondence within 15 days whether the principal contractors has been paid in full or part for work completed.

In this standard, the CIDB again emphasises the need for a written contract to exist between principal contractor and sub-contractor and that the standard forms be used with minimal contract amendments that do not change the intended use. The exception is when amendments need to be included to accommodate special needs.

“It is going to take a long time to get this model right, which relies on the relationships between sub-contractor, main contractor and employer. Meaningful change will not happen by the employer simply dictating terms for engagement. Until then, our LVDA provides some measure of protection to sub-contractors who simply could not afford conventional

adjudication – least of all arbitration and litigation, with their associated costs, time and suffering. This one solution that we already have on the table will work very effectively if we apply ourselves,” Hattingh concludes.

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