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Assessment of the Causes of Failure among Small and Medium sized Construction Companies in the
Free State Province
By
TSHELISO GODFREY MOFOKENG
A dissertation submitted to
THE FACULTY OF ENGINEERING AND THE BUILT ENVIRONMENT
At the department of
CONSTRUCTION MANAGEMENT AND QUANTITY SURVEYING
In the
UNIVERSITY OF JOHANNESBURG
In the fulfillment for the Degree of Magister Technologiae (Construction Management)
SUPERVISOR:
Prof. W. D. THWALA
October, 2012
i
Declaration
I, Tsheliso Godfrey Mofokeng, hereby declare that the "Assessment of the
causes of Failures among Small and Medium Sized Construction Companies
in the Free State Province" is my own work and that all the sources I have
used or quoted have been indicated and acknowledged by means of complete
references. Furthermore, this report has not been submitted in any other
institution for any degree or examination at another university or higher
education institution. In addition, it also represents my own opinions and not
necessarily those of the University of Johannesburg.
----------------------- ------------------------- ----------------------- Signature Student number Date
ii
Dedication
I dedicate this study to my parents, Nkoba Petrus Mofokeng and Keleabecoe
Emily Mofokeng. Mom and Dad you have given me the best teachings of life
any parent could give to their child. The opportunities you both gave me are
appreciated from the bottom of my heart because of the love and sacrifices
you had to make for me to get the best possible education.
I have always tried to make you proud of me and I hope this will put another
feather on my cap of pride.
In so saying, I dedicate this study to you. Mama le Papa ke lerata ka pelo
yaka kaofela and I hope the Lord will keep all of us until I finish my next level
of studies/
iii
Acknowledgements
� Firstly I would like to thank the Lord almighty whom all things are
possible and gave me inspiration and courage to complete this
research study.
� I would also like to extend a special thanks to my supervisor, Professor
Wellington Didibhuku Thwala for his valuable input and assistance from
the beginning to the end as well as the belief he had in me to carry out
this study. Without his patient guidance, teaching, insightful ideas and
long hours of work, this dissertation could not have been completed. I
cannot adequately express my thanks for his help and interest in
seeing me obtain not only my degree, but succeed in all my endeavors.
For all his help and mentoring, I am grateful beyond measure.
� Secondly, I would like to send my appreciation to my eldest brother
abuti Lucky who has guided and supported me in this profession as I
was inspired by him to find myself in the construction field.
� Thirdly, I would like to express my gratitude to my family who assisted
me when I needed help Mama, Papa, Shimi, abuti Blondy and Windy
ke lerata ka pelo yaka kaofela.
� Last but not the least I want to extend my appreciation to my team
Buhle and Wilda, without your guys support and encouragement this
task would have been even tougher than it was. Not forgetting Lineo, I
appreciate all the support and love throughout the years.
iv
ABSTRACT
This research was conducted to investigate the causes of construction
company failure in the Free State Province, for the reason that there are many
risks involved in running a construction company due to the nature of the
construction industry. The study focused on four major factors involved in
common business failures which are Managerial, Financial, Expansion and
Economic environmental factors. The objectives of this research were
achieved by means of a questionnaire that was distributed to 120 small and
medium contractors in the Free State Province. These contractors were
identified in the CIDB website and were listed as expired, suspended or de-
registered then randomly selected. 102 questionnaires were received and 6
questionnaires were spoilt which meant that the total workable questionnaires
were 96 which was at a return rate of 80%. The data analysis that was used
was done by quantitative method. The data gathered include the main four
factors (managerial, financial, expansion and economic environment) of the
study.
Financial factors were found to be amongst the leading causes of company
failures, whereby most respondents said that their companies did not have
adequate cost and accounting practices and systems in place. Delay in
payment from clients was also a amongst the major causes for failure
because the respondents said their companies always had cash flow
problems and had heavy debts to their suppliers. In addition, financial
mismanagement or using company funds for personal usage also contributed
v
because these companies are not always audited and it was easier for them
to use and therefore the companies suffered in that regard.
It was also established that educational qualification and experience in the
construction industry have an effect in a company’s failure or success. It was
found that many respondents have experience in the construction industry,
but was not spent in the managerial positions or in running a company. The
study also made some recommendations from the research findings, it is clear
that the South African construction industry as a whole needs to address the
challenges and problems the small and medium contactors are facing.
vi
TABLE OF CONTENTS
Page
Declaration ...................................................................................................................... i
Dedication ...................................................................................................................... ii
Acknowledgements ...................................................................................................... iii
Abstract ......................................................................................................................... iv
List of Abbreviations ................................................................................................... xii
List of Figures .............................................................................................................. xv
List of Tables ............................................................................................................... xvi
CHAPTER 1 .................................................................................................................... 1
1.0. Introduction ................................................................................................. 1
1.1. Background ...................................................................................... 1
1.2. Definition of Failure .......................................................................... 6
1.2.1. Types of Failures .................................................................... 9
1.2.1.1. Type 1 ........................................................................... 9
1.2.1.2. Type 2 ......................................................................... 10
1.2.1.3. Type 3 ......................................................................... 10
1.3. Problem Statement ......................................................................... 11
1.4. Objective ........................................................................................ 12
1.5. Significance of the study ................................................................ 13
1.6. Scope ............................................................................................. 13
1.7. Research Methodology .................................................................. 13
1.8. Limitations ...................................................................................... 14
1.9.1. Managerial Factors ...................................................................... 15
1.9.2. Financial Factors ......................................................................... 15
1.9.3. Expansion Factors ....................................................................... 17
1.9.4. Economic Environmental Factors ................................................ 17
1.10. Outline of Chapters ...................................................................... 19
1.11. Chapter Conclusion ...................................................................... 21
vii
CHAPTER 2 .................................................................................................................. 22
2.0. Literature review - Literature on construction company failure in
the United States of America ........................................................................... 22
2.1. Introduction .................................................................................... 22
2.2. Background and nature of the USA construction industry .............. 22
2.3. Small and Medium Contractors in the USA ................................... 24
2.4. Risks and failure rate of small and medium construction
companies ............................................................................... 26
2.5. Managerial factors in the USA small and medium
construction companies ........................................................................ 29
2.6. Financial factors in the USA small and medium
construction companies ........................................................................ 31
2.7. Expansion factors in the USA small and medium
construction companies ........................................................................ 36
2.8. Economic Environmental factors in the USA small and
medium construction companies .......................................................... 37
2.9. Programmes in place to assist contractors in the USA .................. 38
2.9.1. Workforce Development Framework .................................... 40
2.9.2. State Level and Local collaboration ...................................... 40
2.9.3. Marketing ............................................................................. 40
2.9.4. Outreach to Urban Areas and immigrant
Populations .................................................................................... 41
2.9.5. Training – Joint Public/Private Sector Ventures ................... 41
2.9.6. Women and Minorities Construction Training
Program ......................................................................................... 42
2.9.7. Community-Based Training Program ................................... 42
2.9.8. School-Based Training Program .......................................... 43
2.9.9. Work-Based Learning Program ............................................ 44
2.9.10. Contractor License Bonds .................................................. 44
2.10. Discussions of the USA literature ................................................ 45
2.11. Chapter conclusion ...................................................................... 48
viii
CHAPTER 3 .................................................................................................................. 49
3.0. Literature review- Small and Medium sized Contractors in Ghana ........... 49
3.1. Introduction .................................................................................... 49
3.2. Background of Ghana and the nature of its construction
industry .................................................................................................. 49
3.2.1. Economy overview ....................................................... 50
3.3. The Built Environment sector in Ghana .......................................... 51
3.3.1. Performance of the Sector............................................. 53
3.3.2. The Construction Industry Setup ................................... 54
3.3.3. Definition of Small Contractor in Ghana ........................ 56
3.3.4. The Key Stakeholders in the Ghana
Construction Industry .............................................................. 57
3.4. Problems in the Ghanaian Construction Industry ........................... 61
3.5. Managerial Factors in the Ghanaian Small and Medium
sized Construction Companies .............................................................. 64
3.6. Financial Factors in the Ghanaian Small and Medium
sized Construction Companies .............................................................. 67
3.7. Contractor Development in Ghana ................................................. 71
3.7.1. Ghana Labour Based Programme ................................. 73
3.7.2. The Contractor Development Project ............................ 74
3.7.3. Ghana Labour-based Feeder Roads
Programme .................................................................................... 76
3.8. Success factors and lessons .......................................................... 79
3.9. Discussion of the Ghana Literature and Conclusion....................... 83
3.10. Chapter conclusion ....................................................................... 86
CHAPTER 4 .................................................................................................................. 88
4.0. Literature review- Small and Medium sized Contractors in South
Africa ................................................................................................................ 88
4.1. Introduction .................................................................................... 88
4.2. Definition of Small and Medium Business in South Africa .............. 88
4.3. Definition of Contractor in South Africa .......................................... 89
ix
4.4. History of business in South Africa ................................................. 90
4.5. South African Literature .................................................................. 92
4.5.1. Managerial factors in the SA small and
medium construction companies ......................................... 100
4.5.2. Financial factors in the SA small and medium
construction companies ....................................................... 101
4.5.3. Expansion factors in the SA small and
medium construction companies ......................................... 104
4.5.4. Economic Environmental factors in the SA
small and medium construction companies ......................... 108
4.6. Government Support Programmes for SMMEs’ ........................... 112
4.6.1. Ntsika ......................................................................... 114
4.6.2. Khula Enterprise Finance........................................... 115
4.6.3. National Contractor Development Programme .......... 119
4.6.3.1. Lessons Learnt ............................................. 122
4.6.4. NDPW Contractor Incubator Programme................... 124
4.6.4.1. Lessons Learnt ............................................. 126
4.6.5. DPW KZN Masakhe Emerging Contractor
Development Programme .................................................... 127
4.6.5.1. Lessons Learnt ............................................. 131
4.6.6. ESKOM Construction Academy ................................. 132
4.6.6.1. Lessons Learnt ............................................. 135
4.7. Success factors and Achievements for participating
Contractor Development Programmes ................................................ 136
4.8. The comparison between the different Contractor
Development Programmes .................................................................. 139
4.9. Private Sector Support Programmes for SMMEs’ ........................ 141
4.9.1. Standard Bank Support Programmes for
SMME’s ............................................................................... 142
4.9.2. Drake & Skull Facilities Management and
Vulindlela Holdings (DSVH) ................................................. 144
4.9.3. FNB Support Programmes for SMME'S ..................... 145
4.10. Role of the CIDB ........................................................................ 147
x
4.11. Role of the NHBRC .................................................................... 151
4.12. Discussion of the literature review and Conclusion ................... 153
4.13. Chapter conclusion .................................................................... 154
CHAPTER 5 ................................................................................................................ 155
5.0. Research Methodology ........................................................................... 155
5.1. Introduction .................................................................................. 155
5.2. Background of the Free State Province ........................................ 155
5.3. Small and Medium Sized Contractors in the Free State ............... 159
5.4. Research Progression .................................................................. 162
5.5. Research Design .......................................................................... 163
5.6. Research Methods ....................................................................... 164
5.6.1. Qualitative Method ..................................................... 164
5.6.2. Quantitative Method ................................................... 167
5.7. Sampling ...................................................................................... 172
5.8. The Questionnaire ....................................................................... 174
5.8.1. Advantages of a Questionnaire .................................. 174
5.8.2. Disadvantages of a Questionnaire ............................. 175
5.8.3. The Questionnaire Structure ...................................... 175
5.8.3.1. Managerial Factors ....................................... 176
5.8.3.2. Financial factors ........................................... 176
5.8.3.3. Expansion factors ......................................... 177
5.8.3.4. Economic Environmental factors .................. 177
5.9. Data Analysis .............................................................................. 178
5.10. Chapter Conclusion ................................................................... 178
CHAPTER 6 ................................................................................................................ 180
6.0. Findings, Recommendations and Conclusion ......................................... 180
6.1. Introduction .................................................................................. 180
6.2. The Challenge & Problem (MIS)................................................... 205
6.3. Interpretation of Results ............................................................... 212
6.4. Findings and Discussions ............................................................. 213
xi
6.5. Summary of the Findings ............................................................. 214
6.6. Recommendations ....................................................................... 218
6.7. Conclusions .................................................................................. 221
6.8. Areas for Further Research .......................................................... 223
REFERENCES ............................................................................................................ 224
APPENDICES.............................................................................................................. 239
APPENDIX A: Questionnaire ....................................................................................... 239
xii
LIST OF ABBREVIATIONS
ABET Adult Basic Education and Training ANC African National Congress APP Affirmable Procurement Policy ASGISA Accelerated Shared Growth Initiative for South Africa BAC Bid Adjudication Committee BBBEE Broad Based Black Economic Empowerment BBBEEA Broad Based Black Economic Empowerment Act BCAWU Building, Construction and Allied Workers Union BCC Black Construction Council BCI Black Construction Industry BEE Black Economic Empowerment BIFSA Building Industries Federation of South Africa BMF Black Management Forum BPCRS Best Practice Contractor Recognition Scheme CCC Construction Contact Centres CD Contractor Development CDP Contractor Development Programme CE Civil Engineering CEDF Construction Employment Development Forum CEITS Civil Engineering Industry Training Scheme CETA Construction Education and Training Authority CIDB Construction Industry Development Board CII Construction Industry Indicators CIOB Chartered Institute of Building CIP Contractor Incubator Programme CMS Construction Management System CRS Contractor Registers Services CSBP Centre for Small Business Promotion CSIR Council for Scientific and Industrial Research DBSA Development Bank of Southern Africa DTI Department of Trade and Industry DPW Department of Public Works EC Emerging Contractor ECDC Eastern Cape Development Programme ECDM Emerging Contractor Development Model ECDP Emerging Contractor Development Programme EDS Enterprise Development Services EPWP Expanded Public Works Programme ESDA Employment Skills Development Agency FET Further Education and Training FNB First National Bank FSDCA Free State Development Corporation Act FSGDSP Free State Growth and Development Strategic Plan GB General Building GBCSA Green Building Council of South Africa GCC General Conditions of Contract
xiii
GCD Growth and Contractor Development GEAR Growth, Employment and Redistribution GDP Gross Domestic Product HDI Historically Disadvantaged Individual HDSA Historically Disadvantaged South African IDC Industrial Development Corporation IDIP Infrastructure Delivery Improvement Programme IDMT Infrastructure Delivery Management Toolkit IDT Independent Development Trust IECDM Integrated Emerging Contractor Development Model ILO International Labour Organisation JBCC Joint Building Committee Contract JV Joint Venture LBSC Local Business Services Centres MBSA Master Builders South Africa MEC Member of Executive Committee MDP Management Development Programme MoU Memorandum of Understanding NSBA National Small Business Act NASSC National Association of Small Scale Contractors NABCAT National Association of Black Contractors and Allied
Trades NAHB National Association of Home Builders NCDP National Contractor Development Programme NDPW National Department of Public Works NEC New Engineering Contract NEDLC National Economic Development and Labour Council NEF National Empowerment Fund NGO Non-Governmental Organisation NHBRC National Home Builders Registration Council NPWP National Public Works Programme NQF National Qualifications Framework NRA: National Roads Authority OECD Organisation for Economic Co-operation and
Development OHS Occupational Health and Safety PCDF Provincial Contractor Development Forum PDI Previously Disadvantaged Individual PDM Procurement and Delivery Management PDP Performance Development Plan PE Potentially Emerging PFMA Public Finance Management Act PMU Project Management Unit PPP Public Private Partnership PPPFA Preferential Procurement Policy Framework Act RDP Reconstructive Development Programme RFA Road Fund Administration RoC Register of Contractors RPL Recognition of Prior Learning SABS South African Bureau of Standards
xiv
SACEM South African Construction Excellence Model SADC Southern African Development Community SAFCEC South African Federation of Civil Engineering Contractors SAICA South African Institute of Chartered Accountants SAQA South African Quality Assurance body SAWIC South African Women in Construction SEDA Small Enterprise Development Agency SETA Sector Education Training Authority SMME Small Medium and Micro Enterprise SALGA South African Local Government Association SARS South African Revenue Service TPP Targeted Procurement Policy USA United States of America UK United Kingdom
xv
LIST OF FIGURES Figure 6.1. Gender of the respondents Figure 6.2. The ages of respondents Figure 6.3. The race of respondents Figure 6.4. Status of the Company Figure 6.5. The positions of the respondents in the company Figure 6.6. The type of work the companies specialized in Figure 6.7. The companies CIDB grades Figure 6.8. The areas were the companies are located Figure 6.9. The number of family members employed within the
company Figure 6.10. The number of full-time employees in the companies Figure 6.11. The number of people registered with professional
councils Figure 6.12. The companies that participated in development
programmes Figure 6.13. The course that were attended by employees in the
companies Figure 6.14. The respondents number of years within the construction
industry Figure 6.15. The respondents’ highest educational qualification Figure 6.16. The key staff members that left the companies Figure 6.17. The key staff members that left the companies Figure 6.18. The cost and accounting systems adequacy in the
companies Figure 6.19. The companies’ proper and efficient estimating and
procurement systems Figure 6.20. The period it takes for the client to make payments Figure 6.21. The companies’ cash flow problem Figure 6.22. The companies’ debts to suppliers Figure 6.23. The type of work which the companies changed to Figure 6.24. The companies working in a different geographical area
outside the Free State Province Figure 6.25. The frequency that the companies get work opportunities Figure 6.26. The companies’ projects running at a point in time Figure 6.27. The total values of each project running at a point in time Figure 6.28. The increase in the companies’ project sizes Figure 6.29. The national economy, inflation and recession affecting
the companies Figure 6.30. The competition amongst companies Figure 6.31. Governments’ policies, regulations and legislations
affecting companies Figure 6.32. The project delays encountered by the companies due
disruptions Figure 6.33. Theft of the companies’ material and equipment Figure 6.34. The main causes of small contractors to fail Figure 6.35. Challenges and problems
xvi
LIST OF TABLES Table 6.1. Contractor Development Programmes Benefits Table 6.2. Contractor Development Programmes Problems Table 6.3. The Challenge & Problem Index table Table 6.4. The main causes of small contractors to fail Table 6.5. How Challenges can be overcome Table 6.6. Governments’ involvement with Small Contractors
1
CHAPTER 1
1.0. Introduction
1.1. Background
The construction industry has unique characteristics that sharply distinguish it from
other sectors of the economy. It is fragmented, very sensitive to the economic cycles
and political environment, and has a significantly high rate of business failure (Enshassi,
Al-Hallaq and Mohamed, 2006). The South African construction industry is an industry
that is increasingly becoming more complex in terms of growth which is caused by the
amount of investments made by the public and the private sectors in constructions
projects. The industry's fortunes tend to fluctuate with the general economy, and it has a
cyclical nature and quick response to the changes in the economy (Enshassi, Al-Hallaq
and Mohamed, 2006). This has allowed many people to see opportunities and opening
up their own construction companies which usually fall under the small or medium
contractors’ categories. This is because South Africa does not have a regulated body
that screens people who want to open up construction businesses, therefore it makes it
very easy for anyone to start their own company and many risks are inherited in how the
industry operates.
Past studies have shown that many of the people who have opened up those
companies do not have experience in the construction industry, but they sometimes
have the start-up capital. They do not always run the day to day business dealings
because they get people with the knowledge to do it for them. The majority of these
2
contractors have very little skills and adequate resources therefore they take up projects
which are relatively low in magnitude. Ogunlana (1996) stated that the industry's
problems in developing economies can be categorized into three areas: (1) problems of
shortages or inadequacies in industry infrastructure, (2) problems caused by clients and
consultants, and (3) problems caused by contractor's incompetence/inadequacies.
Ogunlana and Olomolaiye (1989) indicated that the major problems faced by
contractors in developing countries have been classified as problems imposed by the
industry's infrastructure, problems of inaccurate information and frequent changes in
instructions and failure to meet obligations on the part of clients and consultants, and
problems imposed by their own shortcomings. These statements by Ogunlana and
Olomolaiye are supported by Laryea (2010) that Contractors in developing countries
have limited access to funding sources, especially contractors in the small-and-medium
bracket. One of the biggest consequences of this is that it prevents them from satisfying
the financial requirements (e.g. bid and performance bonds) needed to win major
contracts often awarded to their foreign counterparts.
The number of contractors emerging everyday in the South African construction industry
has pushed up competition and has resulted in some of the contractors reducing their
profit margins enormously.
The CIDB(2009) showed that there was a total of:
� 1 500 registered companies in December 2004
� 7 500 registered companies in December 2005
� 27 500 registered companies in December 2006
� 42 000 registered companies in July 2007
3
� 55 000 registered companies in December 2007
� 65 000 registered companies by the end of March 2008
84% of the companies that got registered between 2004 and 2008 were black owned
and fell in the small and medium categories.
The CIDB stated that growth in the Register of Contractors has continued in the year
under review (2011) with a total of 99,421 Grade 1 Contractors registered and 13,749
Grade 2 to 9 Contractors registered by 31 March 2011. Chart below indicates the
growth in the total number of registrations across Grades 2 to 9 from January 2005 to
January 2011. Information from the CIDB Quaterly Monitor showed the total number of
registrations in the General Building (GB) and Civil Engineering (CE) classes of works
for the past three years. It is seen that there has been a slight increase in the number of
registrations for the first quarter of 2011. Furthermore, there has been a consistent
increase in the number of registrations in Grades 5 and 6 and above.
4
Source: CIDB Annual Report, 2010/11.
By April 2012 there was a total of 173 253 registered contractors whereby 113 775 were
active and 59 306 were suspended, expired or de-registered.
South Africa: Grade No. of
Companies
Active Expired/Suspended/ De-
registered
1 134 127 100 932 42 195
2 17 532 4 287 13 245
3 4 916 1 577 3 339
4 2 509 2 297 212
5 2 232 2 163 169
6 1 709 1 601 108
7 613 586 27
8 217 208 9
9 126 124 2
Total 173 081* 113 775 59 306
5
Source: CIDB, 12 April 2012 *Contractors in these grades vary because of upgrade and downgrade
Free State Province: Grade No. of
Companies
Active Expired/Suspended/ De-
registered
1 7 108 5 105 2 003
2 1 382 288 1 094
3 147 63 94
4 90 79 11
5 0 75 0
6 0 84 0
7 0 24 0
8 0 9 0
9 0 5 0
Total 8 929* 5 732 3 197
Source: CIDB, 12 April 2012 *Contractors in these grades vary because of upgrade and downgrade
The tables above shows that there is a very high level of companies that are not active
because they have expired, de-registered or either suspended. It also shows that the
biggest numbers of contractors that are not active are in grades 1, 2 and 3. The total
percentage of inactive contractors in South Africa is 34.3% and the Free State Province
is 35.8%.
More than 47% of contractors in grade 1, 2 and 3 that are active were not involved in
regular construction work although they remained active (CIDB, 2009). This implies that
the majority of these companies are in the business but not making a profit because of
their inactivity in construction projects. In 2004 minister Stella Sigcau was quoted
saying:
6
“Liquidation is one indicator of poor sustainability and the failure rate
is unacceptably high. It is evident from the findings on industry
performance, which follow, that the high rate of failure reflects
demand volatility and high levels of competition. Industry
respondents confirmed that there has been a long-term decline in
profitability in the industry and many companies confirm profit levels
as low as two percent. Many of the enterprise failures are taking
place in the emerging sector, which is of particular concern,
reflecting low entry levels, the awarding of contracts at unprofitable
levels, poor and inconsistent procurement practices, abuse of
subcontractors by main contractors, and an oversupply of micro and
small businesses.”
Any person who goes into business, their ultimate goal is to get maximum profit and it is
no different to the contractors, which means them cutting their profit margins is making
them run their business in difficult situations and having to cut costs in almost
everything they do, and sometimes compromising quality of work (Kashiwagi and
Johnson, 2003). This exercise of cutting costs has a lot of risks involved because
everything that is going to be done will not always be 100% correct and the majority of
the contractors do it. Complexity, risks involved in the construction industry have led to
enormous failures especially in small contractors and those small emerging contractors
harboring the wrong impression that there is quick money to be made are the mostly
affected (Mvubu and Thwala, 2007).
7
1.2. Definition of Failure
According to a general definition, failure is the situation that the firm cannot pay lenders,
preferred stock shareholders, suppliers, etc, or a bill is overdrawn, or the firm is
bankrupt according to the law (Halim, Jaafar, Osman and Akbar, 2010). Karels and
Prakash (1987) defined bankruptcy in their article “Multivariate Normality and
Forecasting of Business Bankruptcy” as failure from a financial prospect. The factors
often used by previous researchers in their empirical study of bankruptcy are negative
net worth, non-payment of creditors, defaults, inability to pay debts, overdrawn bank
accounts, omissions of preferred dividends, and receivership. Russell (1991) claimed
that contractor failure occurs when a contractor is unable to perform his/her contractual
duties, thus requiring the facility owner to invoke the contract's non-performance clause.
According to Paz (2006), most contractors fail because they grow too rapidly, outpacing
their management and financial resources.
In 1968 Altman defined failure from an economic viewpoint: a company is considered to
have failed if the realized rate of return on invested capital, with allowances for risk
considerations, is significantly and continually lower than the prevailing rates on similar
investments. Another criterion is insufficient revenues to cover costs and situations
where the average return on an investment is below the firm's cost of capital. Arditi,
Koksal and Kale (2000) attributed business failures to the following factors:
(1) budgetary issues
(2) human/organizational capital issues of adaptation to market conditions,
(3) business issues,
(4) macroeconomic issues, and
8
(5) natural factors.
Failure in the construction industry is a global phenomenon. A study that was done by
Strischek and Mclntyre (2008) also highlighted a huge number of business failures in
the U.S. construction industry. The number of contractors for the period of 2004-2006
dropped from 850,029 in 2004 to only 649,602 in 2006, which is a decrease of almost
24 percent. These numbers cover various types of construction works including
buildings (non-single-family), heavy/highways, industrial buildings /warehouses,
hotels/motels and multifamily home construction, and specialty trade contractors.
Construction companies have a higher failure rate than other types of companies. As
Mentioned by Langford, Iyagba and Komba (1993) and Edum-Fotwee, Prince and
Thope. (1996), the state of the British construction industry is not much different from
that of the U.S. The failure rate in the British construction industry has always
experienced a relatively high proportion compared with the rest of the British economy.
The same phenomenon occurs in Malaysia as well. According to the Construction
Industry Development Board (CIDB) of Malaysia, a total of 11,321 construction firms
were classified as dormant and non-active from January 2006 to August 2008. This
figure lends strong support to a statement made by Yin (2006), where he mentioned
that there existed only a small number of successful listed construction contractors in
Malaysia. Further, it has generally been observed that a significant number construction
projects are not completed within the original schedule.
Earlier studies on the impact of financial factors to the failure of constructions firms
identified financial mismanagement, and lack of capital as the main determinants of
failure (Kangari, 1988). As mentioned by Peterson (2005), the Surety Information Office,
9
which is an office that collects data on surety bonds in the United States, has identified
six broad warning signs that a construction company is in trouble. They are as follows:
(1) ineffective financial management system,
(2) bank line of credit constantly borrowed to the limit,
(3) poor estimating and/or job cost reporting,
(4) poor project management,
(5) absence of a comprehensive business plan, and
(6) communication problems.
Four of these six sources of failure are directly related to the financial management of a
company.
1.2.1. Types of Failures
There are different types or kinds of company failure within the business environment.
Al-Hallaq, (2003) stated that there are several examples of companies which failed
without ever making any profits; at the same time Argenti (1976) said that over 50% of
the firms that failed were less than five years old. This statement is concurred by a study
that was done by Thwala and Phaladi (2009) which showed that 68% of the small
contractors that fail are less than four years old in existence. Argenti described the three
types of failure as follows:
10
1.2.1.1. Type 1
Failure follows a very low profile, indicating that its performance never rises above 'poor'
before sinking. It occurs only to companies newly formed and, almost invariably
therefore, affect only small companies, it is therefore low and brief. The general health
of the company probably never rises above 'poor and' and it probably fails within five
years. There will be one-man rule because the company may only have one manager
and lack of management depth. It will also happen that there will be no budget, no cash
flow plans, and no costing system. The company will either obtain a bank loans or buy
equipment on hire purchase. The company may launch a big project and begin life with
some serious defects. It will happen that the owner has in fact seriously underestimated
the cost and overestimated the revenues of the projects the company was formed to
launch within months of the start of the company. The company will find that it cannot
make enough profit to maintain the interest payments. 60% of these type 1 failures
'never get off the ground.
1.2.1.2. Type 2
These types of failures shoot upwards to 'fantastic' heights before crashing down again.
They also occur to very young companies although they usually survive longer than
Type 1. The path is wholly different from Type 1, the companies get off the ground.
There are the same management defects as in Type 1, but trajectories diverge and
sales continue to expand rapidly necessitating new capital resources and these
resources are readily made available. No over gearing or overtrading occurs. The
11
company is noticed and the company has to succeed because it is publicly expected to,
so it has to sell more, so it has to borrow more, so it has to succeed more. The turnover
will grow but this time the profit will not, technically they are overtrading, for turnover has
now risen so long and so fast that the bankers begin not to believe their luck and they
refuse further advances. Sometimes it is normal business hazards, but the collapse will
now be quite swift and no creative accounting can stop the collapse.
1.2.1.3. Type 3
This is a rather more complex trajectory; these companies have usually been going for
years or decades so the start and early years are not considered. As a comparison, the
trajectory for a healthy non-failing company which follows the well known S-curve
consisting of a slow start, a rapid build-up and then an indefinite period of stable 'good
to excellent' performance. Type 3 failures occur only to mature companies which have
been trading successfully for a number of years or decades. Type 3 failures are
considerable-probably between 20 per cent and 30 per cent of all failures. The company
has been and remains 'good to excellent' with turnover rising soberly in real terms, profit
margins good, gearing low, morale good. It will happen that several defects must be
recorded in management structure, namely one-man rule or non-participating board or
weak finance function. There will be defects in the accounting information systems and
are noted, which will mean that one can observe that although a major change has
occurred no adequate response has been made and defects are visible for months or
years before the initial collapse occurs. An overtrade, a failed project, a constraint, or a
hazard might occur in any permutation of two or more and profits fall severely and
12
financial ratios deteriorated. Profits will still have not recovered even though it may be
one or two years and creative accounting will have to begin, partly because the
managers realize that they need a large loan. The general health of the company will be
'poor' or a little above at this stage. In this case the company will already be
waterlogged and profits fail to cover interest payments, a cash flow crisis occurs and all
the drama of the last few months begins.
1.3. Problem Statement
The problem statement to be addressed is the high failure rate among small and
medium sized construction companies in South Africa. Statistics South Africa (2005)
states that from 1995 to 2005, about 5907 construction companies were formally
liquidated. The CIDB (2004) states that much more than 90% of the emerging black
contractors do not survive the first five years. The CIDB further highlight that more than
1,400 construction companies were liquidated over the past three years. The Free
State Province will be used as a case study, were the majority of the companies in the
Free State Province are companies that are not older than 10 years old in their
existence. This means that there is not much of experience involved within the
company, therefore the management or the executive team (which includes the Owner,
the CEO, Contracts Director, Financial Manager, Project Manager and the Construction
Manager) is often faced with difficult situations which need great experience to tackle
them. However the companies that are also young in their existence but with relevant
experienced team members from either working at other companies for a long period of
time or having a tertiary qualification or a combination of both can be an exception.
13
Therefore can it be said that causes such as managerial, financial, expansion, and
environmental are the ones that cause companies to fail?
1.4. Objectives: The objectives of this research will be highlighted as follows:
• To investigate the factors that causes failure amongst small medium contractors
in the Free State Province.
• To investigate what strategies are employed by small and medium contractors in
countering the challenges they are facing.
• To investigate the state of competition amongst small and medium contractors in
the Free State Province.
• To investigate if educational qualification and experience in the construction
industry have an effect in a company’s failure or success.
• To assess the mentorship programmes in place to support the small and medium
contractors in the Free State.
1.5. Significance of the study
The significance of this study is to bring the difficulties faced by the small and medium
contractors in the Free State Province to the attention of the development boards and
government, that they are an important factor within the South African economy.
Government then needs to adopt strategies to develop the small and medium sector
because of the high failure rate amongst them. This will help the sector to grow so that it
can be economically viable by contributing and strengthening the region’s economy as a
whole.
14
1.6. Scope
The researcher to some extent engaged in onsite observation with the management
teams of different companies whilst distributing the questionnaire, the questionnaire was
used as the primary source of data collection. A typical observation on their meetings
was done. Structured interviews were not scheduled, but the management team
members were interviewed informally as needed to clarify and provide information into
conversations.
1.7. Research Methodology
This study was conducted with companies that are situated in Bloemfontein, Welkom,
Virginia, Kroonstad, Odendaalsrus, Allanridge, Theunissen and Hennenman which are
towns that are all in the Free State Province. The visitations and distribution to these
companies was over a period of approximately four months and the primary focus was
on their management styles in the company and interactions with everyone involved in
the company.
The study focused highly on quantitative data analysis by means of a questionnaire,
more data was collected by reviewing related literatures, and gathering information
through journal articles, internet, and construction magazines. Data analysis and
identification of the most relevant factors influencing causes of contractor failures was
the primary and secondary sources. The use of past studies on causes of company
failure topic from different countries was utilized as well. The researcher then wrote a
15
report that combines the relevant theory and previous research with the results of the
practical research done.
1.8. Limitations
This study was carried out on fully black owned small and medium construction
companies in the Free State Province, these companies were randomly selected from
the CIDB contractor database of the companies which were listed as expired,
suspended or de-registered. The time and logistical constraints required less time than
it was ideal for to go to each and every town in the Free State province. By being in
different companies for approximately ten weeks, there were bound to be aspects of the
leadership practice, organizational culture and team communication that may not have
been revealed during the observations. The researcher being an outsider was limited to
what was revealed especially during observations.
1.9.1. Managerial Factors
Experience in any kind of management is very important and it plays a crucial role in
ensuring that a business succeeds or fails. Poor management has been posited as one
of the main causes of failure of small enterprises (Longenecker, Petty, Moore and
Palich, 2006) lack of experience in the constructions industry can make the manager to
make bad business decisions. The level of education and business performance plays a
role in the operation of a company, this might be said that the amount of people who are
16
trained and have higher qualifications might do better than those who do not have
formal training and qualification. The majority of the small and medium companies are
run and owned by people who do not have the qualification or proper training in their
relative field of business. In many small companies the owner is not always there to
monitor how things are doing on a day to day basis which result poor communication
systems and identifying the internal company problems which can result to poor labour
productivity and improvement. Every organization has its key personnel that are vital to
keep the company running, and if that personnel is not retained and is replaced by
unqualified or ineffective personnel it will disrupt the company structure no matter how
small the company is. This shows that managerial factors need total commitment to
ensure that good centralized decisions are made.
1.9.2. Financial Factors
It is well known that many small companies do not have a dedicated finance and
accounting department that deals with the company’s financial reports on a regular
basis which will tell whether the company’s financial standings are in good order or not.
The construction industry is an industry were money comes in huge amounts at once,
this can mean that cash flow mis-management can result in major problems in the
company’s cash flow. A company that has a low profit margin and lack of capital will be
faced difficult problem in running properly. This can be linked with payment delays from
clients because it can be very harmful to the success of the company. Tight competition
amongst small contractors has made many companies to have very low profit margins,
17
this is because the small contractors are overcrowded and everyone is bidding at low
prices to get work. Estimating contributes a lot in company’s finances because under-
estimating will definitely put a company in danger when it has to carry out a job, this
usually happens in small companies because their estimators are not well experienced.
Other factors which can be directly related to the finances of a company are debt and
equity. According to Ndlovu and Thwala (2008) these factors include high overhead
costs in general; the administrative cost of extending small loans to SMMEs; the high
risk of business failure; an exaggerated risk perception of SMMEs on the part of
bankers and institutional investors; and returns on SMME investments that are
considered low relative to the risk and cost of making the investment. Many small and
medium companies do not realize that material usage and wastage as well as
equipment that is hired but is not utilized will affect the company’s financial situation in
terms of yearly profits.
1.9.3. Expansion Factors
There are small and medium contractors who get to win more tenders than others,
which means that the number of project they do increases but they cannot always
manage because of the required production capacity. Over-expansion can drive a
company to a higher-risk investment with financial debt; hence, increasing its chance to
business failure (Enshassi, Al-Hallaq and Mohamed, 2006). A change in the type of
work and where that work is going to be done also contributes to the expansion factor,
18
when a contractor goes to do work outside his normal territory it might bring some
difficulties as he will have to adapt to the new geographical location.
1.9.4. Economic Environmental Factors
The construction industry in normal cases is controlled by the state of the national
economy, therefore the government will decide on how many projects it will invest in if
there is a bad economic downturn. The awarding of the lowest contract price affects the
construction industry’s business environment because all the role players will not be
looking to get the highest possible profits but to get them work that will bring them
income. The environmental problems of the developing countries exist side-by-side with
a lack of managerial experience, financial resources, and legal and administrative
systems necessary to deal with the issue through public and formal education,
formulation and enforcement of “command and control” measures (legislation and
regulations), as well as the devising and implementation of “economic instruments”
(incentives-grants, subsidies- and taxes) (Ofori, 2001). Economic disruptions will affect
the welfare of the site, workers and the general public because they are all linked to the
environmental techniques and practices. Government can take action in implementing
legislation and regulations on the environmental performances. This might mean that
requirements for licenses and approvals on certain jobs to be done. Tax incentives,
grants and subsidies will make the environmental practices good and the small and
medium contractors will benefit from them.
19
1.10. Outline of the chapters
Chapter one
Introduction
This chapter highlights the problem that is going to be investigated and how that
particular problem is going to be investigated. This means that the manner in which the
proposed research is going to be done is going is clarified.
Chapter two
United States of America literature review
This chapter provides background to the study that is being proposed, that means work
that has been published by other scholars and researchers in the United States of
America. The intention is to express knowledge and ideas to the reader about what has
been said on the topic and it will also show the possible strengths and weaknesses from
different countries as well as reference to the past studies and historical background, on
the different causes of small and medium company failures, in the US construction
industry.
Chapter three
Ghana literature review
This chapter explains literature reviewed in reference to the Ghana past studies and
historical background, on the different causes of small and medium company failures
focusing highly on the managerial factors as well as financial management factors, in
the Ghanaian construction industry it will also look at the contractor development
20
programmes that are in place in Ghana. The aim is to extract key points by comparing
and contrasting across studies.
Chapter four
South Africa literature review
This chapter explains the background to the study that is being proposed, that means
work that has been published by other scholars and researchers in South Africa with the
intention to conceptualize the problem statement and objectives of the study. In
particular this literature review will include reference to the past studies and historical
background, on the different causes of small and medium company failures, in the
South African construction industry then extract key points by comparing and
contrasting across studies from the United States of America and the Ghanaian
construction industries.
Chapter five
Research methodology
This chapter defines the activity of the research on how getting information was carried
on and it also clarifies the steps taken in this study.
Chapter six
Findings, Recommendations and Conclusion
This chapter discusses the results of the research on small and medium contractors in
the Free State Province and is presented together with the analysis of the data
21
collected. The background information on the contractors is presented followed by the
factors of running a construction company then the experiences and challenges of the
small and medium contractors and their management staff are discussed. Then the
study is summarized and the conclusion assessed the research question assisting the
researcher in deciding whether or not some of the other information given from the
theory was reasonable to provide an answer to a research question and
recommendations are given where necessary.
1.11. Conclusion
Chapter one introduced the subject of the research study, it gave insight to the structure
and the main factors that the study focused on. The background and the significance of
the study were also highlighted and, it went further to give information on how the
research report was presented per chapter.
Chapter 2
2.0. Literature review - Small and Medium Sized Contractors in United States of
America
2.1. Introduction
22
In this chapter, literature will be reviewed to conceptualize the problem statement and
objectives of the study. In particular this literature review will include the United States
of America as well as reference to the past studies and historical background, on the
different causes of small and medium company failures, in the US construction industry.
2.2. Background and nature of the USA construction industry
The construction industry represents one of the biggest industries in the United States,
accounting for some 9 percent of the nation’s gross domestic product. The industry is
highly fragmented, made up of nearly 700,000 large and small companies. These
companies range in size from one employee to several thousand and they work in
disciplines as varied as home building to general construction of industrial and non-
residential structures, heavy highway and civil engineering, and specialty trades such as
heating/air conditioning, electricians and plumbing (Paz, 2008).
Paz cites information from the U.S. Census Bureau’s 2002 Economic Census, indicating
that the entire construction sector employs about 7,000,000 individuals for a total payroll
of some $254 billion. The industry generates total revenue of $1.2 trillion (Paz, 2008).
According to the 2007 Economic Census, there are more than 171,000 residential
construction companies in the United States. These companies employ some 878,000
people for a total payroll of $29 billion. The value of business done by residential home
builders is a staggering $264 billion, according to the report, which was published in
2005 (U.S. Census Bureau).
Smallness is a trend industry wide. According to the Bureau of Labor Statistics, two out
of every three establishments in the construction industry employ five or fewer people
23
(U.S. Bureau of Labor Statistics, 2006). In residential home building, individual
proprietorships – or companies owned by one individual – make up a little less than a
quarter of the companies in the United States. Of the more than 171,000 residential
homebuilding companies in the United States, roughly 46,000 are individual
proprietorships (U.S. Census Bureau, 2005). Also, small builders – those producing 25
homes or fewer – make up the bulk of U.S. firms (NAHB, 2006).
In fact, small-volume home builders who produce 25 or fewer units a year make up 70
percent of the builder members of the National Association of Home Builders, the
professional organization of the construction industry (NAHB, 2006). There are
approximately 27,000 members of the NAHB who produce 25 or fewer units a year. By
contrast, there are only 1,400 members of the NAHB who produce 500 or more units a
year (NAHB, 2006).
As mentioned by Peterson (2005), the Surety Information Office, which is an office that
collects data on surety bonds in the United States, has identified six broad warning
signs that a construction company is in trouble. They are as follows:
(1) ineffective financial management system,
(2) bank line of credit constantly borrowed to the limit,
(3) poor estimating and/or job cost reporting,
(4) poor project management,
(5) absence of a comprehensive business plan, and
(6) communication problems
A study by Yin (2006) claimed that most contractors do not have sufficient capital to
finance their undertakings. Contractors generally do not have fixed assets like most
24
manufacturers, and they usually own construction equipment rather than lands or
buildings. Unfortunately, banks do not accept these moving assets as acceptable
collateral for loans. Without bank financing, contractors will obviously find it more
difficult to undertake their projects. Financial problems faced by contractors are also due
to low profit margins from projects. Normally contractors always produce good work at
the cheapest price because of the open tender system. Although the system is the best
way to ensure the completion of any project at the lowest price, it is the most difficult
obstacle any contractor would be forced to hurdle in this very competitive world.
2.3. Small and Medium Contractors in the United States of America
Business failures have long been recognized as indicators of economic trends and
failure in the construction industry is a global phenomenon. Dimitras, Zanakis and
Zopoundis (1996) stated that failure can be defined in many ways, depending on the
specific interest or condition of the firm under examination. According to a general
definition, failure is the situation that the firm cannot pay lenders, preferred stock
shareholders, suppliers, etc, or a bill is overdrawn, or the firm is bankrupt according to
the law.
A recent study by Strischek and Mclntyre (2008) also highlighted a huge number of
business failures in the U.S. construction industry. The number of contractors for the
period of 2004-2006 dropped from 850,029 in 2004 to only 649,602 in 2006, which is a
decrease of almost 24 percent. Also looking at the U.S. Census data from 1989 to 2002,
the average rate of failure in the U.S. construction industry is almost 14 percent, while
the average rate of failure for all industries is under 12 percent. These numbers cover
25
various types of construction works including buildings (non-single-family),
heavy/highways, industrial buildings /warehouses, hotels/motels and multifamily home
construction, and specialty trade contractors. Construction companies have a higher
failure rate than other types of companies.
Construction companies that have been in business less than one year had an even
higher failure rate of 36.8 percent. Even companies that have been in business for fifty
years can fail (McIntyre, 2007). According to the U.S. Small Business Administration
(2003), over 50% of small businesses fail in the first year and 95% fail within the first
five years. “Businesses with fewer than 20 employees have only a 37% chance of
surviving four years (of business) and only a 9% chance of surviving 10 years”, reports
Dun & Bradstreet and of these failed businesses, only 10% of them close involuntarily
due to bankruptcy and the remaining 90% close because the business was not
successful, did not provide the level of income desired, or was too weak to continue.
History has proven that old companies can fail just like new ones, and even good
people can experience a business failure.
According to the U.S. Census:
� Very small firms (one to four employees) have the highest failure rate
� Firms with 20 to 499 employees have the lowest failure rate
� Firms with 500 or more employees have a failure rate that falls in between the
very small and medium firms
2.4. Risks and failure rate of small and medium construction companies
26
Joseph (1995) stated that in the United States individual construction firms enter and
exit the market with an amazing frequency which has a very high risk of failure.
Typically, about 15 percent of all small and medium firms terminate or go out of
business every year. At the same time, the number of new firms grows annually by
about 15 percent. Another 2 to 3 percent of all firms, called “successor firms” are taken
over by new or other existing firms. In calendar year 1992, for example, the US
government records show a total of 871,001 new and successor firms being formed.
Over the same period, 818,756 other firms went out of business. This pattern of change
is reflective of what Joseph Schumpeter called “creative destruction,” a process in which
entrepreneurial activity not only feeds economic growth, but is also the source of
economic fluctuations.
Additional contractor failure risks in the US include:
� Not bonding subcontractors, where the general contractor assumes he or she
can pre-qualify subs and forgo the protection of the bond.
� Intangible or uncontrollable work environment issues such as inclement weather,
unidentified poor site conditions, inflation, material and equipment shortages, and
unexpected economic events such as the Gulf Coast disaster.
Overexpansion, whether a change in the type or size of work performed or a move into
a new geographic area, is another leading cause of contractor failure. Problems with
accounting, management, personnel and performance can all turn “good growth” into
unrealistic growth. Accounting and financial management problems include:
� Inadequate cost tracking systems, debt burden, poor cash management,
undercapitalization
27
� Estimating or procurement problems
� A lack of adequate insurance
� Improper accounting practices (not adhering to the American Institute of CPAs’
Audit Guide for Construction Contractors)
The loss of loyal customers is another sign the contractor may be in trouble. When loyal
customers look elsewhere, it is a sign of a decreasing reputation for the company’s
ability to perform contracts on time and within budget.
As Besho (2008) discussed that in 1992, failures reached a record high. During this
time, each major industry realized an increase in business failures. The Dun and
Bradstreet found the following Causes of Business Failure in the United States:
Major Causes and Subcategories Percent of all
1. Neglect Causes 3.70% Business conflicts 2.10% Family problems 0.40% Lack of commitments 0.30% Poor work habits 0.90% 2. Disaster 4.50% 3. Fraud 2.20% 4. Economic Factors Causes 64.10% High interest rates 0.00% Inadequate sales 2.60% Industry weakness 22.70% Insufficient profits 37.70% Inventory difficulties 1.00% Not competitive 0.60% Poor growth prospects 0.20% Poor location 0.20% 5. Experience Causes 0.80% Lack of business experience 0.20% Lack of line experience 0.30% Lack of managerial experience 0.30% 6. Finance Causes 23.90% Burdensome institutional debt 5.00% Heavy operating expenses 16.60%
28
Insufficient capital 2.30% 7. Strategy Causes 0.90% Excessive fixed assets 0.10% Over expansion 0.20% Receivables difficulties 0.60%
Source: Dun and Bradstreet, Business Failure Record, 1992.
Some studies on company failure investigated different patterns of behaviour, such as
the influence of company size and age on the incidence of failure. Argenti (1976)
showed statistics on failure in the USA, until 1976. The data showed that 2% of failed
companies were one year old, more than 50% were less than 5 years old, and about
20% were more than 10 years old. This concurs with what the U.S. Small Business
Administration (2003) said as mentioned earlier. Knight (1979) analysed records of a
large number of small business failures and conducted interviews with the key
personnel involved. He found that a firm usually fails early in its life (50% of all failed
firms do so within 4 years and 70% within 6 years) and that managerial incompetence is
the major cause. Kale and Arditi (1999) developed a study of the influence of age on
business failures. They found an age-dependent business failure pattern in the USA
construction industry. The risk of failure increases initially with increasing age, reaches
a peak point and decreases, as companies grow older. The lack of organizational
learning and lack of legitimacy, characteristic of new firms, explains this pattern.
2.5. Managerial factors in the USA small and medium construction companies
As suggested by Edum-Fotwe (1996), construction firms must undertake regular
performance evaluation to ensure the adoption of good management styles, timely and
appropriate strategies to sustain the business. Kangari (1992) suggests that
29
understanding the causes and symptoms of business failure will help in identifying early
warnings of an impending financial crisis. Cannon and Hillebrandt (1991) emphasize
that financial aspect, particularly financial ratio, is a significant analysis that often
presents a signal to a company’s business (Edum-Fotwe et al. 1996).
Dun and Bradstreet identified the following specific drawbacks of entrepreneurs or poor
decisions the managers make:
• Lack of experience
• Lack of capital
• Poor location
• Too much inventory
• Excessive purchasing of fixed assets
• Poor credit granting practices
• Unwarranted personal expenses
• Unplanned expansion
Some business failures understandably result from unforeseen market conditions or
unfavourable changes in the economic environment.
The construction SMEs and the industry as a whole has been criticized by many with
regard to its adversarial nature, the take up of new technologies and processes and
issues associated with organizational management (Miller, Packham and Brychan,
2002). Managerial weaknesses faced by owner-managers of small firms can impact
upon survival. Many small firms fail to effectively manage markets, finance, employees
and prices that often result in the firm folding. Small firms often refuse to acknowledge
that the environment in which they operate is constantly changing and impacting upon
30
the firm (Kale and Arditi 1998). Construction Industry reports such as Latham (1994)
and Egan (1998) highlight the need for the industry to embrace contemporary
technologies and processes related to proper managerial factors. Very few publications
however investigate the level of management towards technological and process
inadequacy of SMEs. The U. S. Small Business Administration (SBA) reports that over
90 percent of business failures are management-related (Udell, Atehortua, and Parker,
1995). Some studies suggest that failure is a consequence of poor management
because all business functions fall under the discretion of managers to some degree
and are affected by operational practices (Bruno et al., 1987; Gaskill et al., 1993).
Fredland and Morris (1976) note that all failure could be blamed on inadequate
management when "good management" is defined as the ability to foresee potential
threats in the marketplace and react accordingly. Larson and Clute (1979) identified
managerial deficiencies and financial shortcomings as two characteristics of what they
called the "failure syndrome." Managers of failing construction firms (contractors who
were in financial distress and seeking help from the SBA) had little knowledge in the
areas of market segmentation, site selection, inventory control, and cash flow analysis.
Another study found three major problem categories for failed construction firms:
managerial, financial, and product/market (Bruno et al., 1987). Managerial problems
included a weak managerial team, overconfidence by key employees, and incompetent
advice from outside professionals. On the financial side, failed firms reported that a lack
of initial funding, an inability to repay debt, and conflicts with investors were key
contributors to their failure. While poor management and inadequate financing were
cited as major problems in earlier studies, the category of product/market was the
31
primary reason for failure in the Bruno et al. (1987) study. In particular, construction
company founders mentioned problems with projects timing and design, construction
strategy, and limited client base.
2.6. Financial management factors in the USA small and medium construction
companies
Financing is the lifeblood of growing a business whether in the start-up phase or in a
later stage (Besho, 2008). Many businesses fail due to lack of proper financing
channels. Earlier studies by Kanagri (1988) concur with Besho that the impact of
financial factors are the main determinants of failure for constructions firms, and caused
by financial mismanagement, and lack of capital.
Strischek and Mclntyre (2008) illustrated five financial causes of construction failure as
mentioned in Grant Thornton’s report “2007 Surety Credit Survey for Construction
Contractors: The Bond Producers Perspective.” They are slow collection, low profit
margin, insufficient capital/ excessive debt, misuse of banks’ line of credit, and poor
estimation. Whereas, Hwee and Tiong (2002) revealed the important role of cash flow
management in the construction industry. Cash flow is the most important factor
influencing profitability when a construction project is in progress. For many years, the
construction industry has suffered a proportionally high bankruptcy rate than other
industries in the United States. One of the major causes of bankruptcy is inadequate
cash resources. Findings by Sambasivan and Soon (2007) mentioned that construction
work involves huge amounts of money, and most of the contractors find it very difficult
to bear the heavy daily construction expenses when the payments are delayed. Work
32
progress can be delayed due to late payments of clients. This leads to inadequate cash
flow that should otherwise support construction expenses especially that of contractors
who are not financially sound. These findings gave strong support to the conclusion
made by Hwee et al. (2002). It was also found that the three main causes of financial
failure are because of cash flow problems and insufficient working capital which are also
caused by the delay of payments. These delays include delay in processing for
approval, bureaucracy, and technical finalizing of accounts by the clients (Halim, 2010).
According to Moyer, McGuingan and Rao (2007), financial ratios analysis is used to
address three main purposes. First, it is used as an analytical tool in identifying the
strengths and weaknesses of the firm as well as to assess its viability as an ongoing
enterprise or to determine whether a satisfactory return can be earned for the risk taken.
Second, financial ratios are useful as monitoring tools for ensuring the company
objectives are compatible with its resources. Third, financial ratios play a very effective
role in planning to achieve the company’s goals. Financial ratio is a relationship that
indicates a firm’s activities. Financial ratios enable an analyst to make a comparison of
a firm’s financial condition over time or in relation to other firms.
Large construction companies also suffer the same difficulties as the small and medium
companies who end up failing as a company. The FMI group developed a general
model of failure which show some of the typical causes for large contractor failures in
the US and can be categorized into four major components shown along the perimeter
of the Failure Chain Reaction Model.
Failure Chain Reaction Model
33
Source: FMI Corporation, 2007
The financial function plays a significant role in ensuring that company objectives are
compatible with its resources Fotwe et al (1995). The (UK) Rennes survey (Hankinson
et al 1997) argues that owner managers fail to address weaknesses in financial
management and spend less than five hours per week extracting data from financial
accounts. Many small businesses fail because owners have a difficult time projecting
what cash will come in every month, and thus, how much can go out (Besho, 2008).
Storey (1994) offers that many small firms fail to keep adequate financial records and
are often unaware of current financial situations. Owner managers also admitted to
spending the same amount of time analyzing the firms’ strategic aims and objectives
both in the short and long term. Ghosh, Schoch and Teo (1993) reported that the
satisfaction of customer requirements, service, a good management team and good
networks were the chief success factors of over 100 manufacturing firms. This can be
34
compared to Smyth (1999) who argues that switching costs are high for contractors and
clients if the product delivered is complex, within a complicated relationship. As
payment is regarded as an important variable within contractual relationships, a tenuous
link can be made between payment and the type of service provided by all parties within
the relationship. Smyth (1999) argues that costs can be reduced through the supply
chain if the cost of exit from the relationship is high. He fails however, to attach
significance to the contractor SME relationship in those financial benefits can be
achieved if both parties can understand and accept interdependence.
Moreover, various financial ratios and financial models have been proposed in the
search for solution to various financial situations. For example, Z-Score discriminate
model (1968) and Zeta model (1977) were introduced by Altman, focusing on legally
bankrupt firms; Kangari (1992) presents the multiple linear regression model (MLR) by
using financial ratios to assess financial performance and grade of a construction
company. Multiple attributed decision making (MADM) and entropy method are recently
applied by Hsieh and Wang (2001) in identifying critical financial ratios for Taiwan’s
property development firms in recession. Meanwhile, regression analysis (RA) on five
selected financial ratios has been recently employed by Hung , Albert, and Eddie (2002)
to identify firm-specific determinants of capital structure among property developers and
contractors in Hong Kong. Xu and Wang (2007) have used three prediction models i.e.,
support vector machines (SVMs), logistic regression (LR), and multiple discriminate
analysis (MDA) as financial failure tools to evaluate the input/output of corporation. To
fill the gap, this study takes an initiative to seek the financial health of construction
35
companies in Malaysia by using financial ratio analysis. By analyzing financial
information, it can aid in providing answers to justify the financial health of companies.
Each major component represents a whole host of individual causes. For example,
General Economic Conditions that contribute to failure include interest rates, resource
shortages, national demographics, etc. The Nature of the Construction Industry includes
the hard bid process, long project timing, uniqueness of each project, etc. The Culture
and Systems of the Organization includes financial discipline, succession planning,
project/owner selection process, etc. And the Mind of the Contractor includes the drive
to grow and be big, a developed numbness to risk, a hyper-optimistic perspective, etc.
All of these major components combine and interact to produce the Company
Performance, which includes all the financial conditions of the company as well as
project completion versus- schedule outcomes. If the Company Performance leads to a
significant loss of financial flexibility, contractors often end up in a Bankruptcy Doom
Loop. This loop consists of reductions in surety bonding levels, banks calling in loans,
and a greater likelihood of taking on higher-risk projects in a desperate effort to get
urgently needed cash, which in and of itself all too often leads to further project losses
and a quicker pace of the downward spiral to failure which indicate that the US
construction industry has the same effects that affect small, medium and large
contractors.
2.7. Expansion factors in the USA small and medium construction companies
36
According to Schaefer (2006) one of the leading causes of construction business failure
is overexpansion, and it often happens when the contractor or business owner confuse
success with how fast they can expand their business. A focus on slow and steady
growth is optimum. In many cases, insolvency or bankruptcy has been caused by
rapidly expanding companies, although growth would not be repressed. There has to be
an established solid client base and a good cash flow, in order for the company to have
success at the right measured pace. Some indications that an expansion may be
warranted include the inability to fill client needs in a timely basis, and employees
having difficulty keeping up with production demands. If expansion is warranted there
has to be a careful review, research and analysis, identify what and who the company
needs to add in order for the business to grow. It also has to correlate with the right
systems and people. The contractor has to focus on the growth of the business, not on
doing everything in it (Schaefer, 2006). Geographic expansion is one the expansion
factor whereby a strategy that is utilized by many small firms to achieve their growth
objectives (Greening and Barringe, 1998). This approach involves expanding a firm's
business from its original location to one or more additional geographic sites, and is
particularly well suited for firms that cannot expand in their present location but believe
that their products or services may be appealing to consumers in other markets.
37
2.8. Economic Environmental factors in the USA small and medium construction
companies
It has been recognized within the small business arena that the motivation of the owner
manager is the key criteria to the attainment of competitive advantage within a firm’s
environment (Gartner 1988). The literature within this area suggests that the
personalities of owner/managers in terms of values and goals are indeed
indistinguishable from the goals of their businesses (Kotey and Meredith 1997, Jennings
and Beaver 1997). Research conducted by Meredith and Kotey (1997) of 224 small
businesses indicated that personal values, business strategies and firm performance
were empirically related. This research is important in terms of the small construction
firms ability to adopt new technologies is related to the values and goals of the
owner/manager. In a study by Wynarczyk, Watson, Storey, Short and Keasey (1993) of
150 small businesses, the management and marketing abilities of owner/managers has
been shown to have a positive effect upon the financial success of small firms. The
environment where a company is going to be based will be determined by the location,
which is critical to the success of the business. Schaefer (2006) states that, a good
location may enable a struggling business to ultimately survive and thrive, a bad
location could spell disaster to even the best-managed enterprise.
Some factors to consider:
• Macroeconomic and natural factors
• Industry weakness
• Poor growth prospects
38
• High interest rate
• Disaster
Dun and Bradstreet (1989-1991) concurs with this statement that a major weakness of
both the aforementioned factors are that they fail to divulge information about owner
intentions and resultant manifestation, which in effect is one of the causes of business
failure. However, these factors could be used as a template for developing a unique
factors for expressing identified causes of small and medium company failures. There
are many other exogenous factors like high interest rates, stringent rules, and
regulations etc., which are set by the government which have been identified as
prominent causes of business failure (Hall and Young, 1991). These factors are not
under industry control and hence completely outwit the sphere of small and medium
companies influence.
2.9. Programmes in place to assist contractors in the USA
With the US recent economic success and low unemployment rate has become a
skilled worker shortage in most industries. The construction industry workforce situation
has been exacerbated by the passage of the state's $12 billion Educational Facilities
Construction and Financing Act (EFCFA) and the resultant unprecedented building
effort. This demand for skilled workers creates a unique opportunity for State
government, the State's employment and training system, local Workforce Investment
Boards, community- and faith-based organizations, and private sector contractors and
trade unions performing the construction to work together to ensure that all available
human resources are maximized.
39
Since under EFCFA the New Jersey Economic Development Authority handled school
construction contracting for the 30 Abbott school districts and school districts requiring
over 55% financial assistance, the information about the construction project locations,
time frames, contractors, workforce and skill needs becomes timely and accessible.
With the availability of a one-half of one- percent set-aside for outreach and training of
women and minorities, resources are available to customize a workforce development
strategy.
In addition, worker and skill shortage in the construction industry can be ameliorated by
the availability of state resources to:
• Redirect dislocated workers to the construction trades;
• Train individuals that don't currently meet construction industry basic skill
requirements;
• Assist workers seeking nontraditional employment opportunities to upgrade their
skill levels;
• Focus on working with immigrant populations as well as women and minorities;
• Provide career exploration opportunities in the construction trades to students
about to enter the workforce; and
• Utilize all potential sources of potential trained workers such as Workforce
Investment Act and Work First participants, Youth Corps, Youth Build, Juvenile
Justice Commission and Department of Corrections.
40
A number of construction-training programs and initiatives are either being planned or
are already operating in the State. These programs and initiatives include:
The objective of this workforce development strategy plan is to establish a five-year
framework for a more comprehensive, coordinated and systemic approach utilization an
existing infrastructure to target women and minorities for services and meet workforce
shortage and skill needs in the construction industry.
2.9.1. Workforce Development Framework
Under the leadership of the US Department of Labor and Workforce Development, in
conjunction with the State Employment and Training Commission and the other states,
as well as Economic Development Authority the state initiated a workforce development
strategy to accomplish two objectives:
1. Increase opportunities for women and minorities to acquire skills and
construction employment opportunities benefited them economically from the
construction projects in their communities;
2. Assisted contractors and trade unions in recruiting and training women
and minorities which filled their workforce needs under Construction School
Initiative.
41
2.9.2. State Level and Local Collaboration
All of the private and public sector stakeholders needed to be part of the planning and
implementation of a comprehensive and coordinated strategy which met the workforce
and skills shortages in the construction industry. Stakeholders included employers, their
associations, trade unions and councils, Abbott districts, community-based and faith-
based organizations, public and private vocational schools, state and local employment
and training programs, the Departments of Labour and Workforce Development,
Education, Corrections, and Human Services, the USDOL Bureau of Apprenticeship
and Training, the State Employment and Training Commission (SETC) and Workforce
Investment Boards (WIBs).
2.9.3. Marketing
The public was made more aware of the job and career opportunities in the construction
trades. It was important that this information included all levels of jobs in the industry, i.e
architecture, engineering, carpentry, masonry, welding, etc.
Stakeholders promoted such careers awareness through a variety of means. LWD
promoted careers in the construction trades on the NJN public television station. The
private sector hosted career days to develop curriculum kits such as was developed by
the Building Contractors Association of New Jersey and other States in the US. Grass-
roots organizations, including local Workforce Investment Boards, community-based
and faith-based organizations, in partnership with contractors and organized labour,
directly marketed career and job opportunities in their local areas.
42
2.9.4. Outreach to Urban Areas and Immigrant Populations
Statewide marketing was essential to inform a broad spectrum of people of the job
opportunities in the construction industry, an emphasis was placed on untapped human
resources. These groups included women and minorities, economically disadvantaged
inner city residents, ex-offenders, immigrant populations, and welfare recipients.
2.9.5. Training - Joint Public/Private Sector Ventures
Extraordinary situations, such as the school construction project and skilled workforce
shortage, required somewhat complex and customized solutions. The series of training
options listed provided a model to address the training needs of a diverse population,
from some of whom may have needed extensive training services and to others who
may have only need to be informed of the career opportunities in the construction
industry.
Through cooperative efforts, training providers geared their training programs to the
needs of the employers and organized labour. A joint curriculum-development process,
including both the training provider and the users of the products (i.e. contractors and
trade unions) ensured that the skills of the graduates met workforce needs.
All construction-training programs that received funds under the program that was on
the list of approved training programs, and all apprenticeship-training programs were
certified by the United States Department of Labour.
43
2.9.6. Women and Minorities Construction Training Program
LWD implemented Women and Minorities Construction Training Program in each of the
13 counties including Abbott school districts, as well as other components. The program
included the following components:
2.9.7. Community-Based Training Program
Operating under a consortium including community-based and faith-based
organizations, employers, trade unions, schools and the local One-Stop Career Center,
the county Community-Based Training Program will target women and minorities
residing in the Abbott districts and include the following elements:
• Outreach and community informational meetings on the construction industry;
• Assessment of interested individuals;
• Orientation and pre-training preparation;
• English as a Second Language instruction geared toward the construction
industry;
• Literacy training in reading and math delivered in the context of the construction
trades;
• Support services;
• Transportation; and
• Case management of trainees.
44
Based on an assessment and completion of the appropriate community-based training
program services, eligible applicants were referred to either school-based training or
registered apprenticeship opportunities. The community-based program provided
necessary transition services to eligible applicants in either school-based training or
registered apprenticeships.
2.9.8. School-Based Training Program
For individuals that had the appropriate aptitude and basic skill levels, the traditional
vocational training programs in the construction trades provided by public and private
institutions was used to prepare them for employment. Through local Memoranda of
Understanding between grantees operating Community-Based Training Programs and
the local One-Stop Career Center, individuals were referred to and received training at
state-approved training service providers through the LWD's Individual Training Account
subaccount established for the program. Women and minorities that were interested in
the construction trades directly accessed training through the program.
2.9.9. Work-Based Learning Program (Registered Apprenticeship Program)
Depending on construction schedules and worker availability, the most expeditious and
direct mode for workforce development was to move work-ready individuals directly into
employment at the construction sites. The registered apprenticeship program provided
an effective means for contractors and trade unions to deliver customized vocational
training with state-provided financial support.
2.9.10 Contractors License Bonds
45
A Contractor’s License Bond is a License and Permit Bond that is specifically designed
to help all types of contractors. Each trade of contractor is required by the state in which
they operate to carry a contractor license bond in order to be a licensed contractor,
whether it is a plumber, electrician, general contractor or any other contractor.
Contractor bonds will assure that the contractor will operate in compliance with all of the
local laws and statutes within the state that they are operating. Currently Contractor’s
License Bonds are being underwritten similar to other commercial surety bonds. They
use a variety of underwriting measures. Both claims on the contractor’s license and
personal credit history can be taken into account. In some cases the surety may ask for
personal and company financial statements. Though a Contractor’s License Bond is
issued by an insurance company, it is not insurance. The insurance company is
referred to as a Surety or Bond Company. A license bond is a contract between the
surety, principal (contractor), and the oblige (person for whom the contractor is working
for) and it provides financial benefit to the obligee on behalf of the principal, ensuring
that the award of money damages will be fulfilled in the event of a bond claim. The
Contractor’s License Bond is a low risk bond usually and it must be obtained by
contractors in order to satisfy their state’s licensure requirements.
2.10. Discussions of the USA literature
From the literature, it is evident that construction represents a big share of the industry
in the United States of America accounting 9 percent of the nation’s gross domestic
product. It also presents high levels of insolvency and failure, for this sector, is a serious
46
problem as the literature has revealed. Most of the failure, however, can be avoided.
For this to be possible, the causes have to be known. And the major ones are already
known. The major causes of failure are poor management and bad cash flow or
financial management. From the evidence of the impact of cash flow on failure, it is
clear that the causes of failure, even when they are known, do not appear to be taken
seriously especially in the smaller companies. Existing developments and methods in
cash flow forecasting and modeling can serve as a starting point for managers to rethink
their financial management.
Slatter (1984) makes a clear distinction between causes and symptoms of failure. He
describes symptoms as danger signals, which indicate what might be wrong with the
firm. Indications, however, do not provide a guideline for management action. Failure is
the outcome of a complex process and it is rarely dependent on a single factor (Arditi,
Koksal and Kale 2000). In a study of forty UK turnaround situations, Slatter (1984)
identified the principal causes of corporate decline. The factors identified are similar to
the factors identified by Argenti (1976). For these two authors, lack of financial control or
accounting information figure as one of the major causes of failure, after inadequate
management. Lack of financial control means the absence of inadequate application of
one of the following: cash flow forecasts; costing systems; budgetary control. There are
still many smaller construction firms in which all of them are absent (Slatter 1984).
Argenti (1976), in summarizing the work of several authors and professionals, identified
a big variety in opinions, and big differences in the lists of causes. Among the most
47
highlighted were poor understanding of cash flow and lack of capital. Poor financial
management is also viewed as a significant cause of failure by Boussabaine and Kaka
(1998) and by Kenley (1999).
In the context of the construction industry the failure of a firm may be considered to be
dependent on the failure of one or more of its projects. It is difficult, however to
determine both the critical success and the failure factors in projects (Russell and
Jaselskis 1992, Bellasi and Tukel 1996). Some authors described the financial values
as symptoms, rather than causes of failure (Argenti 1976, Slatter 1984). ‘Financial ratios
may not be very reliable because of the ‘creative accounting’ practices used by a failing
company’s management when attempting to hide the poor financial condition of the
company from outside investors and creditors’ (Argenti 1976). Symptoms of failure, for
Slatter (1984) are easier to detect than the causes. He describes the financial indicators
as the most commonly used symptoms, although there are also non-financial factors,
which are taken in account by bankers, receivers and consultants.
A detailed study of various construction companies in the USA in terms of how cash
flow is managed in each of their projects would provide interesting lessons about what
constitutes financial health for a construction company. This can also be applied to the
South African small and medium contractors. The examples of retrospective revisions to
company accounts are a serious challenge to current views on companies accounting
practices and cash flow control (Moyer, 2007).
48
The literature has also revealed that smaller companies do not always have the proper
financial management structure in places, which makes it difficult to manage the
company finances. These cases show how ratio analysis can be problematic, and not
sufficiently transparent. The issue of cash flow raises questions about how a company
could deal with it (Koksal and Kale, 2000). If company survival is to do with cash flow, a
contractor should be able to manipulate the payouts, in order to hold more money for
longer. However, it is clear that this way of raising working capital only passes bigger
problems down the supply chain. This apparent need of a better understanding of the
relation of financial structure and payment regimes is what motivates the research,
which will follow this paper in finding the causes of failure amongst small and medium
construction companies in the Free State Province of South Africa.
2.11. Conclusion
This chapter highlighted the literature from the United States of America, by different
scholars and commentators who have mentioned that operating a small or medium
construction company has possibilities of success and failure. The literature also
showed that even in the USA the SMME contractors have challenges that include
finances and the ability to run and manage a company.
49
Chapter 3
3.0. Literature review - Small and Medium sized Contractors in Ghana
3.1. Introduction
In this chapter, literature will be reviewed in reference to the Ghana past studies and
historical background, on the different causes of small and medium company failures
focusing highly on the managerial factors as well as financial management factors, in
the Ghanaian construction industry it will also look at the contractor development
programmes that are in place in Ghana.
3.2. Background of Ghana and the nature of its construction industry
Formed from the merger of the British colony of the Gold Coast and the Togoland trust
territory, Ghana in 1957 became the first sub-Saharan country in colonial Africa to gain
its independence. Ghana endured a long series of coups before Lt. Jerry Rawlings took
power in 1981 and banned political parties. After approving a new constitution and
restoring multiparty politics in 1992, Rawlings won presidential elections in 1992 and
1996, but was constitutionally prevented from running for a third term in 2000. John
Kufuor succeeded him and was re-elected in 2004. John Atta Mills took over as head of
state in early 2009 (CIA World-factbook, 2010).
50
3.2.1. Economy overview:
Ghana is plagued with unemployment, poverty and annual trade deficits. Ghana has a
population of 21 million, a work force of 10 million and an annual Gross Domestic
Product (GDP) of $48.27 billion. Unemployment is about 20% (World Factbook 2005)
and as much as 40% of the population is living below the poverty line (Trade Union
Congress Ghana (TUCG) 2004).
Ghana is well endowed with natural resources and agriculture accounts for roughly one-
third of GDP and employs more than half of the workforce, mainly small landholders.
The services sector accounts for 40% of GDP. Gold and cocoa production and
individual remittances are major sources of foreign exchange. Oil production at Ghana's
offshore Jubilee field began in mid-December, 2010, and is expected to boost economic
growth. Estimated oil reserves have jumped to almost 700 million barrels. Ghana signed
a Millennium Challenge Corporation (MCC) Compact in 2006, which aims to assist in
transforming Ghana's agricultural sector. Ghana opted for debt relief under the Heavily
Indebted Poor Country (HIPC) program in 2002, and is also benefiting from the
Multilateral Debt Relief Initiative that took effect in 2006. In 2009 Ghana signed a three-
year Poverty Reduction and Growth Facility with the IMF to improve macroeconomic
stability, private sector competitiveness, human resource development, and good
governance and civic responsibility. Sound macro-economic management along with
high prices for gold and cocoa helped sustain GDP growth in 2008-10. In early 2010
President John Atta Mills targeted recovery from high inflation and current account and
budget deficits as his priorities (CIA World-factbook, 2010).
51
Economic growth has remained strong with real GDP growth reaching an estimated
5.9% in 2010 compared to 4.7% in 2009. Growth prospects are even brighter as real
GDP growth of 12.0% and about 11.0% are projected for 2011 and 2012 respectively,
largely on account of the start of oil production in commercial quantities in December
2010 (CIA World-factbook, 2010). In addition, the country’s increasingly democratic
settlement and social stability have served to boost the confidence of investors, leading
to rising investment.
3.3. The Built Environment sector in Ghana
The According to the World Bank (1994), developing countries invest $200 billion a year
in new infrastructure -4% of their national output and a fifth of their total investment.
Regarding its socio-economic significance, the industry contributes about 50 per cent of
all investments in capital goods in many countries (Zawdie and Langford, 2000).
The construction industry contributes 21.9% of industrial output in Ghana and 3.2% of
GDP.(Baah-Nuakoh, 2003). With reference to the full statistics provided by Baah-
Nuakoh, it is obvious that the impact of the built environment sector as a whole is much
greater; including segments of the manufacturing, mining, quarrying, electricity and
water sectors. From observations and reference to legal and regulatory documents such
as the Building Regulations (ROG 1996) it would appear that the Ghanaian built
environment sector is modelled on the UK regulatory system.
Edmond and Miles (1994) investigated the role that SMME contractors play in the
construction industry in developing countries. Nowadays, many multinational firms are
moving into developing countries where a lot of markets are emerging (Wooldridge,
52
2010). Because such countries are mainly developing countries, there is a lot of
demand for all types of construction work (Jaselskis and Talukhaba, 1998). The
construction industry growth of a country is linked to an increase in productivity of
SMME contractors in the construction market. Specific areas where SMME contractors
could improve their efficiency and profitability, for example, site organization, were
identified. A key constraint was the need for up-grading the managerial and technical
competencies of the contractors. The first step would be to appraise the contractors of
skills gaps in their workmen. This would be followed by a properly planned programme
to meet the identified training needs. The dominance of foreign contractors creates what
is referred to as the “Missing Middle” of the contracting business. There is therefore an
opportunity for SMME contractors to develop their market share and to become medium
size. They would however have to improve to compete with large foreign contractors.
ILO (2006) proposed a set of guidelines for the development of SMME contractors in
developing countries. The study not only acknowledged the potential contribution of
SMME contractors to the growth and efficiency of the local economy, but also identified
major constraints facing the construction industry sector. The constraints were classified
as difficulties presented by:
• A particular market and the business environment in which the contractor is
operating (for example steady availability of work, material and labour);
• Client/consultants (for example incomplete design information and delayed
payment); and
53
• Shortcomings and inadequacies of the contractor (for example, knowledge and
familiarity with technical, legal, financial and managerial issues).
The ILO (2006) study highlights deficiencies in planning and management skills as the
greatest stumbling block among SMME contractors and advocates simple planning and
record keeping tools which make a marked difference in the success of SMME
contractors.
3.3.1. Performance of the Sector
From a low point in the 1970s and 1980s the share of construction in the GDP has
moved up from 4.5% in 1975 to 8.5% by the turn of the century and has been doing
about the same levels since. The sector grew by 10% in 2008 but registered a negative
growth rate of 1% in 2009 due to the global economic recession.
Preliminary estimates suggest that the construction sector was the worst hit by the
global economic crisis. Indications are that the construction sector contracted in 2009,
following strengthening growth in previous years that increased from 4.8% in 2001 to an
estimated 13.0% in 2008, which increased the sector’s contribution to GDP to 10%
(Mhango, 2010).
The Ghana Statistical Services (2011) reported that the construction industry
distribution of the Gross Domestic Product (at basis price) by Economic Activity has
been on the rise since 2006. It was at 5.7% in 2006 and rose to 8.8% in 2010, but in
2011 it fell down by 0.2% to 8.6%.
54
This means that the Ghana’s construction industry continues to experience steady
growth – in the past decade, the industry’s annual growth in 2008 and 2009 was 8.6 per
cent and 9.3 per cent, respectively. A more recent challenge has been the apparent
market saturation with cheap but low-quality imported building materials, which has had
a direct, negative impact on the local manufacturing industries.
3.3.2. The Construction Industry Set-up
Shakantu, Kajimo-Shakantu, Saidi and Mainga (2006) argued that the SMME business
sector consists of either family owned businesses employing very few people or self
employed people. Chilipunde (2007) also argued that the SMME contractor is a typical
sole-proprietorship firm or, in many cases, a family-owned business with few foremen
and mostly casual labour employed as needed. USAID (2009) defined the “micro
enterprise as a firm of 10 or fewer employees.” Kayanula and Quartey (2000) observed
that
“There is no single, uniformly acceptable definition of a small firm. Firms differ
in their levels of capitalization, sales and employment. Hence, definitions
which employ measures of size (number of employees, turnover, profitability,
net worth), when applied to one sector, could lead to all firms being classified
as small, while the same size definition, when applied to a different sector,
could lead to a different result”.
The first attempt to overcome this definition problem was by the Bolton Committee
(1971) as reported in Kayanula and Quartey (2000) “.....when they formulated an
55
“economic” and a “statistical” definition.” Under the economic definition, a firm is
regarded as small if it meets the following three criteria:
• “Has a relatively small share of their market place”;
• “Is managed by owners or part owners in a personalized way, and not through
the medium of a formalised management structure”; and
• “Is independent, in the sense of not forming part of a large enterprise”.
Shakantu and Kajimo-Shakantu (2007) continued the argument by saying that SMME
contractors encompass a very broad range of firms from established traditional families
employing 100 people down to self-employed informal enterprises. They state that there
are three (3) broad sets of enterprises represented in the SMME sector and these
include:
• Survivalist;
• Micro;
• Small; and
• Medium enterprises.
The definitions include:
� Berry et al. (2002) defined “survivalist enterprise as enterprises, which are mainly
informal, operated out of necessity to secure minimal income. Survivalists have
little capital and skills and minimal prospects for growth”;
� Berry et al. (2002) defined “micro enterprise as individual or family owned
businesses engaging in subsistence construction activity such as repairs,
renovations and extensions. Micro enterprises almost invariably operate in the
56
informal economy. These enterprises do not pay tax and employ only 1 to 5
individuals. Micro enterprises lack all the trappings of formality”; and
� Berry et al. (2002) defined “small, medium and micro enterprises as businesses
which, though mainly owner managed, employ between 5-10 and 100-200
people respectively. In the main, SMME contractors fulfil all the trappings of
formality”.
Shakantu and Kajimo-Shakantu (2007) argued that a large majority of SMME’s, are
micro enterprises and survivalist, and are concentrated at the very lowest end of scale.
3.3.3. Definition of Small Contractor in Ghana
There is no single definition of what constitutes a small business (Storey, 1994). This
stems from the fact that businesses vary in their level of capitalization, sales and
employment. Countries also differ in their level of economic development to justify the
generalization of a single definition. The Bolton committee (1971), in attempting to
address the problem, based on what they called ‘economic’ and ‘statistical’ definitions,
proposed various definitions for different sectors. The committee categorized
construction firms with 25 employees as small businesses. The Ghana Statistical
Service (GSS) considers firms with less than 10 employees as Small Scale Enterprises
and their counterparts with more than 10 employees as Medium and Large-Sized
Enterprises. Ironically, The GSS in its national accounts considered companies with up
to 9 employees as Small and Medium Enterprises (Kayanula and Quartey, 2000).
Eyiah (2001) argued that this definition could have been realistic, but for the wide range
of subcontracting in the construction sector. A firm may have 25 or fewer employees
57
and be involved in relatively sophisticated and expensive projects subcontracting, to
other contractors. That does not make it a small firm considering turnover, or equipment
and plant holdings. Eyiah and Cook (2003) identified financial class 1 contractors in
Ghana (made up mainly of foreign firms) as large contractors. They note that although
classes 2, 3 and 4 contractors are different, based on financial capabilities, they
possess similar characteristics in terms of managing their businesses hence they could
all be categorized as small and medium scale enterprises.
3.3.4. The Key Stakeholders in the Ghana construction Industry
The key stakeholders in the construction industry in Ghana are clients, professional
consultants and contractors. The government is a major user and consumer of the built
environment in the form of infrastructure, housing and tertiary buildings. Responsibility
for and jurisdiction over, the built environment is shared mainly between two
government ministries, namely, The Ministry of Housing and Public Works and the
Ministry of Roads.
Clients
In Ghana four main clients are distinguishable: the Government (being the major client),
Real Estate Developers, Investors and Owner occupiers. Between 2000 and 2008 the
government of Ghana identified construction as a priority sector for foreign and private
investment as part of its vision to promote the private sector as the engine of growth.
According World Bank (2003) as provided by Anvuur and Kumaraswamy (2006), an
approximate annual value of public procurement for goods, works and consultant
58
services amount to US$600 million. This represent about 10% of the country’s GDP.
This amount forms part of the bulk of the expenditure of all government agencies,
namely, the Ministries, the Assemblies, Departments, Institutions and other agencies.
Procurement of contracts must strictly follow the rules and regulation of the national
procurement law as stipulated in the Procurement Act, 2003 (Act 663). The main
procurement arrangement is the traditional competitive bidding. The government as a
client is represented by the Ministry of Road and Transport (for road works) and the
Ministry of Water Resources, Works and Housing in giving out projects.
The Real Estate developers are also the other group of clients who undertake large
investment in building. Usually, these take loans and undertake speculative buildings for
sale. Their performance is usually influenced by the lending situations in the country. An
interview with the head of the Ghana real estate developers association (GREDA) in
2007 revealed that they expect extra assistance from the government to support them in
their quest to contribute to solving the housing problem in the country. In particular, they
expected the government to have involved their association in its on-going affordable
housing programme. Investors are usually financial companies who decide to invest
excess capital in building construction. The social security and national insurance trust
(SSNIT) is one of the leading investor in housing in Ghana. Owner occupiers are
individuals who decide to build their houses to live in. It has been the tradition of
Ghanaians to buy lands from the chiefs (the chiefs are the custodians and owners of
land in Ghana, not the government) and hire skilled workers to build their houses for
them. This tradition has been entrenched mostly because successive governments
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failed to meet the housing expectations of individuals. Some of these owner occupiers
also rent out extra rooms in their houses for income. Therefore, some of these owner
occupiers are able to progress to the level of being private investors. The owner
occupiers, thus, constitute the largest number of clients in Ghana –almost every
Ghanaian is a potential owner occupier. They, usually, do not engage professional
consultants.
Professional Consultants
Professional consultants who are regularly engaged by the government and other
clients are Architects, the Quantity Surveyors (QS), Geodetic Engineers (GE), Structural
Engineers (St.E), Electrical Engineers (EE) and Services Engineers (SE). Geodetic
Engineers are often called when it is about roads construction. All these professional
are regulated by their professional institution, namely, Ghana Institution of Architects
(GhIE), Ghana Institution of Surveyors (GhIS) for the QS and GE and (GhIE) for the rest
respectively.
Contractors
Contractors in Ghana are grouped into eight categories (A, B, C, S, D, K, E and G)
according the type of works they undertake. These are:
(i) Roads, Airports, and Related Structures (A);
(ii) Bridges, Culverts and other Structures (B);
(iii) Labour based road works (C);
(iv) Steel bridges and structures: construction rehabilitation and maintenance (S);
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(v) General building works (D);
(vi) General civil works (K);
(vii)Electrical works (E); and
(viii) Plumbing works (G).
According to the Ghanaian Ministry of Water Resources, Roads and Transport (2009),
in each category, there are different classes and are grouped into 4, 3, 2 and 1 financial
classes in increasing order. The Ministry also states that Class 4 contractors can tender
for contracts up to $75,000; class 3 up to $200,000; class 2 up to $500,000. Class1 take
contracts of all amounts.
The industry is dominated by large number of small- and medium-sized firms, that is,
classes 3 and 4, especially in the categories D groups, E and G. This is mainly because
such firms are able to register with as little equipment as possible. Mostly, they are sole
proprietors, (few cases of partnerships), and are characterized by high attrition rate.
This is because they are highly influenced by the boom and slum nature of the industry
in Ghana. They are the least organized and because they lack the resources to employ
and retain very skilful labour, their performance is usually below expectation and they
have often been accused of producing ‘shoddy’ works. Because there are often more
jobs within their financial class than those above their limits, and because they form the
largest group, their performance impacts greatly on the performance of the industry.
Because of this, the classification by the Ministry has been criticized as being too
general and obsolete with the registration criteria, list of contractors and monetary
thresholds are not regularly updated (Eyiah and Cook, 2003; World Bank, 1996). The
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two upper classes (D1 and D2) are more organised and hence more stable, taking on
both bigger and smaller works. However, these firms (especially the D2 firms) do not
always employ the very qualified workers. The Ghanaian-based foreign contractors are
able to do this and hence performance better. Vulink (2004) notes that because of the
poor performance of Ghanaian local contractors most of the nation’s major projects are
usually awarded to foreign contractors. Assibey-Mensah (2008) attributes this to the
“non-businesslike culture” with which indigenous firms operate in Ghana.
Construction Procurement
Following the procurement law, construction activities in Ghana (government projects)
are organised essentially as a tripartite arrangement between the client, professional
consultants and the contractor. The clients, upon taken a decision to build, calls on the
chief consultant, usually, the Architect and the other consultants. They provide
professional advice to the government during the briefing stage. They then provide
design, appoint the qualified contractor, supervise the execution and advice for payment
and finally, conclude the project.
3.4. Problems in the Ghanaian Construction Industry
The construction industry around the world encounters various challenges and
problems that hinder its performance. However in a developing country like Ghana,
these problems are real along with a general condition of socio-economic pressure,
institutional weakness, shortage of resources, and payment delays (Barnor, 2010). The
industry, according to research, has performed poorly on innovation when compared
62
with manufacturing industries such as electronics due mainly to resistance to undertake
research and development. According to the World Bank (2001) report, poor quality of
work (processes and product) and cost overrun are identified as the major setbacks in
the Ghanaian Construction Industry.
Reviewing the works of Crown Agents (1998) and Westring (1997), Anvuur and
Kumaraswamy (2006) the performance of the construction industry in Ghana is poor
saddled with several problems ranging from contract administration, through complex
and lengthy payment procedure, delayed payments to that of project execution. It is
noteworthy that clients’ delay in payment to service providers (contractor and
practitioners) also affects payments of salaries and wages of their staff. This is because
sometimes this delays run into several months and thus, these employers find it difficult
to continue paying their staff.
Shakantu et al. (2007), Uriyo, Mwila and Jensen (2004), and Kapulula (2008) argued
that there are many barriers to the development and growth of SMME contractors.
These include:
• Environment regulations;
• Inadequate infrastructure;
• Business regulations;
• Tax and labour; regulations
• Skills shortage,
• Corruption;
• Political interference;
• Choice of technology;
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• Lack of collateral; and
• Keen competition for limited opportunities and unsteady supply of work.
The unskilled labours of the contractors also form the largest group and the lack of
guaranteed income, despite their commitment to work, shows an unpleasant side of the
industry that is seen as one of the largest employer of labour. Because of the
representation of construction workers in the working population of the country, such
situation reflects on the socio-economic life of ordinary Ghanaians. The reverse is also
true. This could be likened to a period of freeze on government projects. To some
extent, in Ghana, there are practical reasons to subscribe to the argument that
construction industry is a regulator of the economy Ashworth (2004).
Kayanula and Quartey (2000) conducted research on the policy environment for
promoting SMMEs in Ghana and Malawi, finding that SMMEs face a variety of barriers
and constraints. They argued that factor availability and cost are the most common
constraints faced. Constraints and barriers faced by the sector include:
• Lack of access to appropriate technology;
• The existence of entrepreneurial oppressive laws;
• Regulations and rules that impede the development of the sector;
• Weak institutional capacity; and
• Lack of management skills and training.
Investigation revealed that both the Ghanaian Ministry of Roads and Transport (MRT)
and the Ministry of Works and Housing (MOWH) do not have an up-to-date list of
contractors operating within their sectors. Many contractors could be identified on the
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register list, but have seized to operate for several years (Eyiah and Cook, 2003). If
after registering their businesses contractors cannot be guaranteed government
projects, and have to go through stringent and costly procedures for further licensing
then the incentive to formal legal status would be reduced. The affected firms are thus
encouraged to operate without license in the informal sector, which provide the
opportunity for foreign firms to dominate the industry. Lack of legal status makes it
difficult for such firms to get access to formal services including established financial
institutions. Eyiah and Cook (2000) also found that emerging entrepreneurs who have
graduated from the universities, with the necessary managerial and technical know-
how, that could have helped nurture local small contractors are discouraged from joining
the industry.
3.5. Managerial Factors in the Ghanaian Small and Medium Construction
Companies
The local contractors in Ghana lack managerial capability (Addo-Abedi 1999 & Eyiah
and Cook 2003) with regard to financial, material and personnel resources (Osei-Bonsu
1992). A study done by Laryea (2010) revealed that contractors described there was a
lack of qualified construction professionals with basic knowledge in construction works.
The study also revealed that there is also a problem with supervision and managerial
aspects of construction work in Ghana. Growth and performance of SMEs in Ghana
have been found to be hampered by several obstacles including: poorly developed
infrastructure; poor business climates; deficiencies in managerial and technical
expertise; lack of demand for SME products and services; and an acute lack of access
65
to credit (Savage, 2007). Rogerson (2000) argued that, effectiveness of support
programmes for SMEs ultimately relies on government commitment as even the best
designed policies are doomed to failure if they are not constantly evaluated for their
impact and effectiveness and reformed accordingly.
Kayanula and Quartey, (2000) stated that lack of entrepreneurial & business
management skills as well as Lack of managerial know-how places significant
constraints on SME development. Even though SMEs tend to attract motivated
managers, they can hardly compete with larger firms. The scarcity of management
talent, prevalent in most countries in the region, has a magnified impact on SMEs. The
lack of support services or their relatively higher unit cost can hamper SME efforts to
improve their management because consulting firms often are not equipped with
appropriate cost effective management solutions for SMEs. Furthermore, absence of
information and/or time to take advantage of existing services results in weak demand
for them. Despite the numerous institutions providing training and advisory services,
there is still a skills gap among the SME sector as a whole. According to Daniels &
Ngwira (1993), about 88% of Malawian SMEs desired training in various skills but as of
1992, less than 6% have actually received it. In Ghana, a lot has actually been achieved
in this regard, though there is still room for improvement.
Management expertise is claimed to be one of the scarcest resource in the construction
industry (Myers, 2004 citing Hillebrandt, 2000, and Ramokolo and Smallwood, 2008).
The lack of managerial know-how places significant constraints on SMME contractors’
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development and growth (Kayanula & Quartey, 2000, and Ramokolo and Smallwood,
2008). Even though SMMEs tend to attract motivated managers, they can hardly
compete with larger firms. The lack of support services or their relatively higher unit cost
can hamper SMME effort to improve their management because consulting firms are
often not equipped with appropriate cost effective management solutions for SMMEs.
Furthermore, absence of information and/or time to take advantage of existing services
result in weak demand for them.
One universal problem facing SMME contractors is the inability to estimate cost,
compile tenders and assess the effects of inflation; this clearly reflects the lack of
training and experience in business and financial management. In the absence of this
experience, SMME contractors tend to rely on intuition based on previous experience
(Chilipunde, 2007). They also overestimate labour productivity and material transport
costs. These vary from one contract to another. Fraser (1989) gives an overview of the
situation:
“The lack of costing skills has led to the under-pricing of contracts. An African
Builder also faces heavy financial losses at the end of the project by virtue of
the fact that he fails to incorporate costs associated with the overheads and
contingencies in compiling and quoting for tenders. What most African
contractors do, and are very confident of, is the use of the standard rate per
m2 as a means of estimating. This is reinforced by the popular census as to
what constitutes an acceptable township rate and the willingness of the
competitors to undercut any contractor who tries to increase his rate. This
method of pricing leads to most contractors ending-up with under-pricing,
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since they tend to use the same rate in all their projects, irrespective of the
finishes, structure, allocation of resources and the nature of the foundations.
To mention the worst part, “township rates” in some cases have remained
unchanged for the past five years, irrespective of inflation prevailing today and
the real value of the Rand in the economy.”
Merrifield (1992) noted that black SMME contractors are generally unable to manage
business risks.
El-tr and Kagari (1994) proposed a framework for monitoring the development of SMME
contractors in Atlanta and deduced that many people started constructing business
without construction education background, market experience or managerial talent
needed to run a construction operation. Some of the skills badly needed are:
• Estimating knowledge;
• Ability to read drawings and specifications;
• Ability to schedule construction activities; and
• Proper accounting/book-keeping skills essential to keep track of the job and
performance cost and profit.
3.6. Financial Management Factors in the Ghanaian Small and Medium
Construction Companies
Hernes (1987) identified that the local contractors in Ghana lack an efficient financial
management strategy. According to Kayanula and Quartey 2000, capital is a major
problem facing SMMEs in Malawi and Ghana. Carson (2006) argued that the difficulties
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that SMME contractors have in attracting finance; strongly affect the performance of
their work.
Access to finance remained a dominant constraint to small contractors in Ghana. Credit
constraints pertaining to working capital and raw materials were cited by respondents
(between 24% and 52% in Parker et al, 1995). Aryeetey, Baah-Nuakoh, Duggleby,
Hettige and Steel (1994) reported that 38% of the SMEs surveyed mention credit as a
constraint. This stems from the fact that SMEs have limited access to capital markets,
locally and internationally, in part because of the perception of higher risk, informational
barriers, and the higher costs of intermediation for smaller firms. As a result, SMEs
often cannot obtain long-term finance in the form of debt and equity. Small contractors
have difficulties in gaining access to appropriate technologies and information on
available techniques. This limits innovation and competitiveness in the construction
industry. Besides, other constraints on capital, and labour, as well as uncertainty
surrounding new technologies, restrict incentives to innovation. 18% of the sampled
firms in Aryeetey et al (1994) mentioned old equipment as one of the four most
significant constraints to expansion.
Small and medium sized contractors in Ghana emphasized the high cost of obtaining
local raw materials; this may stem from their poor cash flows (Parker et al, 1995).
Aryeetey et al (1994) found that 5% of their sample cited the input constraint as a
problem. It was also found that input constraints vary with firm size.
According to Buys (2006), one of the biggest problems in the construction industry is
that of the endless disputes between the client, the professional team and the building
contractors regarding the valuation and payment of the monthly interim certificates.
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Cheung, Tan, Ndekugri and Harris (2000) noted that resolving disputes has been part of
routine management function of project participants. Bonhen (1999) stated that the most
significant issues facing the construction manager before litigation or arbitration is
invoked are the pricing of variations, disputes regarding payment certificates and the
repudiation or cancellation of the contract.
Carson (2006) found out that SMME contractors working on labour-based projects often
have limited access to formal financing services. Operating in a country where interest
rate ceilings and collateral generate a gap between small businesses and banks, SMME
contractors are bound to rely on informal and ad-hoc types of financial services. Within
any developing country, skills transfer initiatives do not occur in a vacuum. The
business environment has a key role to play in the development of the transport sector.
The legal framework and policies around investment and bank lending are fundamental.
Liberalised policies by banks and other financial institutions will only result from effective
communication between the sector, government and the banking community.
According to Carson (2006), difficulties that SMME contractors have in attracting
finance strongly affect the performance of their work. They lead to a variety of sub-
optimal situations where construction operators delay construction, work with the wrong
type of equipment and sometimes pull out because of sudden financial problems.
SMME contractors tendering for construction contracts mostly use their own funds and
family savings to invest in equipment. A large share of financial resources used for
procurement comes from non-construction activity such as transport and trade. In a
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situation where an entrepreneur has insufficient funds to purchase new equipment, the
contractor will obtain second-hand machinery and trucks on the local market.
Carson (2006) observed that supplier credit seems to be the most common source of
external financing for equipment among SMME contractors. Competition on the supplier
market defines whether equipment vendors sell on credit and what they charge in terms
of down payment and interest. In many rural areas, the demand for rentals exceeds
supply, making it difficult for SMME contractors to rent appropriate and well maintained
equipment. It is thus vital to briefly discuss the financing of the projects in some selected
developing countries. Mahommed (2005) agreed with the earlier observation that
contractors face difficulties in financing construction projects due to financial problems;
delay in progress payment, no advance payment and cash-flow problems.
Shakantu and Kajimo-Shakantu (2007) reported that efforts to promote SMME access
to finance might have more impact on development and growth, but access is limited
and cost of capital is high. In addition to insufficient access, high interest rates also pose
a constraint to micro enterprise growth. In addition, Shakantu and Kajimo-Shakantu
(2007) stated that there are core difficulties seen in terms of discrimination by financial
institutions against micro enterprises with little collateral, difficulties in accessing
information and lack of market exposure. Nissanke (2001) observed that the
inadequacy of external finance at the critical growth/transformation stage of micro
enterprises deters growth potential and expansion.
Kayanula and Quartey (2000) found access to finance remained a dominant constraint
to small scale enterprises in Ghana and Malawi.
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“Credit constraints pertaining to working capital and raw materials were
cited by respondents”
(between 24 percent and 52 percent in (Parker, Riopelle and Steel 1995). Aryeetey,
Baah-Nuakoh, Duggleby, Hettige and Steel (1994) reported that “38 percent of the
SMMEs surveyed mention credit as a constraint. In the case of Malawi, it accounted for
17.5 percent of the total sample” (Daniels and Ngwira 1993). This stems from the fact
that SMMEs have limited access to capital markets, partly because of the perception of:
• Higher risk;
• Informational barriers; and
• The higher costs of intermediation for smaller firms.
As a result, SMMEs often cannot obtain long-term finance in the form of debt and
equity.
ILO (1987) identified access to finance as the major problem to SMME contractors,
mainly due to their inability to fulfill collateral requirements. Howorth and Wilson (1999)
noted that some of the reasons for SMME contractors’ failures have been the result of
poor or careless financial management.
3.7. Contractor Development in Ghana
Because of the inadequacies of local contractors in many developing countries (most of
whom are small firms) foreign construction firms are usually engaged to undertake most
large projects (Ofori, 1991; Adams, 1993: Aniekwa, 199). These firms prefer to employ
expatriates even where qualified local professional manpower is available (Osborne,
1984), and to import other resources required for their operations. Writers of contractor
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development argue that most developing countries can no longer afford dependence
solely on imported resources to execute their construction works or to maintain existing
ones to meet these demands because of the direct bearing on the value-added.
Although generally, contractors in developing countries have a poor reputation (Edmond
and Miles, 1984; Miles and Ward, 1991), it becomes imperative to develop small
contractors, particularly, in situations where foreign contractors feel reluctant to engage
themselves in projects in the rural areas (where infrastructure are most needed)
because of their financial unattractiveness (Kirmani, 1988). Miles and Ward (1991), in
their study in Ghana, sponsored by the ILO, justified their focus on small contractors on
the grounds that:
• They are powerful generators of income and employment
• Without a network of efficient small contractors rural health centres, villages water
suppliers, low-cost roads and similar projects are often difficult or expensive to provide
• The more soundly based the small-scale sector can be made the better will be the
prospect for the development of medium and large-scale national firms.
The engagement of foreign contractors is not being disputed, for reasons given earlier,
but many are of the view that to enhance efficiency in implementation of the
construction required to stimulate growth, development of local contractors must be
given due consideration (Eyiah, 2004). Their effective participation, Adams (1993)
notes, would increase competition among themselves; they would in turn make
increased use of local materials and resources and also create job opportunity for local
professionals.
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3.7.1. Ghana Labour Based Programme
The objectives of the Labour Based Programme in Ghana are threefold.
• To improve rural accessibility
• Increase contracting capacity
• Create rural employment
The project commenced in 1986 and to date 93 contractors have been trained under the
scheme to work on labour based road rehabilitation and maintenance contracts. It is
mainly funded by UNDP and the World Bank and has resulted in the rehabilitation of
1,400km of rural roads at a cost of US$14 million.
The programme is promoted to contractors by a newspaper advertisement campaign
and selection is based on education, previous experience and locality of business.
There are three stages to the training process which addresses the needs of both the
contractors and Department of Feeder Roads (DFR) staff;
Stage1. 20 weeks of classroom and fieldwork training
Stage2. 4 months trial contract of 5 km carried out under supervision
Stage3. 4 year development with on-site training undertaking a 20
km contract per annum
Following their period of initial training (stage 1.) the contractors are provided with a set
of equipment, worth US$150,000 financed through a bank loan which is repaid over the
following 4 year period (Opoku, 1995).
This loan repayment represents a significant element of the contractors’ overhead as
the bank interest rate in Ghana is about 35%. In order to ensure that contractors are
able to repay their loans the DFR guarantees contracts will be awarded for the first 4
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years after training. Each contract lasts approximately one year and has a value of
US$240,000. The project attempted to operate these contracts under a competitive
tendering system, however, the formation of cartels forced the DFR to adopt a schedule
of rates for the initial 4 year period. Following the repayment of the equipment loan
contractors competed for work through competitive tendering in an open market
3.7.2. The Ghana Contractor Development Project
The Ghana contractor development project first focused on the practical training of
contractors’ site supervisors. In addition, the contractors themselves received
management and business guidance aimed at increasing their management abilities
and work productivity. At a later stage, specific contractor training for senior executives
was provided in a structured manner, partly through a local management institute and
partly through the government training establishment
Four to five supervisors per contractor were trained in full rehabilitation on site over an
18-20 week period. The contractors themselves also attended some management
training sessions. More formal management training was only introduced after the
programme had expanded significantly, eight years after the start of the pilot project.
Training in maintenance was also formally integrated at this later stage.
One approach to practical training for labour-based roadwork’s which has been used in
several projects is the “Ghana model” and consists of:
• A demonstration model road site (5 - 10 km) managed by the contracting agency
and technical assistance staff on which all the appropriate labour-based activities
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are taught to contractors and (usually) supervisory staff of the contracting
agency. This is effectively a direct labour operation. Trainees are assessed and
awarded certificates of competence;
• A trial contract (around 5 km) is given to each contractor at fixed rates based on
the productivity achieved on the model site. The contracting agency gives close
advisory supervision and the contractor's performance is assessed;
• A full contract (10-20 km) is awarded to each competent contractor, still under
fixed rates (which may be adjusted following the trials), but with otherwise
standard contract conditions. The contracting agency's advisory role is greatly
reduced as the contract proceeds.
These three stages (up to two years duration) constitute the full training programme.
Project experience indicates that:
� a comprehensive training programme for contractors can best be divided into
four main phases:
� preparation, consisting of all necessary arrangements to start the actual
training process;
� training implementation, comprising the formal courses and field training;
� trial contract, where contracts are issued on a trial basis; and
� mentorship, which provides the contractors with support and guidance
during their initial period as independent contractors.
� The necessity for, and duration of, each phase is determined by the training and
support needs of the various categories of trainees and the kind of contract work
they will be required to do;
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� The majority of potential course participants tend to have an existing level of
work experience which needs to be utilized. Generally, contractor trainees have
businesses or jobs and cannot be absent for a long period to attend
comprehensive training courses. This implies that the training should:
� be as short and concentrated as possible in terms of time;
� be strongly linked to the work experience and the problem-consciousness
of the participants;
3.7.3. Ghana Labour-based Feeder Roads Programme
The Ghana labour–based feeder roads programme was started in July 1986 as a
component of the Fourth Highway Project under the sponsorship of the International
Development Association (IDA). The following were the objectives of the
programme:
a) To improve accessibility to rural areas through the large scale application of a cost-
saving approach to feeder (rural) road construction, improvement and maintenance,
using local resources;
b) To create a capacity within the Department of Feeder Roads (DFR) to manage
labour–based contractors;
c) To create the capacity for private contracting firms to efficiently apply labour–based
methods to road construction, improvement and maintenance, and
(d) To generate rural employment opportunities.
In order to achieve the above objectives:
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a) DFR and contractors' supervisory staff were trained in the application of labour–
based technology for the rehabilitation and regravelling of gravel-surfaced roads;
b) Each contractor was provided with light equipment and assorted hand tools
estimated at US $150,000;
c) Each trained contractor was assured of contracts for the first 48 months after
training, i.e. the equipment loan repayment period, and
d) In order to facilitate the design and supervision of works, DFR was provided with
technical and logistic support.
Training
The following selection procedure is followed:
a) In the beginning, newspaper advertisements were put out for applicants. Thereafter,
the practice was discontinued due to the large number of applications;
b) The applicant receives an application form and returns it after responding to the
questionnaire.
c) The application is then evaluated against set criteria.
The labour-based training started in April 1987. A common training programme was
run for the DFR and the contractors, each of whom sponsor four (4) supervisors. It
lasted for about eighteen (18) weeks. The initial training covered the rehabilitation
and regravelling of gravel surfaced rural roads. However, in 1993, a short, 3-week
training programme, specifically designed for routine and recurrent road
maintenance works, was introduced. The contractors who were trained earlier were
invited to avail themselves of the opportunity for routine maintenance training. By
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February 1995, the programme had trained eighty one (81) contracting firms for
roads rehabilitation and regravelling. Six (6) of the firms are owned and managed by
women.
Contractor Profiles
The selected firms were generally small companies engaged in such businesses as
trading, farming, the running of small restaurants, and small building and civil
engineering contracting. Fifty-five percent (55%) of the Managing Directors have
basic education, about ten percent (10%) each are civil engineers and other
graduates, with the rest being technicians.
The selection of firms was based on a few years of demonstrated competence in
some construction works and a registered office in the project area. After training,
most contractors have performed very well, though a few have done badly. The
payback rate for the loan has been slower than expected, though repayment is in
progress.
Arrangements for Contractor Support
Tools and equipment are advanced to each trained contractor as a loan which is
administered by a Bank. The loan is repayable within forty eight (48) months.
Each trained and equipped contractor is awarded a contract of about US $240,000
each year, for the loan repayment period. The contract may be for either
rehabilitation/regravelling or a combination of rehabilitation/regravelling and
routine/recurrent maintenance works.
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Funding for tools and equipment has been provided by the International
Development Agency (IDA of the World Bank), Danish International Development
Association (DANIDA), United States Agency for International Development
(USAID) and the Government of Ghana (GOG). Technical assistance has been
provided by the ILO with funding by the United Nations Development Programme
(UNDP). The civil works contracts have been funded by DANIDA, USAID and GOG.
3.8. Success factors and lessons
Drawing on the Ghana’s success story of labour-based infrastructure delivery through
contractor development programmes from the study done by McCutcheon (2008), the
following lessons can be advanced to help implement similar programmes elsewhere:
(i) The Feeder Roads Programme has demonstrated the technical feasibility,
financial viability and appropriateness of using employment-intensive
methods for infrastructure provision without compromising quality of
product.
(ii) Successful development of labour-based small contractors’ hinges on
effective and relevant training received (not just life-skills), provision of
necessary resources and continuity of work. The government’s crucial
responsibility is to strengthen its contract management capacity.
(iii) Selection of contractors and their permanent staff (supervisors,
mechanics, artisans and storekeepers) should be based on threshold entry
level of numeracy and literacy where appropriate. This will improve training
efficiency and effectiveness.
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Late payments of certified work pose a significant risk to the success of
employment-intensive contractors. Thus, to eliminate cash-flow problems
and unrest at construction sites, and improve contractor’s ability to attract
further funding from financial institutions, timely payment is crucial.
(iv) Decentralisation is good to promote active participation of local
communities in developing a practical feeder road maintenance system
(World Bank, 1999) and in addition to fostering ownership and
responsibility for maintenance needs. However, the execution was
premature because of inadequate consideration given to capacity issues
and resource (human capital and funding) needs at the District assemblies
for efficient maintenance of the roads (ILO, 2005). As summarised by the
World Bank, the decentralisation process was tainted by (a) weak
organisational capacity at the district level and reluctance to devolve
accountability to local constituents; and (b) political interference at the
district level.
(v) To improve performance: (i) involve contractors in selection of equipment
(ii) timely payment to labour-based contractors for work accomplished, (iii)
local production of tools (if quality can be ensured).
(vi) However, as noted by Ashong (1996), high premium should be placed on
training and supervision. In monitoring trained personnel, appropriate
feedback mechanisms should be instituted for timely response to the day-
to-day technical and management needs of already trained foremen and
supervisors in the field.
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(vii) Given that small contractors find it difficult to secure bank loans for their
work, governments should consider provision of light equipment on a lease
basis.
(viii) Evaluation should form an integral component of every employment-
intensive infrastructure programme. In addition, recording and reporting
systems should be strengthened in order to ease difficulties associated
with programme evaluation.
(ix) For continuity of programmes and effectiveness of poverty alleviation,
developing countries should endeavour to raise their own funds and move
away from over-dependence on foreign aid.
(x) Small contractors should be categorized by their developmental
requirements. Assistance and support schemes should then be
specifically designed to address the needs of companies in each group. In
this categorization, the most important criterion would appear to be the
nature of the owner-manager, owing to the key role such a person plays in
the performance of and prospects for, the company.
Similar to the Kenyan Rural Roads Programme, the Ghana contractor development
programme was initially successful due to a number of integrated factors. These include
a Ghana government’s policy decision to use labour-intensive methods for its feeder
roads programme. Funding from various donors spearheaded by the World Bank
enabled good preparation together with relevant training to take place. The programme
was institutionalised within an existing Roads Department. Nonetheless, lack of
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commitment expressed by late payment of contractors and inadequate preparation for
decentralisation of the programme (after almost one-and-a-half decades of success)
was a serious setback. The programme was dealt a further blow when dwindling
funding ushered in a period of severe cash flow problems. Many small contractors were
therefore indirectly forced out of the programme.
Notwithstanding the difficulties and shortcomings the Ghana contractor development
programme for executing labour-intensive construction works became a model and
reference point for other sub-Saharan countries.
Many writers have cited that construction industry in general plays a very important role
in the socio-economic development of every country, therefore the development of
small contractors in each country should be pursued with a two-pronged strategy
(Kobole, 2009). Efforts should be made to improve the capability and capacity of
contractors, this will make them better able to deal with the problems and constraints
resulting from the nature of their operating environment, where the construction industry
has a very high company failure rate.
3.9. Discussions of the Ghana literature
Rwelamila (2002) and Mashamba (2001) agreed that the SMME sector in the Southern
African construction industry needs the support of the relevant industry stakeholders
such as government, training and research organisations. According to Mashamba
(2001), estimates show that foreign contractors and consultants hold 70 percent of the
construction market in the Southern African Region.
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Dlungwana and Rwelamila (2003) stated that much of the contractor development effort
in South Africa and in other African countries focuses on providing work opportunities to
as many contractors as possible, instead of assisting a limited number of contractors to
build long-term sustainability. Much of this effort is also characterised by ad hoc
development interventions that do not promote a culture of continuous improvement and
long-term growth of contractors.
Khoza (2008) suggested that inconsistent procurement and delivery practices by clients
and consultants also impede the development of contractors. These include:
� Poor designs;
� Flawed tendering procedures;
� Processing of interim and final payments;
� Cash flow and ultimately sustainability of contractors;
� Poor client procurement practices also include focus on lowest price,
undermining project delivery and the performance of contractors; and
� The practice of promoting the lowest price is further encouraged by tough
competition due to an oversupply of contractors.
Contractors in Malawi, like many of their counterparts in other developing countries, are
faced with a number of constraints and challenges that affect their growth. A seminar
organized in 1997 on “Challenges and Opportunities in the Construction Industry in
Malawi” identified ten issues which impact adversely on the performance of SMME
contractors (Nyasulu, 2000). Among them, the following were considered to be critical:
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� A low share in work opportunities (10 percent for civil works contractors);
� Poor quality of services and products;
� The lack of a policy on the construction industry;
� Inadequate commitment, particularly from professional constituencies, in
addressing contractors training; and
� Inadequate financing and credit facilities.
Other issues identified include:
� Inadequate training facilities; a projected long-term shortage of human resources;
lack of equipment corruption and high taxes;
� Medium-sized projects continue to decline, access to credit remains a serious
problem for the majority of contractors, and the problem of construction
equipment affects the performance of SMME civil contractors throughout the
country; and
� On the basis of contractors’ annual returns submitted to the NCICM for the year
1999, about 73 percent of registered contractors complained of poor work
opportunities, 56 percent complained of financial problems, and 26 percent cited
lack of equipment as a problem.
These problems are not unique to Malawi only but to other developing African countries.
In a recent World Bank (2000) project undertaken by the NCICM that studied the
development of SMME contractors in construction industry in ten Southern African
countries. It was identified that the aforementioned problems were hindering the
development of SMME contractors.
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Quagraine(2007), explained a concept that should be used in the Ghanaian
construction industry which is the family-based labour management FBLM concept
which is made up of 3 main components:
1. A Family-Based Team Work (FBWT) concept (a team work concept that would have
its root in the Ghanaian culture) to help attract more local contractors and workers to the
program and also to facilitate an efficient management.
2. Improved management strategies including recruitment, training, work method,
communication and reward systems to complement the FBWT concept.
3. Adopted management strategies namely, the roles and responsibilities matrix
strategy and other knowledge transfer strategies to complement the FBWT concept.
The FBLM concept which is designed to be rooted in efficient management systems
and the local culture of Ghana would have the potential of creating between 23,000 and
34,000 jobs in the first year of its implementation when an increment of 10% of the $174
million is annually invested in the labour-based road rehabilitation program (Quagraine,
2007). The FBLM concept would also help reduce Ghana’s dependence on imported
equipment, especially for road and other construction activities. It would help Ghana to
conserve its scarce foreign exchange to boost internal investments.
The family-based approach would seek to upgrade the financial training program of the
current approach to focus on cash flow analysis, cost control and budgeting. Knowledge
in cost control helped program participants to control expenditure on resources used
including materials, labour, hand-tools and light equipment. The cash flow analysis
training program would also help contractors with timely payments to avoid labour
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dissatisfaction. They lead to a variety of sub-optimal situations where construction
operators delay construction, work with the wrong type of equipment and sometimes
pull out of projects or close down their companies because of sudden financial
problems. Greenstone (2007) cited that efforts should be made to improve the capability
and capacity of contractors, this will make them better able to deal with the problems
and constraints resulting from the nature of their operating environment, where the
construction industry has a very high company failure rate.
3.10. Conclusion
In this chapter, literature from Ghana was discussed and many writers have cited that
construction industry in general plays a very important role in the socio-economic
development of every country, therefore the development of small contractors in each
country should be pursued with a two-pronged strategy (Kobole, 2009).
As it has also been mentioned in the literature most commentators found that the main
factors that contribute enormously in the Ghanaian construction company failure are
lack of work opportunities, managerial, financial, and economic environmental factors. It
was identified that there are development programmes in place to support and assist
the contractors.
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Chapter 4
4.0. Literature review - Small and Medium Sized Contractors in South Africa
4.1. Introduction
In this chapter literature will also be reviewed with the intention to conceptualize the
problem statement and objectives of the study. In particular this literature review will
include reference to the past studies and historical background, on the different causes
of small and medium company failures, in the South African construction industry.
4.2. Definition of Small and Medium Business in South Africa
Small business in South Africa has been grouped as Small and Medium Enterprises
(SME), and also as Small, Medium and Micro Enterprises (SMME’s). The National
Small Business Act defines SME’s as “a separate and distinct entity that cannot be part
of a group of companies” (Government Gazette 377, 1996). It is managed by its owners,
and can be a sole proprietorship, partnership, a close corporation, co-operative or a
company. The Government’s white paper on promotion of small business acknowledges
important differences and needs between survivalist and micro enterprise on the other
hand, and small and medium enterprises on the other.
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4.3. Definition of Contractor in South Africa
According to the JBCC Series 2000, a Building Contractor or Contractor means the
person or persons, partnership, firm or company who’s tender for certain building work
has been accepted. The definition Contractor includes his or their heirs, executors,
administrators and/or successors. The definition Contractor further includes any
representative of the Contractor appointed by him in writing or recorded in the minutes
or records of the first site meeting for the purpose of receiving on his/her behalf
communications from the Employer.
According to the CIDB Act 38 of 2000 no public sector client may award construction
contracts to a contractor who is not registered. The Register grades and categorizes
contractors according to their capability to carry out construction projects. There are 9
different grading levels according to which contractors can be registered. A grade
determines the maximum Rand value of a project as well as the type of construction
works a contractor is capable to perform. The table below shows the contract value
each contractor can undertake in each grade as at the end of the financial year, 31
March 2011:
Source: CIDB Annual Report, 2010/11.
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Structure of the Contractors in South Africa
CATEGORY
ECONOMIC SECTOR
ANNUAL TURNOVER
MANAGEMENT SKILLS LEVEL
SMALL
FORMAL
LESST THAN R10M
VERY POOR & FAIR
INFORMAL
MEDIUM
FORMAL
R10M – R50M
POOR, FAIR, GOOD
&VERY GOOD INFORMAL
LARGE
FORMAL
ABOVE R50M
FAIR, GOOD &VERY
GOOD Source: CSIR, April 2002
Small Building Contractor – In South Africa, the National Small Business Act (1995)
defines a small contractor as having fewer than 50 persons in fulltime employment, a
turnover of less than R 5 million and a gross fixed asset value of less than R 1 million
Medium Building Contractor – In South Africa, the National Small Business Act (1995)
defines a medium contractor as having fewer than 200 persons in fulltime employment,
with a turnover of less than R 20 million and a total gross fixed asset value of less than
R 4 million
4.4. History of Business in South Africa
When the African National Congress (ANC) came into power after the 1994 elections,
which was a big political turning point government, it inherited the highly unequal
distribution of the benefits of growth from the apartheid government. Apartheid
produced an almost entirely white business elite. This elite was highly concentrated in
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terms of corporate ownership and control. This inequality was highly radicalized, in that
apartheid had ensured that white South Africans had skills, opportunities and high
incomes, whilst many black South Africans lacked skills, faced few opportunities, and
remained in poverty. The apartheid state shaped the business environment directly
through parastatals in (especially) rail and air transport, iron and steel, electricity, and
telecommunications (Nattrass and Seekings, 2010).
The ANC led government put strategies in place to create influential small black
businesses to have access in the formal economy. This was aimed at broadening the
economic base of South Africa by promoting small and medium enterprises through the
Reconstructive Development Programme (RDP). The government expanded over the
years with objectives of empowering businesses by training, implementing affirmative
action as well as affirmative procurement and equity ownership (van der Nest, 2004).
The introduction of Black Economic Empowerment (BEE) came in place in 1994 and
was enhanced in the early 2000’s which was a process aimed at redressing the
imbalances in the ownership and control of South Africa’s economic resources by
increasing black participation at all levels of the economy. This would be done by job
creation, poverty alleviation, specific measures to empower black women, education,
skills transfer and management development, meaningful ownership and access to
finance to conduct business. Black economic empowerment can also be seen as a way
to deepen the economy and stimulate growth in the country by releasing the economic
potential of the black population (van der Nest, 2004).
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New complimentary legislative instruments that expanded through the existing models
were introduced. The Deputy Minister of Public Works N. Kganyago (2005)
acknowledged that these included Broad-Based Black Economic Empowerment Act and
codes which enabled private sector initiatives, the Construction Sector Charter which
concretized industry commitment and the register of contractors which created a
framework for targeting a sustainable development. At the same time, an array of
instruments and programmes had been put in place including learnerships, training and
mentorship, financial packages, procurement, joint-ventures and partnerships,as well as
Expanded Public Works Programme (EPWP). All these instruments and programmes
provided an opportunity to improve an opportunity to improve current development
outcomes and for addressing many of the identified challenges and unintended
consequences.
There was however a macro challenge in that the South African construction industry
needed to double its output over the next ten years (Kganyago, 2005). That required
enterprises to grow, consolidate, be profitable and nurture skills. In doing so, jobs would
be generated through small and medium enterprises.
4.5. South African Literature
Small and Medium construction companies play an indispensable role directly and
indirectly as a contributor to the South African economic growth. The CSIR states that
construction accounts for 7 percent of total employment with 75 percent of all
construction workers found in developing countries. Typically over 90 percent of
construction workers are employed in micro firms with fewer than 10 persons.
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Internationally, small and medium-sized enterprises (SME’s) constitute 97 percent of all
construction firms globally, with 95 percent of firms being micro firms having 10 or fewer
employees.
The National Small Business Act defines SME’s as “a separate and distinct entity that
cannot be part of a group of companies” (Government Gazette 377, 1996). It is
managed by its owners, and can be a sole proprietorship, partnership, a close
corporation, co-operative or a company. The Governments White Paper on the
promotion of small business acknowledges important differences and needs between
survivalist and micro enterprise on the one hand, and small and medium on the other.
According to Khoza (2008), among the challenges facing SMME contractors are
unsustainably high levels of competition for limited opportunities as a result of the
continuous flow of new entrants into the industry. More than 80 000 contractors are
currently registered on the CIDB Register of Contractors. The CIDB Quarterly Monitor
shows that of these, many of the contractors in Grades 2 to 4 will fail to win a tender in
four years. Without work, contractors cannot establish track records that are essential to
move up the CIDB grades. They also cannot develop or retain skills necessary to
deliver construction projects.
The SME sector is a significant employer of people; it creates numerous economic
opportunities for medium and small enterprises; its products have an extraordinarily
long life and they unleash abundant economic opportunities for their consumers; and it
contributes directly to improving the quality of life of its users. For example the small
and medium construction sector contributed 221 000 new jobs between 2006 and 2009
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on top of the 662 000 that were already existing (CIDB, 2009), but despite their
significance, small and medium contractors are faced with the threat of failure with past
statistics indicating that three out five fail within the first few years. According to Thwala
and Phaladi (2009) lack of effective management during their early stages is a major
cause of business failure for small and medium sized contractors and some key
features of small-scale contractors are that they are largely unregistered, operate in
informal sector of the economy and have very little formal business systems.
In South Africa, the White Paper on Creating an Enabling Environment for the
Construction industry, describes the South African SME sector as largely
underdeveloped and lacking the managerial and technical skills and the sophistication
enjoyed by larger, well established contractors (Dlungwana and Rwelamila, 2003).
These challenges seem to change (evolve) according to different macro and micro
conditions. Steyn, Bruwer and Hamman (2006) stated that 'Bankruptcy is a cash
phenomenon'. The underlying reasons for financial distress may vary from entity to
entity, some may not be profitable at all, while others may be very profitable and
expanding rapidly, but as a result thereof cannot meet their obligations. Whatever the
reason for failure, it culminates in the fact that the company has a shortage of cash to
pay its obligations.
The failure of many of the small and medium construction companies are disruptive in
the country’s economy as a whole and can have major rippling effects. South Africa is a
developing country and it is faced with challenges that are faced by all developing
countries in the world. Thwala and Phaladi also stated that these challenges include,
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amongst others, the lack of resources for training contractors, such as funds, poor
construction procurement systems and lack of management capacity and resources to
equip managers to operate their business enterprises effectively and efficiently. In
addition, the relative lack of success facing emerging contractors in South Africa was
discussed by (Rwelamila, 2002; Miles, 1980; Croswell and McCutchen, 2001;
Mphahlele, 2001 and Ofori, 1991); International Labour Organization –ILO- (1987); as
follows: Inadequate finance and inability to get credit from suppliers; Inability to employ
competent workers; Poor pricing, tendering, and contract documentation skills; Poor
mentoring; and fronting for established contractors; Lack of entrepreneurial skills; Lack
of proper training; Lack of resources for either large or complex construction work; Lack
of technical, financial, contractual, and managerial skills; and late payment for work
done (Thwala and Phaladi, 2009).
A company can be said that it has failed when it has been declared bankrupt or
insolvent due to the lack of operation. Rwelamila and Lobelo (1996) explain that
insolvency may be broadly defined as an inability of a business entity to meet pending
financial commitments. For a construction firm, such a situation creates conditions
whereby a business entity is unable to fulfil its contractual obligations with regard to
work-in-progress or creditors owing (De Valence, 1994).
There are indications to suggest that during times of adverse conditions, the occurrence
of insolvent conditions seem to be on the increase. Whether such adverse conditions
and mounting insolvencies are mutually exclusive remains a subject of debate.
According to Hindle (1991), the knowledge of trends in business cycles is paramount to
the survival of construction firms. Furthermore, Lansley (1987) emphasises a need for
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firms to attune their strategies to the environments they operate in; thus enabling them
to be in sync with market trends. He argues that adopting such strategies ensures that
competing firms operate on the same level to variable market conditions. Reviewing the
world construction sector through the past three decades, Lansley (1987) and Langford
(1991) note the following general trends: 1960s - characterised by long term stability in
construction markets; 1970s -the market transformations during this period were
phenomenal and could not be handled by tried tested methods for competing and
struggling firms to remain in business; 1980s - the conditions of low levels of demand
for construction work and declining role of governments as key players in various
economies.
The South African construction sector has been part and parcel of the wrath of these
worldwide trends. In a survey conducted by Henry (1994), insolvency causal factors
associated with insolvencies in general construction firms were identified. These factors
could be broadly classified into categories of operational management, environmental,
strategic, personal, cost overruns and technological factors.
In Africa a key issue for policy development surrounding small and medium-sized
enterprises (SME) concerns the determinants of successful SMEs (Rogerson, 2000).
Evidence from a range of international studies points to the fact that while entrepreneurs
are generally not in short supply in most African countries, only a small fraction of new
enterprises will ‘graduate’ from birth to become small enterprises with more than 10
workers (Mead, 1998; Mead & Liedholm, 1998; Liedholm & Mead, 1999). In southern
African research, it is estimated that only 1 per cent of new micro-enterprises will make
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the transition to a successful established small enterprise (Mead & Liedholm, 1998).
Despite their small numbers, this group of growing and successful SMEs is viewed as
offering a critical contribution to the policy goals of employment creation, promotion of
economic growth and poverty alleviation.
Feedbacks from various scholars indicate that operational and strategic factors are the
principal causes of insolvencies among general construction firms. Two forms of
insolvency exist as recognised by law, namely commercial and factual insolvency.
Commercial insolvency occurs where a business entity is unable to service its debts
even though its assets may exceed its liabilities, whereas factual insolvency is where a
firm’s liabilities exceed its assets S.A.I.C.A (1995). The terms of bankruptcy and
insolvency are often deemed to be interchangeable when referring to a failure of a
company, although they may represent the same situation their application differs.
Langford et al. (1991) refers to bankruptcy as a term pertaining to individuals , whereas
insolvency being a broader term incorporating liquidation , receivership and
administration of a company by bankers , or others with a financial stake .
Rwelamila and Lobelo (1996) states that liquidation is referred to also as winding -up,
involves a process whereby the life of a company is brought to an end when it is unable
to pay its debts. Whereas receivership involves an appointment of a receiver liquidator
whose main role is to protect the assets of the insolvent company, on behalf of the
secured creditors (Ramsey, 1985). Incumbent upon his or her appointment the
liquidator may continue running the affairs of the insolvent firm for a while to sell off its
assets or streamline its operations for it to be profitable again and sell the company as a
going concern.
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There are economic factors, which are worthy of note, but may be perceived as being
external and non-bearing to a firm’s survival. Although they may be external to a firm’s
operations, failure by firms to recognise their effects may lead to the termination of their
operation (Rwelamila and Lobelo, 1996). Therefore , given that construction projects
necessitates heavy capital investment which attracts interest from the borrowed capital
portion , the need to study the way the market behaves is crucial to understanding the
cash flow needs of a firm. The amount of investment available is governed by many
economic factors such as the level of income, profit, taxation and market conditions
(Ren, 1992) and (Symons, 1995).
The role that management plays in controlling and providing vision in a firms’ activities
can be its detriment if not properly managed or strategized. Management needs
amongst other things, to adapt their organisations to deal with growth effectively, either
by minimising its growth to level off or face the risk of the business outgrowing its own
organisation (Schleifer, 1990). The nature of construction products is such that, they are
a once-off endeavours meaning that, labour, plant and materials have to be assembled
separately for each job. This places a heavy burden on site management to co-ordinate
and supervise the various trades (Davis, 1991).
Douglas (1985) emphasises the analysis of peaks and troughs in the economic cycle as
being relevant to the contractor, in that the company’s level of success is affected and
dependent on the outcome of these cycles. Hindle (1991) supports this statement as
well, in that the analysis allows management to detect and react to changes in demand
for their services. Douglas (1985) and Hindle (1991) concede to the fact that there’s an
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apparent neglect in the marketing of construction services during boom times, given that
work and capital is easily obtained. Whereas in a recession, work and capital is scarce
and the marketing of construction services become important. Close monitoring of the
business environment is crucial in a contracting firm’s strategic planning, given the
highly sensitive nature of the industry.
Small shifts in the interest rate often dictate development intentions of important clients
(Langford and Male, 1991). The government controls the credit and interest rates thus
influencing the construction industry a great deal, therefore the demand for construction
products is largely influenced by the government’s monetary policy (Ren, 1992).
Newcombe et al. (1990) and Kangari (1990) all support this view that government fiscal
policy affects patterns in government expenditure and income, whilst the monetary
policy affects the supply of money and credit facilities (i.e. interest rates). Therefore this
means that the companies which mainly rely on government jobs will be the ones that
suffer a great deal and the majority of those companies are small and medium
enterprises. Therefore, the fiscal policy on one hand affects the construction industry
directly through the demand for new buildings and works, whilst on the other hand the
monetary policy indirectly affects changes in interest rates (i.e. any increases reduces
the demand for construction). That also means that the South African government will
react according to the international economic status in spending on public infrastructure.
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4.5.1. Managerial factors in the SA small and medium construction companies
Experience in any kind of management is very important and it plays a crucial role in
ensuring that a business succeeds or fails. Poor management has been posited as one
of the main causes of failure of small enterprises (Longenecker, et al., 2006) Lack of
experience in the constructions industry can make the manager to make bad business
decisions. The level of education and business performance plays a role in the
operation of a company, this might be said that the amount of people who are trained
and have higher qualifications might do better than those who do not have formal
training and qualification. The majority of the small and medium companies are run and
owned by people who do not have the qualification or proper training in their relative
field of business. In many small companies the owner is not always there to monitor
how things are doing on a day to day basis which result poor communication systems
and identifying the internal company problems which can result to poor labour
productivity and improvement. Every organization has its key personnel that are vital to
keep the company running, and if that personnel is not retained and is replaced by
unqualified or ineffective personnel it will disrupt the company structure no matter how
small the company is. This shows that managerial factors need total commitment to
ensure that good centralized decisions are made.
Good management implies an awareness of all factors making up a successful
business namely good strategy, marketing, pricing and financial control (Douglas,
1985). Financial mismanagement and management incompetence have been cited
among the attributes that lead to the prominence of construction failures (Kangari,
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1988), (Henry, 1991), (Schleifer, 1990), (Potgieter and Frank, 1990). Furthermore,
management information permits management to monitor, measure and evaluate
performance of the company at certain time intervals, with the attainment of an
improvement of profitability in view Potgieter and Frank,1990). Strategic management in
construction Langford and Male (1991) perceive the function of a strategic planner in a
construction company, being to synchronise the company’s activities with those of the
industry albeit being consistent with the resources of the firm. The uncertain
environment within which the construction industry operates, dictates that management
adopts varying approaches to manage change based on their experience. The strategy
adopted by management in contracting firms is reflected in the quality of service
delivered in terms of programme, budgetary control and conformance to specification
(i.e. realisation of the project objectives) (Winch and Snyder, 1993). The nature of the
construction environment has forced prudent firm to adopting a policy of subcontracting
where the demand for construction services is less predictable (Langford and Male,
1991), (Langsley, 1987 ).
4.5.2. Financial factors in the SA small and medium construction companies
The high competition among emerging contractors has contributed to increase financial
failures of the emerging market, making the market unsustainable (Mvubu and Thwala,
2007). Financial Management is the key, which determines business growth (Young
and Hall, 1991). Proper financial management in a company ensures that resources are
properly controlled and planned for. Tong (1990) affirms this view in that, where a firm
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experiences uncontrolled growth, conditions may arise where financial needs are in
excess of available resources thus increasing the vulnerability of the firm towards an
insolvent state.
The most prominent causes of failure with construction companies’ results from
inadequate cash resources and failure to convince creditors of the availability of money
(Hsing-Hui, 1989), (Ren, 1992), (Jach, 1985) and (Tong, 1990). Jach (1985) concurs
with this view that even profitable firms could be forced into liquidation, because the
demand for payment or settlement of outstanding accounts could not be met at the
critical time despite the fact that the assets are tied in long-term investments.
Furthermore, capital is often required to smoothen out the strains on the cash flow
resulting from the occurrence of cost and uncertainty (Ren, 1992). Escalating materials
prices coupled with high interest rates have forced management of construction firms to
focus on the control and flow of money as being critical to its survival (Ryder, 1978).
Moreover, the terms of payment stipulated in the contractual conditions and the
escalation formulae (on contracts with escalation) require a great deal of expertise to
apply, coupled with the task of ensuring promptness in the submission and payment of
bills to ensure that the cash flow situation is controlled and improved upon (i.e.
preventing the possible erosion of profit). Potgieter and Frank (1990) assert from their
study that, there needs to be training amongst entrepreneurs on matters relating to
financial management such as bookkeeping, tax planning, budgeting and cash flow
management. Additionally, the lack of management information also contributes to the
failure of businesses.
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The use of financial ratios and inter-firm comparisons have been cited as the most
useful tools in providing management information which measures the overall
effectiveness of any business (Potgieter and Frank, 1990). Lack of access to finance
both during pre-construction which disqualifies emerging contractors from meeting
guarantee and performance bond requirements and during construction which leads to
cash-flow problems, incomplete work and even liquidation are financial constraints
facing emerging contractors able (Mvubu and Thwala, 2007).
Tight competition amongst small contractors has made many companies to have very
low profit margins, this is because the small contractors are overcrowded and everyone
is bidding at low prices to get work. Estimating contributes a lot in company’s finances
because under-estimating will definitely put a company in danger when it has to carry
out a job, this usually happens in small companies for the reason that their estimators
are not well experienced. Other factors which can be directly related to the finances of a
company are debt and equity. According to Ndlovu and Thwala (2008) these factors
include high overhead costs in general; the administrative cost of extending small loans
to SMMEs; the high risk of business failure; an exaggerated risk perception of SMMEs
on the part of bankers and institutional investors; and returns on SMME investments
that are considered low relative to the risk and cost of making the investment. Many
small and medium companies do not realize that material usage and wastage as well as
equipment that is hired but is not utilized will affect the company’s financial situation in
terms of yearly profits.
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As early as 1987the ILO identified access to finance as the major problem to SMME
contractors, mainly due to their inability to fulfill collateral requirements. Fraser (1989)
agreed with the observation that African black SMME contractors are regarded as falling
into the high-risk category. Motlanthe (1990) argued that the consequences of limited
access to finance tend to have a detrimental effect on the reputation of SMME
contractors, who often resort to taking deposits for new contracts as a means of
financing their current work. This tendency is partly a reaction to the contractual
conditions governing payments, which often present great difficulties for SMME
contractors. Khumalo’s (1994) research revealed that even technically competent
builders faced obstacles to success. The biggest constraints were difficulty with finance
from reluctant financial institutions, which generally classify them as high-risk clients
regardless of their capabilities (Uriyo, et al., 2004).
Khoza (2008) opined that the high risk nature of construction, as well as perceptions of
banking institutions that emerging enterprises are a high credit risk, means that it is very
difficult for contractors to access finance. In desperation, many contractors turn to
“cession” agreements, which have a negative impact on their track record and CIDB
grading.
4.5.3. Expansion factors in the SA small and medium construction companies
Government’s Broad-based Black Economic Empowerment Strategy (BBBEE) and Bill
is the essential keystone for promoting black economic empowerment and the ability for
contractors to expand. In some instances there are small and medium contractors who
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get to win more tenders than others, which means that the number of projects they do
increases but they cannot always manage because of the required production capacity.
Over-expansion can drive a company to a higher-risk investment with financial debt;
hence, increasing its chance to business failure (Enshassi, Al-Hallaq and Mohamed,
2006). A change in the type of work and where that work is going to be done also
contributes to the expansion factor, when a contractor goes to do work outside his
normal territory it might bring some difficulties as he will have to adapt to the new
geographical location.
Achieving employment equity and promoting skills development is integral to the BEE
strategy, this has opened more opportunities for companies to get more projects within
their local geographic areas and outside. However, other legislations also deal with
these issues, particularly the Employment Equity Act and the Skills Development Levy
of employing local people and giving projects to local contractors. With regard to the
local contractors, they must be given the work if they have the ability to start and
complete the whole project, but if they do not have that ability outside contractors will be
given the work.
ProfitCrew.com (2010) explains that expanding into new areas is amongst leading
causes of contractor failure. Problems vary from accounting, management, personnel
and performance and can all turn “good growth” into unrealistic growth. Typically,
contractors can deal with one “new” at a time – location, key management personnel,
job type, size, customer, architect or key subcontractor. In many cases, before a
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contractor expands its scope of business operations, there are needs that have to be in
place with a strong infrastructure, including the following:
• Equipment
• Project management depth with experience and technical expertise. Rapid
growth can result in outgrowing management talent, systems or processes.
• Accounting systems. Keep in mind that a business with remote sites and large
sums of money requires extremely effective internal accounting controls.
• Understanding of the new territory, the labour pool, subcontractors, the owner
and regulations
• Estimating. An increase in the backlog of work or estimators facing a shorter lead
time to prepare bids is a warning sign of larger problems. Having a good
estimator who will take the time to prepare accurate estimates can make or break
a project.
• Well-defined market niche and growth plan
Companies that expand rapidly will have accounting issues because they will be dealing
with larger accounting systems. Accounting systems are crucial for a growing
contractor, and problems with those systems can lead to trouble. Before extending or
increasing the contract capacity a contractor to expand to a new area or a bigger project
price, there must be adequate cost and project management systems; Absence of
estimating or procurement problems; Regular job schedules; Adherence to proper
accounting practices; Solid management of cash flow and overhead; Balance between
liquidity level (cash and accounts receivable) and debt level, as well as a consistent and
growing level of equity. To accomplish this balance, keep debt low, focus on retaining
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money in the business to support future growth, pay bills on time and collect receivables
on time (ProfitCrew.com). Smaller contractors do not often have most of the aspects in
place and that can be detrimental to the state of the company. Incremental growth
(without overextending resources) will lead a company to a state were work cannot be
fully done.
The government’s desire to seek and assist small contractors to:
• A competitive fast-growing economy that creates sufficient jobs for all work seekers;
• The redistribution of income and opportunities in favour of the poor;
• A society in which sound health, education and other services are available to all; and
• An environment in which homes are secure and places of work are productive.
The strategy recognizes that there will be more opportunities for small and medium
contractors and growth trajectory of about 3% per annum is insufficient to reverse the
unemployment crises in the labour market, provide adequate resources for the
necessary expansion in social service delivery, and provide progress toward an
equitable distribution of income and wealth. The strategy therefore seeks to develop a
competitive, outward-orientated economy that will attain an annual growth rate of 6%
and create an annual growth in employment of 400 000 new jobs. Several inter-related
developments are postured, and a brisk expansion in private sector capital formation.
The CSIR (2007) stated that key challenges that need to be addressed at local level
include the need to redress the legacy of apartheid planning that undermines social and
economic integration and employment. The provision of affordable housing has a role to
play in achieving this social and economic integration and allowing small and medium
companies to grow in terms of size of projects they undertake. The provision of Multi-
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Purpose Community Centers (MPCC’s) is another key element in the strategy to
strengthen the role of local government, and an agreement was reached that ultimately
MPCCs should be operational in all 284 municipalities. To this end, government had
committed itself to extend the number of MPCCs from 37 to 60 and the work to be done
will be focused on emerging contractors. The above will require a major transformation
in the environment and behaviour of both the private and public sectors and will have to
include a competitive platform for expansion by the South African construction sector.
In addition, the dangers of expansion include the hiring of new senior leaders, having
new ownership of the contractor and subcontractor, hiring on new project managers,
and even installing a new accounting system.
4.5.4. Economic Environmental factors in the SA small and medium construction
companies
Rwelamila and Lobelo (1996) states that these factors are perceived to be beyond the
control of management. Ntuli and Allopi (2009) states that while economic factors are
worth nothing, however , they may be perceived as being external to a firm’s operations,
failure by firms to recognize that their efforts may lead to the termination of a firm’s
operations.
There are many external influences impacting upon the performance of the construction
sector, one of the most crucial being the role of government. Legislation and public
sector capacity, both in terms of financial and human capital, influence the performance
of the industry directly (CSIR Boutek, 2003). Since 1994 government has passed more
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than 1000 pieces of legislation, which have in turn spawned numerous regulations.
There are at least 30 Acts that impact directly and indirectly on the operating
environment of the South African construction industry, most of which are un-
coordinated and rest with various ministries. They impact upon tender procedures and
procurement; employment and labour practices; black economic empowerment;
planning permissions and controls; skills development and training; business practices;
and the role of the built environment professions. Business associations have the
impression not only of over-regulation but of poorly drafted regulation or of good law
being poorly implemented. All of this acts to constrain business growth and investment
and hobble enterprise, and this can cost jobs (CSIR Boutek, 2003).
It has been asserted that the construction industry has distinct characteristics that
renders it much more susceptible to failure than others (Ren, 1992; Jack, 1985);
(Kangari, 1988; Davis, 1991). These are:
• Trading within a high uncertain environment e.g. uncertain ground conditions,
unpredictable weather and labour availability.
• The necessity to price a product before it is produced.
• Competitive tendering as a means of pricing.
• The low fixed capital requirements for entry into market results in market being
over capacitated.
The construction industry in normal cases is controlled by the state of the national
economy, therefore the government will decide on how many projects it will invest in if
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there is a bad economic downturn. The awarding of the lowest contract price affects the
construction industry’s business environment because all the role players will not be
looking to get the highest possible profits but to get them work that will bring them
income. The environmental problems of the developing countries exist side-by-side with
a lack of managerial experience, financial resources, and legal and administrative
systems necessary to deal with the issue through public and formal education,
formulation and enforcement of “command and control” measures (legislation and
regulations), as well as the devising and implementation of “economic instruments”
(incentives-grants, subsidies- and taxes) (Ofori, 2001). Economic disruptions will affect
the welfare of the site, workers and the general public because they are all linked to the
environmental techniques and practices. Government can take action in implementing
legislation and regulations on the environmental performances. This might mean that
requirements for licenses and approvals on certain jobs to be done. Tax incentives,
grants and subsidies will make the environmental practices good and the small and
medium contractors will benefit from them.
Segments, which are highly restricted through governmental or other agency
regulations such as environmental preservation/remediation and safety, are much less
attractive.
• Socio-Political Environment: consists of laws, government agencies and pressure
groups that influence and limit various organizations and individuals in a given
society. For Example, South Africa has many laws covering issues like competition,
preferential procurement (BBEE), fair trade practices, environment protection, safety
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etc. Well conceived regulation can encourage competition and ensure fair trade
markets for goods and services.
• Economic Environment: refers to all economic variables that have an impact on the
next planning cycle. It involves factors such as customer purchasing power,
spending pattern, economic growth, interest rates, unemployment rate, growth of
key industries etc.
• Technological Environment: is the most dramatic force wherein a new technology
replaces an older technology. New technologies create new markets and
opportunities. A wide range of new technologies can revolutionize the delivery
process and production process. This in fact reflects the level of applied knowledge
systematization in company’s market for controlling, arranging and altering the
physical and social environment. New technology results either in change of yearly
production cost or improvement in services/ product features offered at the same
cost. The factors involved are the competitor’s and clients tendency in technology
innovations, accessibility of information systems and availability of execution and
construction systems.
Escalating materials prices coupled with high interest rates have forced management of
construction firms to focus on the control and flow of money as being critical to its
survival (Jach, 1985). Moreover the terms of payment stipulate in the contractual
conditions and the escalation formulae (on contracts with escalation) require a great
deal of expertise to apply, coupled with the task of ensuring promptness in the
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submission and payment of bills to ensure that the cash flow situation is controlled and
improved upon (i.e. preventing the erosion of profit).
The government and the private sector play a major role in influencing activity within the
construction sector. An unfavourable exchange rate is likely to limit government
disposable income, thus forcing it to expend its resources on meeting its immediate
needs as opposed to infrastructure works. An unfavourable exchange rate may often
restrict the borrowing capacity of the ruling government because of the high interest
costs associated with foreign capital loans.
4.6. Government Support Programmes for SMME’s
As large enterprises have restructured and downsized small, medium and micro
enterprises (SMMEs) have come to play an increasingly important role in South Africa's
economy and development (SMME 10year Review, 2004). The sector has grown
significantly. In 1996, around 19% of those employed were in the informal sector of the
economy. By 1999 this had risen to 26%. The government has therefore targeted the
SMME sector as an economic empowerment vehicle for previously disadvantaged
people. As a result, SMMEs have received significant attention and investment, ranging
from the establishment of state-initiated projects to supportive legislation, a variety of
funding institutions and government incentives through the Department of Trade and
Industry (SMME 10year Review, 2004). The National Small Business Act, passed in
1996, helped to establish many of the supportive structures now in place.
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The CEO of the CIDB, Ronnie Khoza said it was reported in 2010 that training and
contractor development were not prioritized by those mandated to do so. The cidb was
therefore requested to play a role, beyond its mandate, to improve performance in this
area. The cidb has therefore decided to facilitate training through various interventions,
including injecting funding for strategic training opportunities. Contractor Development
has been recommended for consideration as a national priority. In this regard a Steering
Committee has been formed between the cidb and the national Department of Public
Works. Provinces have been selected for progressive inclusion regarding improved
reporting on all contractor development opportunities, implemented through the
framework for the National Contractor Development Programme (NCDP). The
consultative process with MECs and HoDs and senior management in the identified
provinces has been very positive.
The cidb states that it has undertaken an initiative to expand the training and
development of contractors by considering overseas opportunities, sharing of
information with regional partners as well as identifying and partner with tertiary
institutions in South Africa. The South African/German initiative has been pursued with
the intention of sourcing funding and signing an MoU with the German counterparts.
This is to be supported by the respective government’s bilateral agreements. The cidb
has undertaken a number of trips in the SADC region and hosted visitors from SADC
countries that wanted to partner with the cidb on issues of common interest (CIDB,
2011).
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According to Towards a Ten Year Review, a discussion document reviewing the impact
of the government's policies since 1994, there were 2.3 million people who owned at
least one Value Added Tax (VAT) unregistered company. Of these, only 338 000
owners had employees, a total of 734 000.
Government initiatives, facilitated by the DTI and associated organizations, include the
Centre for Small Business Promotion (CSBP), Ntsika Enterprise Promotion Agency and
Khula Enterprise Finance.
The CSBP implements and administers the aims of the national strategy, which includes
job creation (SMME 10year Review, 2004). The DTI has recently signed an agreement
with the European Union which will see the EU donating R550m to start a risk capital
fund for SMMEs. The DTI associated organizations are:
4.6.1. Ntsika
Ntsika was established as a new entity under the 1996 National Small Business Act,
with its initial responsibilities focused on the (“wholesale”) supply or facilitation of small
enterprise support in the spheres of information, marketing and procurement, export
facilitation, research and training (SMME 10year Review, 2004). This was a vast task,
with the relatively small staff expected to work through grass-roots bodies, local
stakeholders and provincial as well as municipal partner organizations throughout the
country. Given South Africa’s complex small enterprise scene during 1995/6 when
Ntsika was established, the high expectations created by the White Paper and its broad
based endorsement. More objectively seen, Ntsika has over the past eight years been
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successful in establishing an important niche in the spectrum of national small
enterprise support agencies. According to Barry et al. (2002), Ntsika was established to
implement the national small business strategy. It provides non-financial support to
small business through a number of programmes such as Local Business Services
Centres (LBSC’s)
Ntsika provides non-financial support services to the SMME sector, tackling issues like
management development, marketing and business development services. The agency
also helps with research and inter-business linkages (SMME 10year Review, 2004).
4.6.2. Khula Enterprise Finance
Khula Enterprise Finance was established, in the terms of the White Paper on Small
Business in 1996, as a wholesale finance organization under the Companies Act
(SMME 10year Review, 2004). It is one of five public development funding agencies.
Instead of lending directly to the SMME applicant, it aids the growing network of outlets
of so-called retail finance intermediaries (RFIs), which consist of banks, NGOs, and
provincial development corporations. It is a limited liability company, with an
independent board of directors. Khula management is accountable to the shareholder
(currently the government) through this board of directors, as required by the
Companies Act. The company does not rely on government guarantees. The rationale
for such a structure was to establish an appropriate mechanism for leveraging private
capital for SMME finance. Initially, Khula started off with a government grant of R162.4
million, which was subsequently increased to R300 million. In addition, it received a total
of R36.2 million in grants and loans for specific projects from donors, including the
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governments of Canada, Denmark, Norway, and Sweden, as well as the EU, UNDP and
the Ford Foundation. At the end of March 1998, total capital and reserves stood at R380
million. Khula’s mission is to ensure enhanced availability of credit and equity finance
for SMMEs by offering guarantees, loans, and seed capital plus advice to RFIs in
search of capacity and capital. Fundamental principles that underpin Khula are good
governance and transparency. Khula subscribes to the best form of corporate
governance as prescribed by Kings Commission on Corporate Governance (SMME
10year Review, 2004).
In particular, Khula offers the following five products:
• Credit guarantees to private sector institutions: Khula provides individual,
institutional and portfolio guarantees to RFIs and their clients. For individual
clients seeking bank loans, the bank itself can apply to Khula for an additional
security, limited to a maximum of R600,000 for a three year period. Similarly, an
RFI wishing to access loan finance from a bank can apply for an institutional
guarantee. Lastly, if an RFI considers its SMME portfolio to fall beyond its current
prudent lending practices, it may wish to share the risk through a portfolio
guarantee. Khula is prepared to indemnify the RFI for up to 80% of its
irrecoverable losses.
• Business loans (14.5% interest p.a.): These loans, of between R1 million and
R10 million, are made to RFIs specifically for on-lending to individual applicants,
and cannot be used to finance operational costs. The amount, procedures and
conditions attached to the loans depend on Khula’s evaluation of the RFI’s
experience. Those that have been operating for over three years and having a
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loan book greater than R1 million are considered to be more experienced. These
organizations have a floor lending level of R2 million and a ceiling of R100
million. Depending on its purpose, a loan may be taken on a term basis, as
bridging finance, or as a revolving credit.
• Seed loans (noninterest bearing): In order to nurture a strong and growing
network of RFIs, Khula provides start-up capital to help new RFIs cover their
initial operational expenses and build up a loan portfolio. If the RFI achieves
agreed performance targets, Khula will consider converting the loan into a grant.
• Equity funds: At the upper end of the SMME scale, companies may require
equity partners to assist in their expansion and development. Khula is in the
process of establishing equity funds together with other interested investors and
institutions. These funds will consider participation of up to 49% and exit within
two to seven years. Most likely candidates are small and medium-sized
businesses with a net asset value of not less than R500,000).
• Capacity building: Operating on a joint participation basis, where Khula matches
the funds provided by the RFI, Khula offers to co-finance capacity building
programs. These cover areas such as strategic planning, accounting, design and
installation of systems, training of loan officers, and skill development for boards
of directors.
To prevent cross-subsidiation and ensure sustainability, Khula delivers its services
through different trading entities: the guarantees through Khula Credit Guarantee Ltd.,
the loan and equity products through Khula Enterprise Finance Ltd., and capacity
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building through Khula Institutional Support Services (ISS). Each of these entities has
its own manager and board, but the board members are drawn from the main board.
RFIs interested in any of Khula’s products have to pass a three-step assessment. In a
first preliminary evaluation, Khula looks either at the applicant’s future plans or existing
performance, including:
� the number of clients currently handled or planned to be acquired;
� the cost of loan issuance for the RFI;
� gender outreach or specific program;
� repayment rate, and
� the proportion of its loan portfolio that is at risk, i.e., affected by arrears.
The second step consists of a score-based evaluation in which the applicant’s record of
development and operational activities is assessed. Once the applicant has qualified for
a detailed appraisal, it will be checked according to the third-level framework:
� the organization’s governance (board of directors and management);
� management routines, procedures and processes;
� financial performance of the organization (five-year trading results and forecasts,
cash management, profitability etc.); and
� its human resources policies and record.
According to Khula’s minimum criteria, an eligible RFI should have an average
repayment rate of 85%, 50 active clients, an operational self sufficiency ratio of 20%, a
cost per rand lent of R1.00 and 25 clients per loan officer.
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Khula offers financial support mechanisms to the sector. The financial products include
loans, the national credit guarantee system, grants and institutional capacity building.
Khula has also launched its own micro-lending scheme, Khula-Start, an entry-level
programme that provides loans to first-time borrowers in the survivalist sub-component
of the SMME sector.
The organization has recently launched the Khula Technology Transfer Fund to
facilitate access to local and international technology. In addition, a new fund is being
set up to serve businesses in Gauteng, North West Province and the Free State. A
similar fund already exists for businesses in the Northern, Eastern and Western Cape,
as well as in Mpumalanga, Limpopo and KwaZulu-Natal.
4.6.3. The National Contractor Development Programme (NCDP)
The National Contractor Development Programme (NCDP) is a sector-specific
intervention within the framework of South Africa’s Accelerated and Shared Growth
Initiative (AsgiSA) (CIDB Status Quo Report, 2009). Led by the Minister of Public Works
and the Provincial MECs, it is committed to the accelerated growth of the construction
industry to meet rising national demand. Specifically, the NCDP is geared to address
enhancing capacity and equity ownership across the different contracting categories
and Grades, as well as improved skills and performance in the delivery of capital works
and maintenance across the public sector (CIDB Status Quo Report, 2009)..
The NCDP Framework (2010), recognizes that there are various components of
development which contractors need to progress through in order to become competent
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experts in their field of operation and to grow and improve their performance – and
incorporate the various principles discussed in the preceding sections (DPW & CIDB,
2010). The NCDP recognizes that contractor development initiatives should therefore
cover a broad spectrum of activities, including:
• Construction Work Force Development, incorporating the development of the
construction workforce through artisan and supervisor development (typically the
ungraded workforce and cidb Grade 1 and 2 contractors.) Key instruments that can be
used include learnerships of various forms together with the necessary supporting
structures.
• Contractor Development, focusing on the development of contractors and comprises
several subcomponents starting at the emerging contractor stage and progressing to
the stage which focuses on developing the contracting enterprises (i.e. focusing on the
business development), together with a focus on improving the performance of
contractors:
• Emerging Contractor Development, focusing typically on Grade 2 and 3 contractors.
Key instruments that can be used include learnerships within Emerging Contractor
Development Programmes (ECDPs), predominantly incorporating mentorship in which
the emerging contractor learns the business side of contracting including tendering for
work, pricing, HR management, marketing, financial management, contract
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administration, etc. Within the ECDPs, budgets are typically ring fenced for allocation to
ensure sustainable work for the learner contractors.
• Enterprise Development, in which enterprises start growing, developing markets for
their services, expand their workforce, expand their areas of operation, accumulate
capital for future growth, expand their plant and equipment, business and technical
systems. This stage would target Grade 3 to 6 contractors who exhibit potential to
develop. Key instruments which could be used within this stage include a combination
of joint ventures, direct contracts, etc. Within the enterprise development stage,
contractors would be awarded contracts through competitive bidding utilizing
appropriate procurement strategies to ensure sustainable work supply to the contractors
within the competitive bidding environment.
• Performance Improvement, in which the established enterprise introduces best
practice systems for health and safety, quality management, environmental
management, etc. in order to improve their performance. This stage would target the
Grade 4 to 7 contractors who exhibit potential to develop. Key instruments which could
be used include a combination of joint ventures, direct contracts and various other
instruments within the context of the cidb Best Practice Contractor Recognition Scheme
and the cidb Best Practice Project Assessment Scheme.
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Source: Department of Public Works & Construction Industry Development Board, January 2010
4.6.3.1. Lessons learnt:
Achievements of past and current contractor development initiatives have been widely
accepted that the success of the past and current contractor development initiatives has
been quite modest (DPW & CIDB, 2010). However significant lessons can be drawn
from those initiatives.
Of greater importance these programmes have been able to:
1. Inform policies and research agenda promoting the participation of emerging
contractors.
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2. Advocate the interest of emerging contractors and ensured that policies and
procedures in the construction industry create an environment conducive to the
development and promotion of emerging contractors.
3. Inform policies on the peculiarities of the construction industry problems.
4. Increase the participation of emerging contractors in mainstream construction
activities.
5. Substantially increase the emerging construction enterprises share of work
opportunities within the public sector.
6. Stimulate economic activity in the most depressed areas.
7. Promote the participation of women in construction.
8. Support emerging contractor’s access to business training, finance, tendering
information and work opportunities,
9. Support the establishment and strengthening of the organizational capacity of
emerging contractors.
10. Persuade through intermittent interaction financiers to provide the necessary
support to emerging contractors.
4.6.4. NDPW Contractor Incubator Programme
The National Department of Public Works Contractor Incubator Programme (NDPW
CIP) runs over a three year cycle, and focuses on the development of contractors in
cidb Grades 3 to 7 (CIDB Status Quo Report, 2009).
The purpose of the Programme is to create an enabling environment within which
qualifying existing contracting enterprises can develop. The Programme includes
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focused supply side support through a structured mentorship-centred enterprise
development programme.
The NDPW CIP has an established regulatory framework to support contractors, and
the business processes of the NDPW CIP are also aligned to the preferential
procurement policy and the Public Finance Management Act (PFMA). The NDPW CIP
business process model allows for the targeting of categories defined by the
Department as blacks, women, youth and the disabled (CIDB Status Quo Report,
2009).
The NDPW aims to commit budgets to the Programme through annual planning, and
Incubator Programme participants are able to access work at one financial category
higher than non-participants (up to Grade 5). In reality, however, insufficient funds and
capacity constraints limit the allocation of sufficient work opportunities to the CIP.
Performance on a contract is measured in terms of completion of the contract according
to the quality requirements of the client within the agreed budget (cost) and time
schedule (CIDB Status Quo Report, 2009). The NDPW CIP matches a construction
contracting enterprises’ abilities with the demands of the contract to ensure that quality,
schedule and cost requirements are met while the contracting enterprise operates
profitably.
It is also stated in the CIDB Status Quo Report (2009) that the NDPW CIP incorporates
representatives of all of the programme stakeholders into a CIP unit, consisting of
NDPW clients, NDPW consultants, CIDB, CETA (and other Setas), financial institutions,
mentors, training providers and other government departments (e.g. Provincial DPWs,
DTI, etc.). However the capacity of the CIP Management Team is currently severely
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constrained due to insufficient staff capacity and high vacancy rates. Inadequate
management resources have also resulted in inadequate management systems being
put in place. The option of sourcing part-time staff is limited due to unclear policy on the
use of external capacity.
NDPW Contractor Development Model:
The targets for contractor development in the NDPW CIP are to have at least 50% of
currently cidb registered contractors to be competitive in an open market at the end of
2012. Selection of a contracting enterprise is based on experience in contracting and
experience in construction-related activities. Other criteria include registration as a
business enterprise, access to skilled staff, banking and credit record, the type and size
of a contractor, level of a contractor’s development, potential to satisfy contract-specific
key performance areas, and track record.
Mechanisms derived from the South African Construction Excellence Model (SACEM)
framework are used to a limited extent to monitor and evaluate contractors during the
Programme – but this is not taking place in practice (CIDB Status Quo Report, 2009).
The intended monitoring and evaluation tools include contractor development plans,
contractor’s monthly reports, internal audits, mentor’s monthly reports, and internal
reviews. These tools are also intended to be used for ongoing evaluation of contractors
within the CIP.
Contractors exit the CIP after 3 years, and this includes an assessment of their level of
development using the SACEM model. Projects are awarded to contractors within CIP
on the basis of a limited bidding process, and the CIP aims to provide contractors with
sufficient work opportunities within the Programme. There are no strategies that support
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ongoing contractor support and monitoring after exiting the Programme (CIDB Status
Quo Report, 2009).
4.6.4.1. Lessons learnt:
The lessons learnt from the National Department of Public Works Contractor Incubator
Programme (NDPW CIP) were identified in the CIDB Status Quo Report (2009) are as
follows:
1. The National Department of Public Works Contractor Incubator Programme
(NDPW CIP) ensured that the security of payment and payment cycles were
improved by paying contractors every 14 days, and the NDPW applied the
department’s waiver of guarantee and scheme as it was already noted, that
demand side project funding is currently a severe constraint within the
Programme.
2. Joint ventures only had to be considered where contractors have clearly defined
roles and responsibilities to avoid exploitation and delays.
3. The CIP Programme Management team aimed to ensure that the Construction
Education and Training Association (CETA) expedited training arrangements and
other programmes such as the Black Suppliers Development Programme of the
Department of Trade and Industry.
4. Accessibility to back-to-back agreements and credit guarantees with the
Independent Development Corporation (IDC) and the banks for bridging finance
were also arranged.
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5. Mentors coached contractor’s onsite during the project and also incorporated
outcomes of the development plan in providing support, whereby the key support
areas included leadership, project management, stakeholder management,
resource management, cost and quality management, handling sub-contractors
and suppliers and managing the environmental and statutory requirements e.g.
OHS.
Specific lessons extracted from various initiatives have become a recipe for sustainable
contractor developement programmes. These lessons have informed the core principles
and design of contractor development programmes including the draft NCDP Business
plan.
4.6.5. DPW KZN Masakhe Emerging Contractor Development Programme
The Masakhe Emerging Contractor Development Programme (Masakhe ECDP)
operates in the KwaZulu-Natal province under the custodianship of the KwaZulu-Natal
Department of Public Works (CIDB Status Quo Report, 2009). The Masakhe ECDP
focuses on the development of emerging contractors and companies, aimed at creating
a conducive environment in which emerging contractors can thrive, by facilitating
access to:
• Markets (DPW KZN contracts);
• Financial support;
• Training and mentoring; and
• Skills transfer; and
• Creating an emerging contractor development mechanism, performing:
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• Basic business management and technical training;
• Implementing targeted procurement interventions;
• Ongoing technical support through a mentorship plan;
• Linkages with financial institutions or funding agencies for appropriate financing
products; and
• Ongoing monitoring and evaluation of participating contractors.
The Programme is a phased advancement programme that mentors contractors
through various Grades, and has been designed and structured to give an end-to-end
assistance and/or support framework, encompassing training and mentorship, financial
and technical support to the contractors on the Programme as opposed to ad-hoc
preferential procurement interventions (CIDB Status Quo Report, 2009). The Masakhe
ECDP targets projects falling within the CIDB scope of value of R1m to R5m (or CIDB
Grades 2 to 5).
150 contractors have entered the Programme which was started in 2007, and no
contractors have to date increased their CIDB grading. Because of the newness of the
Programme, no contractors have yet exited the Programme.
The Masakhe ECDP incorporated representatives of all the Programme stakeholders
into a Project Management Unit (PMU). The PMU consisted of a contractor
development directorate situated at the KZN DPW head office that performs the overall
M&E. The contractor development directorate has also been split into regional blocks
which are in charge of actual project implementation. The regional offices also carry the
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capacity of programme managers, project leaders, mentors and consultants. Other
stakeholders involved with the Programme include the CIDB and the CETA.
Projects with the CIDB grade R1m to R5m values are targeted by the KZN DPW to be
set aside for the Masakhe ECDP’S. Budgets are identified and set aside for the
Programme. Business process and requirements have been drafted and documented,
detailing the Programmes procurement methods, line function responsibilities and the
scope for development to be followed by the KZN DPW (CIDB Status Quo Report,
2009).
The procurement method used is based on limited bidding processes, applies the
following HDI procurement scoring:
• Women: 40%
• Youth: 20%
• Priority Population Group: 35%
• Physically Disabled: 5%
DPW KZN Contractor Development Model
The criterion for inclusion into the Masakhe ECDP encompasses elementary training
and profiling on entry. The focus of the criterion for inclusion includes BBBEE and a
technical profile, contractor performance and contractor grading for progression. The
Masakhe ECDP provides contractors with business and technical training, together with
mentorship for onsite technical support and business management. Progression within
the Programme is linked to growth in CIDB contractor grade, successful completion of
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projects at a high quality, and the acquisition of business and technical skills and
business performance. Advancement from one stage to the next is considered when:
• The contractor has met a required level of competency as prescribed for each ECDP
stage;
• The contractor has successfully completed a number of projects or a required total
project value; and
• A Masakhe ECDP performance management report confirms 1 and 2 above.
The Masakhe ECDP aims to provide contractors with sufficient work opportunities within
the Programme, but access to projects within the Programme has been highlighted as a
major constraint by contractors. The Programme is not designed to award successful
contractors with an NQF Level 4 or 5 qualifications in construction management.
Joint ventures and sub-contracting are only considered to benefit the ECDP contractors
in projects outside of the Programme, due to project scale and complexity.
Subcontracting and JVs are encouraged but are only implemented by Masakhe ECDP
in a controlled environment where contractors’ roles in the partnership are well defined
and spelled out (CIDB Status Quo Report, 2009).
4.6.5.1. Lessons learnt:
The lessons learnt from the Masakhe Emerging Contractor Development Programme
(Masakhe ECDP) were identified in the CIDB Status Quo Report (2009) and are as
follows:
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1. The Masakhe ECDP payments cycle system ensured that contractors were paid
every 14 days, although information regarding payment disputes resolution
processes was not highlighted.
2. The Programme used standard conditions of contract, and sureties waived in
place of a retention system that minimized risk for the client and the Department
during the defects liability period.
3. The Masakhe ECDP provided access to both financial and non-financial support.
The non-financial support involved soft training, which involved business
administration and management training, technical training from basics of
tendering, including project costing, and technical onsite skills. Financial support
included partnerships with financial institutions for the purposes of incorporating
financial management support, and pure lending.
4. Access to training in the Programme was geared to give training on a phase by
phase basis, starting with pre-tender training, pre-construction training, and then
construction phase training. Mentors are also used as part of the training through
partnerships initiative, to provide ongoing training on specialist areas of
intervention, on an ongoing basis.
5. Contractors who have been on the Programme and have reached Grade 4 and 5
were encouraged to engage contractors from lower Grades of the programme
during construction phase of project implementation in an effort to foster
business linkages.
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4.6.6. ESKOM Construction Academy
The ESKOM Contractor Academy was established in response to demonstrable
shortages in contractors that are capable of line construction, electrification of towns,
schools and clinics in deep rural areas, the management of way Leaves and servitudes,
as well as a need to improve the quality of work delivered by line construction
contractors to meet ESKOM’s requirements, to improve the performance of ESKOM’s
networks.
The ESKOM Contractor Academy focuses separately on (i) developing the necessary
business and construction management competences within employers/owners, and (ii)
uplifting and building capacity in the technical skills of employees. The ESKOM
Academy currently operates or is being rolled out in Limpopo, Eastern Cape, Western
Cape, and a business case is currently being developed for the role out of the
academies based on the needs throughout the country. A second class of 2 groups was
planned to start in January 2009 in Limpopo. The Academy is targeting to train sufficient
owners/employers and skilled crafts employees to provide in the needs of ESKOM. The
objective is to create upwards mobility and mobility into other construction areas.
The pilot of the Academy drew on contractors that have already been awarded
contracts in Line construction, Electrification, Post connections within ESKOM, or are
registered on the vendor list as future contractors. The contractors are screened based
on their performance and to meet the necessary entrance criteria for the Academy. The
focus was expanded in 2009 to include other contractors in ESKOM's supply chain.
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The Academy runs over a 10 month cycle, and to date 38 contractors and 10
employees, Linesmen, have graduated from the pilot programme. The Programme is
currently registered as a Skills Programme at NQF Level 4. The academy is currently
not focusing on formal qualification but rather on achieving credits on the registered
Skills Programme. On completion of the programme the learners are awarded a
certificate from the University of Limpopo who is doing the Quality Assurance of the
programme. Out of the 28 contractors (owners/employers), 26 have successfully
completed the Programme and have received the certificates from the university. The
Programme is at NQF Level 4 in construction management, while the 10 employees
(Linesmen) have all received certificates of completion of the practical training at NQF
Level 3 in Minor Reticulation construction. They have to do the practical workplace
training and on completing the Portfolios of Evidence will be submitted to the EWSETA
who will award the certificates for the Skills Programme. The current national Line
construction qualification is being revised, and on completion the learners can do the
bridging training to qualify for the full qualification.
The ESKOM Contractor Academy has partnered with the University of Limpopo and
other recognized specialist service providers to provide business and technical training.
The Academy is run as a separate unit within ESKOM, and is not involved in the award
or project management of contracts – but only in competence development. The intent
of the Academy is to develop the contractors to grow and become successful and
sustainable businesses, with whom ESKOM can build long term sustainable
relationships. All the contractors that enter the Academy have already secured contracts
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from ESKOM. An operational budget for training and other overheads is also obtained
from ESKOM.
ESKOM Contractor Development Model:
As already noted contractors that enter the Academy have already secured contracts
from ESKOM through the normal tender and contract adjudication process. Contractors
that need developmental support to attain ESKOM’s performance standards and who
meet appropriate entrance criteria are then selected to participate in the Academy.
Contractors then participate in a 10 month programme in which they receive structured
training over a period of one week per module in business management, SHEQ, project
management, people management, the New Engineering Conditions of Contract and
Regulations and process after procuring a contract. The study schools consist of two
parts, e.g. the theory and then a practical business related assignment. Both parts must
be successfully completed with a minimum pass mark of 50% in each category. The
training is provided by specialist’s external training providers. The contractors that meet
the training requirements of the Skills Programme graduate with credits at NQF level 4.
Of significance is the emphasis on exiting the Academy is not with an increase in
contractor grade, but with competence development to successfully manage and grow
their businesses, to successfully compete in the open market, and through this be able
to move upwards in the grading. The objective is also the transfer of skills and
competencies to other employees in the business by the owners/managers/”artisan”
that have successfully completed the Programme.
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The Academy does not provide formal mentoring support post completion to
contractors, but provides full mentoring and coaching support services throughout the
Programme.
Employees for technical skills training are selected on the same basis as the
owners/employers, and participate in an 18weeks training programmes at ESKOM’s
training centres. Training provided for the current pilot groups includes construction of
Low Voltage, and Medium Voltage overhead power lines up to 33KV, construction of
pole mounted transformers, electrification of towns, Service connections, Pre-paid
metering and fault finding. The 18 weeks is equivalent to 20% of the training and is
focused on equipping the learners with core and elective skills. It is expected that the
learner will complete the training at the workplace under a trained coach. The current
learners will become workplace coaches. It is planned to extend the scope significantly
in order to cover more areas in ESKOM’s built programme.
The Academy undertakes strict quality control procedures to ensure the quality of all
training is provided. The University of Limpopo is responsible for the overall on site
quality assurance whilst the Skills Programme is registered under the EWSETA’s quality
assurance.
4.6.6.1. Lessons learnt:
The lessons learnt from the ESKOM Contractor Academy were identified in the CIDB
Status Quo Report (2009) and are as follows:
1. In the pilot phase, the ESKOM Contractor Academy, did not introduced any
demand side practices specific to the Academy programme. In fact, no extension
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of time or budget was given to contractors who participated in the Academy, and
all contractors had to agree to adhere to the original construction contract while
participating in the Academy.
2. Contractors that successfully graduated from the Academy were given preferred
supplier status with ESKOM, but that was subject to ESKOM’s ongoing
performance monitoring and assessment procedures (involving contractor
performance reports on completion of all ESKOM contracts).
Other lessons learnt are that, there is an urgent need for:
• Broadening of public sector support to all levels of government (national, provincial
and local)
• Differentiation in the design and implementation of focused support programmes;
• An expansion of privately supplied contractor support services;
• A spread of support services to all the regions and places of the country, both urban
and rural; and
• A reasonable co-ordination of these efforts, notwithstanding limited financial and
organizational (implementation) capacities.
4.7. Success factors and Achievements for participating contractor development
programmes
Each public sector client who, as a large portion of their mandated business procures
construction goods and services (both new and maintenance works) will be encouraged
to align their current programmes if they have them to the NCDP or institute contractor
development programmes within their normal business processes (DPW & CIDB,
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2010). The typical generic components of the contractor development programme within
a public sector client will comprise:
1. Political and senior management support – essential to a successful programme will
be approval and support by the leadership of the organization
2. Result and target setting – comprising defining targets linked to the NCDP results
framework, which the organization will commit to achieve in terms of its capacity and
contracting needs;
3. Budget allocation – comprising allocation of a defined budget for procurement of
construction goods and services (including maintenance) within the contractor
development programme;
4. Management resources – comprising committing adequate resources (either internal
or externally contracted) to drive the contractor development programme within the
organization;
5. Procurement strategy – comprising defining a procurement strategy (within the
current regulations) which will facilitate contractor development (e.g. clustering of
projects within one contract, term contracts, large contracts with targeted skills
development requirements, incremental allocation of work within a larger contract etc.)
6. Contract management and prompt payment - comprising committing adequate
resources (either internal or externally contracted) to provide efficient and effective
administration of contracts including certification and payment of contractor’s claims on
time;
7. Site supervision and quality assurance - comprising committing adequate resources
(either internal or externally contracted) to provide effective site supervision and quality
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assurance on a consistent ongoing basis throughout the life of all contracts awarded
within the programme. This is an important component as inadequate supervision and a
poor quality management system is seen as one of the key reasons for poor quality;
8. Skills development – comprising linking contractors to skills development
programmes offered by other stakeholders who commit to provide these initiatives as
part of their contribution to the NCDP;
9. Access to finance - comprising a combination of providing appropriate surety
conditions to contractors (for example the current strategy adopted by (NDPW) and
linking contractors within the programme to financial institutions offering working capital
to contractors who have been awarded viable contracts
10. Monitoring and reporting – comprising reporting progress and achievement of the
results within their normal reporting process to the organizational leadership and
quarterly to the NCDP facilitator.
The success factors of the CDP’s are driven by achieving the components above, and
have clearly played a very important role in supporting the development of the
construction industry and the development of emerging contractors that participated in
them. Currently, very few of these Programmes have been assessed on a national level
as to their successes and challenges.
4.8. The comparison between the different Contractor Development Programmes
Many of the CDPs target contractors from Grade 1 or 2 upwards – which largely
convolute the objectives of contractor development with objectives of job creation when
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combined in Programmes with higher grade contractors. Contractor Grades 1 to 3 are in
fact the most competitive and unsustainable sectors (CIDB Status Quo Report, 2009). A
focus within CDPs on these sectors also results in budget and projects allocations that
are often fragmented to create opportunities for contractors that do not necessarily have
the potential to develop into higher grade contractors.
Such Programmes are often established to pursue specific socio-economic objectives
as the main objective, artificially creating a construction demand, particularly in the
lower grades. As a result, these CDPs become job-creation initiatives with short term
impact and do not lead to long-term sustainable contracting enterprises. As a result of
the convolution of objectives, by capturing these as CDP’s neither contractor
development nor the EPWP goals are attained (CIDB Status Quo Report, 2009).
PROGRAMME Target Grades
National Contractor Development Programme (NCDP) 1 to 5
National Department of Public Works Contractor Incubator Programme (NDPW CIP) 3 to 7
Masakhe Emerging Contractor Development Programme (Masakhe ECDP) 2 to 5
ESKOM Contractor Academy 1 to 3
Source: Status Quo Report: SA Contractor Development Programme, March 2009
The NCDP (Section2.5) recommends that contractor Grades 1 and 2 should focus on
construction workforce development through artisan and supervisor development, while
contractor Grades 2 and 3 should focus on emerging contractor development
incorporating, predominantly, a mentorship model. An extension to this concept is that
contractor Grades 1 to 3 offer an opportunity for a focus on “trade contractors” (such as
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tiling, plumbing or plastering enterprises), which requires key competencies of business,
construction management, and artisan skills. Furthermore, other than the NDPW CIP,
the DPW EC CIDP and the ECDC IECDM, there appears to be very little focus on the
development of higher grade contractors (CIDB Status Quo Report, 2009).
In this regard it should be noted that the primary objective of a CDP is, by definition, to
create developmental opportunities for emerging contractors – and not simply to create
work opportunities for new entrants. The primary objective of a CDP must therefore be
measured in terms of an increase in the level of skills, competencies and experience
attained by a contractor – enhancing the emerging contractor’s path towards
sustainability. Such development is usually measured in terms of attaining:
• Accredited NQF Level qualifications in construction management;
• Industry accepted performance standards; and / or
• Increased financial capability (such as an increase in the contractor’s cidb Grade).
It should be noted that an objective of the ESKOM CDP is to develop a delivery capacity
in line with ESKOM’s service delivery objectives in a sector where known shortages
exist. Other than the ESKOM programme, there is very little evidence that any CDPs
take any cognizance of capacity constraints in specific sectors – and in particular in
areas such as mechanical and electrical engineering as well as in special works
categories (CIDB Status Quo Report, 2009).
In addition to the above, there appears to be very little alignment in the CDPs assessed
between available public sector spend and the target groups – which is undermining the
sustainability of contractors in many areas. This is not only limited to a dominant focus
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within CDPs on Grade 1 to 3 contractors, but extends beyond Grade 3 contractors in
some provinces where supply and demand are out of alignment. Furthermore,
significant opportunities exist for CDPs to focus on contractor development in higher
Grades (say Grades 5 to 7) where equity ownership remains very skew.
4.9. Private Sector Support Programmes for SMME’s
Outside the public sector, two seemingly contradictory processes have picked up
momentum during recent years. On the one hand, many of the NGOs and CBOs active
in the small enterprise support sphere have faced declining public or foreign (donor)
funding, which forced them to rationalize, scale down the range and spread of activities,
merge with other bodies or close down altogether. At the same time there has been a
rapid increase in the number and activity range of private, profit-based service suppliers
focusing on particular needs of small enterprises. These include private persons helping
entrepreneurs with the preparation of their business plans, mentors, marketing agents,
and more generally, the suppliers of financial, business and property services as well as
training and related consultancies. Some of these services are supplied as part of
service packages of financial, marketing, insurance and human resources service
suppliers, whereas others focus more narrowly on specific needs of small enterprises.
In many cases these private services are financially supported by public sector support
programmes, which mean the private service supplier is only the implementing agency.
This approach is highly recommended in international circles of small enterprise support
agencies.
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Also falling within this category is the steadily expanding trend of larger enterprises
providing development services or outreach programmes for small enterprises – be it
their clients, their suppliers or some other target group/s. This can be in the sphere of
procurement, in training programmes or in the sponsoring of vouchers (for discounts on
service charges).
In the longer term, the role of PPPs is likely to expand further, given government’s
strong commitment towards PPPs in the economic development area and their positive
track record in the implementation of support programmes. Yet, PPPs cannot be viewed
as an alternative to public sector funding for basic services.
4.9.1. Standard Bank Support Programmes for SMME’s
Standard Bank South Africa has established an Enterprise Development team to
support small enterprises. This team reviews the bank’s existing offerings to small and
medium enterprises (SMEs) and provides new and supportive services to meet the
needs of this market. With a majority of businesses failing during their first two years of
operation, the team focuses on new businesses, providing financial and non-financial
services and tools. Extensive work is done to revise how the bank funds these
businesses, including how they are assessed for loans and finding relevant capital
funding solutions.
The bank is establishing a model that combines financial support, business
development support and market access through corporate supply chains, particularly
for black owned and black women owned businesses. Standard Bank has developed a
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list of preferred business development support providers and are piloting a tool to track
the success of their interventions. The team collaborates with Procurement and
Logistics unit and other large corporate entities in South Africa to facilitate SME access
to supply chains and is creating solutions to help SMEs manage their businesses and
cash flows.
Standard Bank South Africa’s service offerings to SMEs include leveraged finance,
contract finance and franchising. The bank works with key stakeholders such as the
Department of Trade and Industry, development finance institutions, provincial and local
governments and associated agencies in this regard. Alliances have been made with
the Khula Enterprise Indemnity Scheme and the KwaZulu-Natal Department of
Economic Development Fund. In 2010, a number of businesses supported by the
KwaZulu-Natal development fund received business development support to aid their
growth. Standard Bank also has a Memorandum of Understanding with the Construction
Industry Development Board in South Africa to facilitate access to finance for emerging
contractors that have been awarded contracts by private or public companies.
Over the past years, black SMEs (BSMEs) in South Africa have been afforded greater
opportunity. Their success has however been hindered in part by their lack of general
business experience and technical expertise, late payments from corporates and
government, inadequate screening and assessment processes when awarding tenders
and the misuse of finance received. Standard Bank South Africa is working to ensure
sustainable finance is provided to BSMEs. This includes developing new support
structures with corporates, development finance institutions and provincial
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governments, and engaging with them on issues such as late payments and proper
assessments of BSMEs’ capabilities during tendering. Where traditional balance sheet
lending does not suffice, the bank is enhancing its product offering to meet the needs of
BSMEs.
4.9.2. Drake & Scull Facilities Management and Vulindlela Holdings (DSVH)
Drake & Scull Facilities Management and Vulindlela Holdings (PTY)LTD participates in
Private Public Partnerships across diverse industries biased towards infrastructure
development The Emerging Contractors Development Programme, an initiative aimed
at achieving meaningful empowerment.
To date, a total of 325 residential houses have been renovated by DSVH, with the value
of project work in this area alone falling in the region of R174 million. Of this amount,
almost 50% has been spent on Emerging Contractors – small companies owned and
run by formerly disadvantaged individuals, or entrepreneurs who’ve had to carve their
careers out of the bedrock of an impoverished background. DSVH, seeing the incredible
potential in these contractors, decided to support them with a special initiative.
The Emerging Contractors Development Programme (ECDP) Encapsulated within the
DSVH contract with the Department of Public Works, the Emerging Contractors
Development Programme (ECDP) has been designed to develop the technical and
entrepreneurial skills of small to medium-sized enterprises, in an on-site, “live” project
environment. Ultimately, it gives participating contractors greater access to contract
opportunities within governmental and private sectors of the economy. More broadly,
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the programme is designed to support and further the enterprises of Previously
Disadvantaged Contractors, particularly women.
The programme incorporates an intensive course that provides training to equip
Emerging Contractors with the basic business skills so essential for running a
successful company within the construction industry. Course material covers critical
aspects such as Financial & Business Management, tender and contract paperwork,
legal issues, Occupational Health & Safety, HIV/AIDS in the workplace and other
pertinent matters. Contractors emerge from the course with their preexisting experience,
abilities or motivation augmented by applicable business knowledge.
4.9.3. First National Bank Support Programmes for SMME’s
The First National Bank has identified that South Africa's historic background and its
impact on the construction industry, means that very few of the emerging construction
enterprises are able to meet the stringent and sometimes constraining conditions
demanded for public and private sector projects (CIDB Media Release, 2008). Some of
the challenges that emerging contractors face include: high capital outlay requirements,
project and business management skills, capacity to deliver in volumes and to handle
large projects. Most of these challenges relate to the issue of access to project finance
and related financial management. In an effort to address some of these challenges,
FNB and the cidb are working together to provide services and products, inclusive of
business management skills training and mentoring to cidb registered contractors, and
to continually share information and give guidance to small enterprises that seek
financial support.
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The CIDB media release also stated that in terms of the memorandum of
understanding, FNB will provide banking business accounts to cidb registered
contractors enabling them to make and receive payments as well as providing tailored
finance packages to contractors that meet the criteria set by the Bank. Emerging
contractors will also be eligible to receive assistance in developing business plans
through FNB's small business channel Biznetwork. FNB's Enterprise Development and
Start-Up divisions whose objective is to provide small businesses across all sectors of
the economy with financial and business development services (non-financial support),
will capacitate and enable contractors to contribute significantly in the creation of
sustainable employment , business growth and achieve long term profitability ensuring a
move from second economy into first economy sector - an objective shared by the
National Department of Public Works and cidb in the jointly established National
Contractor Development Programme (NCDP). When signing the Memorandum, Mr.
Arrand said
"We are excited about this partnership and we believe it is the beginning of
a process of building enduring and rewarding relationship with the CIDB,"
He concluded by saying that "FNB is committed to helping to grow small
businesses for the betterment of South Africa's economy."
The cidb's role includes, among others, provision of guidelines on appropriate
procurement methodologies for registered contractors; facilitation of access to cidb
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support initiatives for contractors referred to the cidb by FNB and to establish an
enabling framework to deliver access to finance, training, mentoring and knowledge
tools (CIDB Media Release, 2008). The implementation of the MOU is through the
Provincial Construction Contact Centres (CCC's) simultaneously allowing FNB direct
exposure to cidb registered contractors. The CEO of cidb said that
"This MOU is a commitment of the cidb and FNB to grow and develop
contractors", he said that "the success is not in the signing of the MOU but in
the results and the impact thereof to the industry and, most importantly, to
the emerging contractors".
4.10. Role of the Construction Industry Development Board (CIDB)
The Construction Industry Development Board (cidb) – as stated on its website is a
Schedule 3A public entity - was established by Act of Parliament (Act 38 of 200) to
promote a regulatory and developmental framework that builds:
• The construction delivery capability for South Africa’s social and economic
growth.
• A proudly South African construction industry that delivers to globally competitive
standards.
The CIDB is tasked with providing strategic leadership to stakeholders in the
construction industry in order to stimulate sustainable growth, reform and improvement
of the industry, for effective delivery and the industry’s enhanced role in the country’s
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economy. The mandate given to cidb by its Act includes the standardization of public
procurement of construction and the introduction of Registers of Contractors and of
Projects. These actions had to be taken within three years of its establishment. In order
to fulfill its mandate, cidb has created four programmes, which also are the basis of its
management structure. These are:
• Procurement and Delivery Management
• Construction Registers Service
• Industry Development
• Growth and Contractor Development.
The cidb’s focus is on
• Sustainable growth, capacity development and empowerment
• Improved industry performance and best practice
• A transformed industry, underpinned by consistent and ethical procurement
practices
• Enhanced value to clients and society
Construction plays a vital role in South Africa’s economic and social development. It
provides the physical infrastructure and backbone for economic activity. It is also a
large-scale provider of employment. The legacy of Apartheid has, however, left the
South African construction industry with a number of development and transformation
challenges. These include:
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• Improving effectiveness of public sector spending on physical infrastructure
development and maintenance.
• Improving labour absorption, labour relations and job stability.
• Accelerating sustainable transformation through access to opportunity, finance
and training.
• Reducing the impact of HIV and AIDS in construction
• Ensuring international competitiveness.
In 1997 government published the Green Paper on “Creating an Enabling Environment
for Reconstruction, Growth and Development in the Construction Industry" paving the
way for establishment of the cidb. The cidb Act (Act 38 of 200) was passed in October
2000 establishing the cidb mandate to lead stakeholders in construction development.
The CIDB Act mandates the Board to:
• Establish a national register of contractors and of construction projects to
systematically regulate, monitor and promote the performance of the industry for
sustainable growth, delivery and empowerment.
• Promote improved delivery management capacity and the uniform application of
procurement policy throughout all spheres of government.
• Promote improved performance and best practice of public and private sector
clients, contractors and other participants in the construction delivery process.
• Promote sustainable participation of the emerging sector.
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• Provide strategic direction and develop effective partnerships for growth, reform
and improvement of the construction sector.
Other key outputs and other aspects of these programmes are:
Procurement and delivery management aligned with government supply chain
management policy;
• Code of Conduct for all participants in construction procurement
• Library of Construction Procurement Best Practice
• Standard for Uniformity in Construction Procurement
• Compendium of Legislation affecting the construction industry
• The Toolkit Delivery Management System, which forms the basis of the Infrastructure
Delivery Improvement Programme (IDIP).
Public bodies are now mandated by the Supply Chain Management Regulations to use
cidb procurement prescripts.
The CIDB was also established to provide leadership to stakeholders and to stimulate
sustainable growth, reform and improvement of the construction sector for effective
delivery and the industry’s enhanced role in the country’s economy.
The CIDBs’ mission is to direct and drive an integrated construction industry
development strategy that transforms the role of industry and stakeholders for
sustainable growth, improved delivery, performance and value to public and private
sector clients, and investors through strategic partnerships; to strategically and
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deliberately promote the empowerment of small, medium and micro enterprises to
improve their capability and grow the economy; to develop employees to be meaningful
participants in the organization.
4.11. Role of the National Homebuilders Registration Council (NHBRC)
The NHBRC was established as a company not for gain to provide standards for the
home building industry and protect housing consumers from unscrupulous builders. It is
also a statutory body that acts as a housing consumer protection body working in
partnership with responsible homebuilders to maintain and improve the quality of all
newly constructed homes in South Africa. It provides additional methods of redress for
consumers in response to increasing concern from consumer bodies and mortgage
lenders. The NHBRC registers home builders, lays down minimum standards and
requires builders to provide a warranty on all bondable new houses. Every builder
wishing to access credit must be registered with the NHBRC and conform to its building
standards and guidelines. Consumers, who want to acquire a bank loan to buy a newly
built house, may buy only a house that has been built by a registered builder. The
functions of the NHBRC also provides benefits to financial institutions by ensuring that
they are investing in quality products, even if that investment is in the low income
housing sector.
The NHBRC became a statutory body with the introduction of the Housing Consumers
Protection Measures Act, 1998, Act 95 of 1998. The primary mandate of the Housing
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Consumers Protection Measures Act is to regulate the activities of practitioners involved
in the business of home building with a view to improving quality standards in the home
building industry. The Act provides for the NHBRC to undertake the following activities:
regulating the home building industry
representing the interests of housing consumers
providing protection to housing consumers should builders not comply with the
stipulations of the Act
improving home building quality through standards that address the
building process
assisting home builders through training and inspection
promoting consumer rights and providing consumer information
expanding consumer protection to the housing subsidy sector of the
market
communicating with and assisting builders to register in terms of the Act (South
Africa, 2000b)
The NHBRC’s mission is firstly to protect housing consumers by establishing,
implementing and regulating quality standards in the home building industry and
secondly, to establish a warranty fund and to provide assistance to housing consumers
under circumstances where homebuilders fail to meet their obligations. Accolade
Construction is registered with the NHBRC and is, therefore required to build to their
prescribed standards, all of which were established to protect the consumer
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4.12. Discussion of the literature review
As it has been mentioned in the literature most commentators found that managerial,
financial, expansion, and environmental factors do contribute enormously to company
failure in the construction industry. These factors pose a very difficult challenge to the
owners of small and medium contractors because they do not have training or
experience and when they do not stand up to the challenge they suffer a great deal as
they will not operate their companies effectively and efficiently.
The Contractor Development Programmes in South Africa play a vital role in ensuring
that the small and medium contractors are well developed to partake in the construction
industry. The literature shows that the public sector is more involved in the development
programmes more than the private sector, with all the different programmes in place.
The literature from both South Africa and International do not differ from each other as
they both have similar points and factors that describe the causes of small and medium
construction companies. Throughout the world, one finds the SMME's are playing a
critical role in absorbing labour, penetrating new markets and generally expanding
economies in creative and innovative ways ( Ndlovu and Thwala, 2008).
The USA, Ghana and South African literature confirms previous research which
indicates that a major reason for failure among small firms is poor management and
financial management. It also suggests that failure can be caused by a variety of factors
and amongst them that were also identified are expansion of the company as well as
the countries economic state that dictates how the whole construction industry. Some of
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the lessons from the literature are that the construction SMME sector suffers from the
same challenges and there is a similar trend from the different countries.
4.13. Conclusion
This chapter highlighted the South African literature by different scholars and
commentators have mentioned that operating a small or medium construction company
has possibilities of success and failure. The development programmes that are in place
in South Africa as well as the other countries were assessed and lessons learnt were
identified.
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CHAPTER 5
5.0. Research methodology
5.1. Introduction
This chapter explains the research methodology which was adopted in undertaking the
study. Buys (2002) explained research methodology as the way in which researchers
proceed to solve problems. Fellows and Liu (1997) added by stating that it is the
principles and procedures of logical thought process which are applied to a scientific
investigation. It also clarifies the steps to be taken in this study to ensure the research
data is accurate and the research is rigor. Quantitative research approach was selected
for this research. The reasons are to provide a critical perspective on the research as
stated in the research title which will provide more rigor and validity to the research.
Furthermore, the research protocol and field procedure are examined to ensure that the
samples chosen for the questionnaire method used will provide an unbiased and
accurate research data.
5.2. Background of the Free State Province
The Free State lies in the heart of South Africa, with the Kingdom of Lesotho nestling in
the hollow of its bean-like shape. Between the Vaal River in the north and the Orange
River. Bloemfontein is the capital of the province. The city has a well-established
judicial, institutional and administrative infrastructure.
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The road network density of the province is the third-highest in the country. The big
national road which is the artery between Gauteng and the Western and Eastern Cape,
passes through the middle of the Free State.
Important towns include Welkom, the dynamic pulsing heart of the goldfields and one of
the few completely pre-planned cities in the world; Virginia and Odendaalsrus, other
gold mining towns; Sasolburg, which owes its existence to the petrol-from-coal
installation established there; Kroonstad, an important agricultural, administrative and
educational centre; Parys on the banks of the Vaal River; Phuthaditjhaba, well-known
for the beautiful handcrafted items produced by the local people, and Bethlehem,
gateway to the Eastern Highlands of the Free State.
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|Source:www.places.co.za, 2012 |
On a national basis, the Free State contributes about 16,5% of South Africa’s total
mineral output. The mining industry is the biggest employer in the Free State and is
responsible for some 22,6% of GGP of the province. Investment opportunities are
substantial in productivity improvement areas for mining and related products and
services.
Vision 2014 was recently adopted by the National Government of South Africa and is
regarded by the Free State Growth and Development Strategic Plan (FSGDSP) as one
of the most important guiding documents for development in the Free State.
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The combination of some of the most important targets and objectives making up Vision
2014 are as follows:
• Reduce unemployment by half through new jobs, skills development, assistance to
small businesses, opportunities for self-employment and sustainable community
livelihoods.
• Reduce poverty by half through economic development, comprehensive social
security, land reform and improved household and community assets.
• Provide the skills required by the economy, build capacity and provide resources
across society to encourage self-employment with an education system that is
geared to productive work, good citizenship and a caring society.
In the case of the Free State, this implies an economic growth rate between 6% and 7%
per annum up to 2014 (FSDCA, 2007). Emphasis should be placed on development
projects that are labour intensive like the EPWP. Skills development is also critical,
especially medium-skilled workers, in realising accelerated economic and employment
growth in the Free State Province.
Basic infrastructure provision in the Free State has an impact on the socio-economic
conditions of its local communities. The lack of infrastructure and basic services induces
a risk adverse environment. The efficiency of local government in terms of infrastructure
provision influences business location and investment. Infrastructure includes access to
land, buildings, road networks and services, such as electricity, water, waste collection
and sewerage services. Infrastructure development is regarded as one of the most
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prominent methods of employment creation, due to the high level of labour intensity that
can be related to it.
It is imperative that local spheres of government in the Free State provide sufficient
basic infrastructure and services to communities in order to improve the living
conditions, as well as to create an attractive business and investment environment.
Infrastructure development should be done in a labour intensive way, creating
employment opportunities for local communities, including women and the disabled.
This form of employment generation has been recommended as a successful method of
government intervention for local economic development in South Africa (Makgoe,
2008).
5.3. Small and Medium Sized Contractors in the Free State Province
The Emerging Contractor Development Programme (ECDP) was established in the
Free State to provide a database for all small and medium contractors, provide advice
on procurement and administration, provide basic counselling, categorise contractors,
and provide them with advice and referral services regarding the various sources of
possible support such as Ntsika and Khula. Specific emphasis is placed on the
promotion of Black people, emergent contractors and women contractors. An important
piece of legislation is the Preferential Procurement Policy Framework Act (Act 5 of
2000), which governs the allocation of contracts to emergent contractors in support of
BEE.
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Makgoe (2008) stated that the main reason why Public Works programmes have stayed
small in South Africa, with the exception of the EPWP and the CPWP, is that they lack
the involvement of the private sector and corporative state enterprises, such as Telkom
and Eskom. Experience has shown that government departments cannot provide large-
scale delivery on their own.
Labour-intensive infrastructure provision in the Free State should take the form of
public-private partnerships (PPPs). The unemployed would gain income, marketable
skills, confidence and dignity. Business would gain directly from contracts won in return
for the use of labour-intensive techniques and indirectly from an improved infrastructure
and a better investment climate. That way, businesses and local communities will feel
that government is doing something tangible about unemployment (FSDCA, 2008).
Small, Medium and Micro Enterprises (SMME) are recognised worldwide for their
potential to generate job opportunities, particularly when the economy is on a downward
trend.
Within the macro-economic context provided by the GEAR strategy, the specific
framework for SMME development was set forth in the 1995 White Paper on Small
Business (South Africa 1995), which together with the National Small Business
Development Act of 1996 paved the way for the launch of a range of new support
institutions and initiatives.
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The Small Enterprise Development Agency (2009) clearly elaborated that the
importance of the SMME economy for economic development and job creation in the
Free State has been clearly acknowledged in several development strategies and plans
for the province. It has been announced that DTI will release a new refocused strategy
for SMME development to replace the policy approach that had been in operation since
1994. Key issues that impact upon SMME development that have emerged since 1995
are those of local economic development, Black Economic Empowerment and the DTI’s
own changing economic frameworks, most importantly the Integrated Manufacturing
Strategy.
Economic research in the Free State conducted under the Premier’s Economic Advisory
Council (PEAC) indicated that the formal economy of the province is simply not able to
absorb all the newcomers to the labour market. It is furthermore highly unlikely that this
trend in the provincial economy will be reversed in the short to medium term. This
situation suggests strongly that SMMEs provide one of the only possible ways to reduce
the current high level of unemployment and poverty in the Free State. A critical
prerequisite for successful SMME development is entrepreneurship. Entrepreneurship
in this regard does not only refer to knowledge and experience in business
administration, but most importantly, to a high level of motivation, drive and work ethics.
The CIDB grading register by class of works as of 29 June 2011states that there were
5512 active registered contractors (3163 are General Building contractors and 1326 are
Civil Engineering contractors), 1960 were suspended, 13 have been deregistered, and
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2253 have expired in the Free State Province. The contractors that were suspended,
deregistered and have expired are all inactive and are not functioning properly
according to the CIDB, which can be interpreted that they are not succeeding as
business entities and can therefore be regarded as failing companies as it was
discussed in chapter4 in the different types of company failures.
5.4. Research progression
The researcher worked as the fieldworker by distributing the questionnaires and asking
questions beyond those included in the questionnaires. This was particularly aimed at
gaining quantitative data. The strength of the quantitative data was based on the fact
that data collection is going to be focused on the natural occurrences of running the
business within the different companies. The questionnaire was designed by the
researcher under the supervision of Professor W.D. Thwala. The questionnaires was
tested by being distributed to the small and medium contractors, completed by owners
or directors of registered construction companies as these persons would be in a
position of authority to reflect on the actual situation, which would enable proper and
accurate comparisons to be made in the Free State Province. This study was conducted
with companies that are situated in Bloemfontein, Welkom, Virginia, Kroonstad,
Odendaalsrus, Allanridge, Theunissen and Hennenman which are towns that are all in
the Free State Province. The visitations and distribution to these companies was over a
period of approximately four months and the primary focus was on their management
styles in the company and interactions with everyone involved in the company.
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5.5. Research design
The first step in research protocol is to decide on the research methodology. Leedy and
Ormrod (2005) described research methodology as an attempt to systematically find an
answer to a research question with the support of demonstrable facts. Thus research is
a process of inquiry and investigation which is systematic and methodical.
A synthesis of literature (for example Blumberg et al 2005; Gay and Airasian, 2003;
Silverman, 1985; Sekaran, 1992; Fox, 1969) would suggest that research process
would proceed in steps as illustrated in the figure below:
Source: Leedy and Ormrod (2005)
1.) Identify area of
research focus
2.) Conduct a literature
search and review
3.) Formulate research
questions
4.) Select appropriate
research strategy
5.) Identify unit of analysis and
determine sample size and
identities
6.) Design data collecting
instrument
7.) Collect data
8.) Analyze and interpret
results in respect of the
9.) Draw conclusions
and make recommendations
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5.6. Research Methods
5.6.1. Qualitative method
The qualitative research interview seeks to describe and the meanings of central
themes in the life world of the subjects. Qualitative research is "an empirical inquiry” in
research (Yin 1994) such as to investigate causes of failure among small and medium
construction companies in the Free State Province. The main task in interviewing is to
understand the meaning of what the interviewees say (Kvale, 1996). A qualitative
research interview seeks to cover both a factual and a meaning level, though it is
usually more difficult to interview on a meaning level (Kvale, 1996). Interviews are
particularly useful for getting the story behind a participant’s experiences. The
interviewer can pursue in-depth information around the topic. Interviews may be useful
as follow-up to certain respondents to questionnaires, e.g., to further investigate their
responses. (The Qualitative method describes things as they are. It is also referred that
it is the analysis and interpretation of observations for the purpose of discovering
underlying meanings and patterns of relationships, including classifications of types of
phenomena and entities, in a manner that does not involve mathematical models.
Johnson (1995), notes that qualitative methodologies are powerful tools for enhancing
our understanding of teaching and learning, and that they have gained increasing
acceptance in recent years.
Researchers have long debated the relative value of qualitative and quantitative inquiry
(Patton, 1990). Phenomenological inquiry, or qualitative research, uses a naturalistic
approach that seeks to understand phenomena in context-specific settings.
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Qualitative research, broadly defined, means "any kind of research that produces
findings not arrived at by means of statistical procedures or other means of
quantification" (Strauss and Corbin, 1990). Where quantitative researchers seek causal
determination, prediction, and generalization of findings, qualitative researchers seek
instead illumination, understanding, and extrapolation to similar situations. Qualitative
analysis results in a different type of knowledge than does quantitative inquiry.
Qualitative research and evaluation are located toward the fictive end of the continuum
without being fictional in the narrow sense of the term (Eisner, 1991).
There are several considerations when deciding to adopt a qualitative research
methodology. Strauss and Corbin (1990) claim that qualitative methods can be used to
better understand any phenomenon about which little is yet known. They can also be
used to gain new perspectives on things about which much is already known, or to gain
more in-depth information that may be difficult to convey quantitatively. Thus, qualitative
methods are appropriate in situations where one needs to first identify the variables that
might later be tested quantitatively, or where the researcher has determined that
quantitative measures cannot adequately describe or interpret a situation.
Several writers have identified what they consider to be the prominent characteristics of
qualitative, or naturalistic, research (Eisner et. al, 1991). The list that follows represents
a synthesis of these authors' descriptions of qualitative research:
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1. Qualitative research uses the natural setting as the source of data. The researcher
attempts to observe, describe and interpret settings as they are, maintaining what
Patton calls an "empathic neutrality".
2. The researcher acts as the "human instrument" of data collection.
3. Qualitative researchers predominantly use inductive data analysis.
4. Qualitative research reports are descriptive, incorporating expressive language and
the "presence of voice in the text".
5. Qualitative research has an interpretive character, aimed at discovering the meaning
events have for the individuals who experience them and the interpretations of those
meanings by the researcher.
6. Qualitative researchers pay attention to the idiosyncratic as well as the pervasive,
seeking the uniqueness of each case.
7. Qualitative research has an emergent (as opposed to predetermined) design, and
researchers focus on this emerging process as well as the outcomes or product of the
research.
8. Qualitative research is judged using special criteria for trustworthiness.
Furthermore, some researchers believe that qualitative and quantitative research can
be effectively combined in the same research project (Strauss and Corbin, 1990;
Patton, 1990).
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5.6.2. Quantitative method
Quantitative research is thought to be objective whereas qualitative research often
involves a subjective element (Ross, 1999). Quantitative research refers to the
systematic empirical investigation of quantitative properties and phenomena and their
relationships. The process of measurement is central to quantitative research because it
provides the fundamental connection between empirical observation and mathematical
expression of quantitative relationships.
Quantitative research is generally made using systematic methods, which can include:
* The generation of models, theories and hypotheses
* The development of instruments and methods for measurement
* Experimental control and manipulation of variables
* Collection of empirical data
* Modeling and analysis of data
* Evaluation of results
The objective of quantitative research is to develop and employ mathematical models,
theories and/or hypotheses pertaining to phenomena. This research methodology is
appropriate where quantifiable measures of variables of interest are possible, or where
hypotheses can be formulated and tested, and inferences drawn from samples of
populations (Liebscher 1998).
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Quantitative research uses methods adopted from the physical sciences that are
designed to ensure objectivity, generalizability and reliability (Weinreich, 2006). These
techniques cover the ways research participants are selected randomly from the study
population in an unbiased manner, the standardized questionnaire or intervention they
receive and the statistical methods used to test predetermined hypotheses regarding
the relationships between specific variables. The researcher is considered external to
the actual research, and results are expected to be replicable no matter who conducts
the research.
The strengths of the quantitative paradigm are that its methods produce quantifiable,
reliable data that are usually generalizable to some larger population. Quantitative
measures are often most appropriate for conducting needs assessments or for
evaluations comparing outcomes with baseline data. This paradigm breaks down when
the phenomenon under study is difficult to measure or quantify. The greatest weakness
of the quantitative approach is that it decontextualizes human behavior in a way that
removes the event from its real world setting and ignores the effects of variables that
have not been included in the model.
The functional or positivist paradigm that guides the quantitative mode of inquiry is
based on the assumption that social reality has an objective ontological structure and
that individuals are responding agents to this objective environment (Morgan &
Smircich, 1980). Quantitative research involves counting and measuring of events and
performing the statistical analysis of a body of numerical data (Smith, 1988). The
assumption behind the positivist paradigm is that there is an objective truth existing in
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the world that can be measured and explained scientifically. The main concerns of the
quantitative paradigm are that measurement is reliable, valid, and generalizable in its
clear prediction of cause and effect (Cassell & Symon, 1994).
Being deductive and particularistic, quantitative research is based upon formulating the
research hypotheses and verifying them empirically on a specific set of data (Frankfort-
Nachmias & Nachmias, 1992). Scientific hypotheses are value-free; the researcher's
own values, biases, and subjective preferences have no place in the quantitative
approach. Researchers can view the communication process as concrete and tangible
and can analyze it without contacting actual people involved in communication (Ting-
Toomey, 1984).
The strengths of the quantitative method include:
• Stating the research problem in very specific and set terms (Frankfort-Nachmias
& Nachmias, 1992);
• Clearly and precisely specifying both the independent and the dependent
variables under investigation;
• Following firmly the original set of research goals, arriving at more objective
conclusions, testing hypothesis, determining the issues of causality;
• Achieving high levels of reliability of gathered data due to controlled
observations, laboratory experiments, mass surveys, or other form of research
manipulations (Balsley, 1970);
• Eliminating or minimizing subjectivity of judgment (Kealey & Protheroe, 1996);
169
• Allowing for longitudinal measures of subsequent performance of research
subjects.
The weaknesses of the quantitative method include:
• Failure to provide the researcher with information on the context of the situation
where the studied phenomenon occurs;
• Inability to control the environment where the respondents provide the answers
to the questions in the survey;
• Limited outcomes to only those outlined in the original research proposal due to
closed type questions and the structured format;
• Not encouraging the evolving and continuous investigation of a research
phenomenon.
The study also focused slightly on qualitative data on the open-ended questions and
where data was collected by reviewing related literature, and gathering information
through journal articles, internet, and construction magazines. Data analysis and
identification of the most relevant factors influencing causes of contractor failures was
the primary and secondary sources. The use of past studies on causes of company
failure topic from different countries was also utilized. The author then wrote a report
that combined the relevant theory and previous research with the results of the practical
research done.
Apart from the demographic details contained in the questionnaires, a section on a list
of challenges experienced by the small and medium contractors was included. The
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magnitude of these challenges were measured by means of a likert scale of 1 – 5 (The
ratings were as follows (1) = To no extent, (2) = To small extent, (3) = Moderate, (4)
= To large extent, (5) = To very large extent.). A likert scale is the most popular
type of scale in Social Sciences and is used to measure multi-dimensional attitudes.
Likert scales were originally developed by Rensis Likert, a sociologist at the University
of Michigan from 1946 to 1970. Likert was concerned with measuring psychological
attitudes, and wished to do this in a "scientific" way. Specifically, he sought a method
that would produce attitude measures that could reasonably be interpreted as
measurements on a proper metric scale, in the same sense that we consider inches or
degrees Celsius true measurement scales. Other social scientists, such as Thurstone,
had already developed sophisticated methods for measurement of psychological
phenomena, but these were unsuited for Likert's attitude research. Likert, after trying
various alternatives, gradually developed what we now call Likert scales.
By Likert's method, a person's attitude is measured by combining (adding or averaging)
their responses across all items. This summing or averaging across several items was
essential for Likert to contribute to genuine measurement.
Several characteristics or features that define a Likert scale are noted:
1. The scale contains several items.
2. Response levels are arranged horizontally.
3. Response levels are anchored with consecutive integers.
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4. Response levels are also anchored with verbal labels which connote more-or-less
evenly-spaced gradations.
5. Verbal labels are bivalent and symmetrical about a neutral middle
6. In Likert's usage, the scale always measures attitude in terms of level of
agreement/disagreement to a target statement.
In this instance it will be analyzed by using the statistical standard deviation method and
ranked with the highest weighting factor to the lowest.
5.7. Sampling
Sampling is a technique of selecting willing members of the population and involving
them in a study such that the results are representative of the entire population It is a
convenient and cost saving approach to a research study (Asraf and Brewer, 2004).
Naoum (2007), and Fellows and Liu (2007) presented the following procedures of
sampling:
� Random sampling – Is a sampling procedure where the sample is derived by
randomization process from a homogenous or homogenous conglomerate
texture population.
� Systematic sampling – This form of sampling procedure, as the name implies, is
a systematic selection of certain items according to a predetermined criterion.
� Stratified sampling – This sampling procedure essentially uses stratified
population instead of homogenous population.
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� Cluster or area sampling – This sampling procedure entails sampling into groups
of a large population which is spread over a large area.
Fellows and Liu (1997), argue that if there is no evidence of variation in the population
structure, or if there is no reason to ignore the structure then random sampling
procedure is appropriate.
To obtain a representative sample that truly reflects the population, the researcher had
to look carefully at the nature and characteristics of the population (Leedy and Ormrod,
2005) to determine the type, method and procedure for sampling.
After identifying, classifying and listing the enterprises, the next step was to determine
an appropriate sampling strategy to identify the specific companies in terms of number
and identities (sample) that had to be studied. A database of small and medium
contractors was obtained from the CIDB registered contractors list, were the contractors
were randomly selected and a maximum of 120 small and medium sized contractors
were surveyed. The fieldworker distributed the questionnaires to the owners or the
persons who are responsible for the construction firms.
For the best sampling method chosen for this study, small and medium construction
companies of various sizes were selected. Literature review indicated that companies of
varying sizes differ in their profiles relating their competencies and income. It was
therefore useful for the author to employ a sampling method that acknowledges the fact
that there are different types of companies due to size differences and perhaps the
same companies within a class.
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5.8. The questionnaire
Wikipedia describes a questionnaire as a series of questions asked to individuals to
obtain statistically useful information about a given topic. When properly constructed
and responsibly administered, questionnaires become a vital instrument by which
statements can be made about specific groups or people or entire populations. They are
a valuable method of collecting a wide range of information from a large number of
individuals, often referred to as respondents.
5.8.1. Advantages of a Questionnaire
Questionnaires are very cost effective when compared to face-to-face interviews. This is
especially true for studies involving large sample sizes and large geographic areas.
Written questionnaires become even more cost effective as the number of research
questions increases. Questionnaires are easy to analyze. Data entry and tabulation for
nearly all surveys can be easily done with many computer software packages.
Questionnaires are familiar to most people. Nearly everyone has had some experience
completing questionnaires and they generally do not make people apprehensive.
Questionnaires reduce bias. There is uniform question presentation and no middle-man
bias. The researcher's own opinions will not influence the respondent to answer
questions in a certain manner. There are no verbal or visual clues to influence the
respondent. Questionnaires are less intrusive than telephone or face-to-face surveys.
When a respondent receives a questionnaire in the mail, he is free to complete the
questionnaire on his own time-table. Unlike other research methods, the respondent is
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not interrupted by the research instrument. Some people might be scared when
answering questions (Wikianswers.com,2011).
5.8.2. Disadvantages of a Questionnaire
Questionnaires are impersonal, this means that it may be difficult to understand
answers and thus to act on them. Also, there is a chance that the question may be
misinterpreted, rendering the answer useless. Questionnaires also invite people to lie
and answer the questions very vaguely which they would not do in an interview.
Open questions can take a lot of time to collect and analyze. People are not always
willing to fill questionnaires in so they may just throw them always. Sometimes
questions used are too standardized (closed) so some peoples preferred answers may
not be included, and this also does not allow for much detail. Peer pressure of
embarrassment may cause people to not want to answer certain questions, or they may
want to impress the researcher and fabricate the truth by filling in untrue answers,
making questionnaires unreliable and sometimes invalid (Wikianswers.com, 2011).
5.8.3. The Questionnaire Structure
According to Desta (2006), a research design should ensure that the evidence collected
addresses the research questions and is essential to ensure coherence and rigour. It is
necessary because it is the questionnaire that will provide the data to test the validity of
the problem statement and in order to acquire relevant data the appropriate question
must be asked.
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The measuring instrument (or data collection instrument) in form of a questionnaire
consists of four major parts namely classification, managerial factors, financial factors,
expansion factor and economic environmental factors. Each briefly describes in terms of
what it sought to investigate. Categorized questions sought to identify the attributes of
respondents and group them accordingly, for example, CIDB grading of the company,
age, number of people employed and location to name but a few. In other words the
section provided the demographic profile of the respondents with intention of providing
further explanations to some observed facts.
5.8.3.1. Managerial factors
Under managerial factors the questionnaire aimed to find out the observations of the
management services of the companies as well as their experience in the industry and
their highest educational qualification. In the literature review, it is found that
management information and knowledge permits them to monitor measure and
evaluate performance of the company at certain time intervals, with the attainment of an
improvement of profitability image of the whole company.
5.8.3.2. Financial factors
Under financial factors the questionnaire aimed to find out if the companies have
adequate cost and accounting systems in place, whether the estimating and
procurement systems are done properly and efficiently. Since the literature review found
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that high competition among emerging contractors has contributed to increase financial
failures of the emerging market, the questions asked had to relate directly to the
relevant financial factors that a company has.
5.8.3.3. Expansion factors
Under expansion factors the questionnaire aimed to find out whether the companies
expanded by changing the type of work they usually perform, get work in different
geographical areas outside the Free State Province and if there is a significant increase
in the sizes of individual projects that the company run. The literature review suggested
that over-expansion can drive a company to a higher-risk investment with financial debt;
hence, increasing its chance to business failure, therefore these questions would find
out about the expansion factors within the companies.
5.8.3.4. Economic Environmental factors
Under economic environmental factors the questionnaire aimed to find out if factors like
the national economy as well as the recession affected the companies. Other factors
like governmental preferential procurement policies had affected the companies. The
literature review states that these factors are perceived to be beyond the control of
management, therefore all the possible environmental factors questions were asked in
the questionnaire.
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5.9. Data analysis
An analytical strategy is required to analyze the research data and subsequently leads
to the research conclusion (Tellis 1997). The data was analyzed by using quantitative
techniques. The main statistics calculated in the data analysis are the mean, variance
and frequency scores. Chilipunde (2007) citing Siegel and Castellan (1988) stated that
the variance test is appropriate for detecting variation within a sample.
5.10. Conclusion
This chapter has emphasized the fundamental research concepts underpinning the
methodology adopted in the study, because the objective in this chapter was to outline
the methodology used. The route was taken to justify the selection of the various
methods and techniques of research. Firstly, the Free Sate Province was introduced
and background explained then the study was considered within the main stream
research. Secondly the research processes were described and discussed. In
particular, the survey method based on the questionnaire as a data collecting method
was discussed as the main strategy that was adopted for the investigation. The steps
which underpin the survey method were then described namely identification of the
subjects, determination of population size, determination of the sample size, and the
selection of the identities of the members of the sample. Following on to the research
process was the discussion on how to design an effective measuring instrument to form
of a questionnaire. The main ingredients considered were discussed including
measurement questions, measurement scales and data, issues of length, reliability and
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validity were also mentioned. Finally, the template or format of the measuring
instrument was discussed and actual questionnaire was developed. The results from
the data collected in the survey are presented in the next chapter.
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CHAPTER 6
6.0. Findings, Recommendations and Conclusion
6.1. Introduction
In this chapter the discussion of the results of the research on small and medium
contractors in the Free State Province is presented together with the analysis of the
data collected. The main statistics calculated in the data analysis are the mean. The
presentation is done with the aid of graphs and pie charts. Firstly the background
information on the contractors is presented followed by the factors of running a
construction company. Thirdly the experiences and challenges of the small and medium
contractors and their management staff are discussed.
A total of 120 questionnaires were distributed to randomly selected respondents that
were identified on the CIDB website which were listed as expired, suspended or de-
registered. 102 questionnaires were received and 6 questionnaires were spoilt which
meant that the total workable questionnaires were 96 which was at a return rate of 80%.
The data analysis that was used was done by quantitative method.
71
29
0
20
40
60
80
% of
respondents
Gender
Gender of respondents
Male
Female
Figure6.1. Gender of the respondents
The study focused through the whole sector which is run by both male and female.
There were 68 males and 28 females that responded to the questionnaires. The
majority of the respondents were males whereby in total they amounted to 71% and the
females to 29%. This indicates that the industry is dominated by males.
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13
28
2219 18
0
5
10
15
20
25
30
% of
respondents
Age
Age of respondents
21yrs to 30yrs
31yrs to 40yrs
41yrs to 50yrs
51yrs to 60yrs
61yrs and older
Figure6.2. The ages of respondents
Hughes (2003) stated that the age of the respondents is usually related to an
experience profile. The ages of different respondents ranged from 23 years to 64 years
old. The age category of 21 years to 30 years respondents was at 13%, 31 to 40 years
respondents was at 28% which was the highest in this category, 41 to 50 years
respondents was at 22%, 51 to 60 years respondents which was at 19% while
respondents that were 61 years and older was at 18%.
Race of Respondents
69
3
199
0
20
40
60
80
African White Coloured Indian/Asian
Race
Figure6.3. The race of respondents
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The majority of the respondents in this study were Africans who constituted 69% and
Coloureds at 19%. The White and Indian respondents comprised of 3% and 9%
respectively.
Status of the Company
24, 24%
65, 65%
11, 11%
Inactive
Temporarily Inactive
Permanently Inactive
Figure6.4. Status of the Company
The current state of the companies was asked to establish whether the company was
active or not and if they will be back to productive levels again. 24% of the respondents
said that they were Inactive, 65% said they were Temporarily Inactive, while only 11%
said they were Permanently Inactive. The respondents that said the company is
temporarily inactive, 86% of those respondents said that their companies can be
restored back to productive levels while 14% said they had no hope that the company
can be restored back to any productive levels.
182
Position of the respondents
75, 75%
3, 3% 2, 2%
19, 19%
1 , 1%
Managing Director
Managing Partner
Construction ProjectManager
Construction Manager
Other
Figure6.5. The positions of the respondents in the company
The respondents as business owners and share holders are most informed about the
business and how it is run; hence the expectation is that accurate responses will be
provided. The above graph indicates that most of the respondents, i.e. 75% of them,
were the Managing Directors (owners) of the businesses. Managing partners
(shareholders) constitute 19% of the sample, Construction Project Managers 1%,
Construction Managers 3%, while only 2% were other (employees of the business,
mainly senior foremen).
183
14
68
2
16
0
10
20
30
40
50
60
70
% of
respondents
Civil Works General
Building
Roads &
Earthworks
Other
Companies type of work
Figure6.6. The type of work the companies specialized in
The study is directly focused on the small and medium construction companies, hence it
is imperative that the business types are specified. As presented in figure 6.6 most of
the small contractors own the General Building construction companies which constitute
68% of the types of work. Civil Works companies are at 14%. The least owned
companies are those with Roads and Earthworks at 2%. Other which is a combination
of renovations and maintenance, made up 16%.
54
25
10 72 2 0 0 0
0
10
20
30
40
50
60
% of
respondents
Grades
Companies CIDB grading
Grade 1
Grade 2
Grade 3
Grade 4
Grade 5
Grade 6
Grade 7
Grade 8
Grade 9
Figure6.7. The companies CIDB grades
184
In this case the question on the size of the business will help ensure that only the small
and medium contractors are the focus of the study. The small contractors are
categorized into Grade1 to 3 and medium contractor in Grade 4 to 6. In this case 54%
of the companies were in Grade 1, 25% were in Grade 2, 10% were in Grade 3, 7% in
Grade 4, and Grades 5 and 6 were at 2% and 2% respectively.
Location or Area of companies
76
24
0
20
40
60
80
Urb
an
Rura
l
% of
respondents
Figure6.8. The areas were the companies are located
The Free State Province has a lot of rural areas but the majority of the companies
operate from urban areas. The figure shows that 76% if the companies are situated in
the urban areas while 24% are situated in rural areas.
185
Number of family members in the company
6
39
23 21
7 4
0
10
20
30
40
50
None 1 2 3
4 or
5
More
than
5
% of
respondents
Figure6.9. The number of family members employed within the company
The majority of the small companies are started with the intentions of making it a family
business and it shows from the respondents that in almost every company there is a
family member working in the company. The figure above shows that 6% had no family
members employed in the company, 39% had 1 family member, 23% had 2 family
members, 21% had 3 family members, 7% had 4or5 family members and only 4% had
more than 5 family members working in the company.
Number of full-time employees in the companies
79
12
7
4
0 20 40 60 80 100
Number of full-
time employees
% of respondents
25 and more
11 to 25
6 to 10
1 to 5
Figure6.10. The number of full-time employees in the companies
186
Since the study is focusing on small and medium construction companies it makes
logical sense that a large amount of companies had a number of employees between
1to5 and was at 79%, 6to10 was at 12% and 11to25 was at 7% and the company which
had 25 and more employees was at 2%.
People in Companies with Professional Registrations
7%10%
20%
4%
12%
0%
5%
10%
15%
20%
25%
Co
nstr
ucti
on
Pro
ject
Man
ag
er
Co
nstr
ucti
on
Man
ag
em
en
t
Qu
an
tity
Su
rveyo
r
Arc
hit
ect
Civ
il
En
gin
eeri
ng
% of
Respondents
Figure6.11. The number of people registered with professional councils
Belonging to a professional body helps gain competitive advantage in a built
environment business, as it could help networking and obtaining business information.
Most of the companies do not have any people registered with any professional councils
or bodies because of their sizes, which mean they cannot afford to pay for their
services. However the companies that did have people registered are either the owners
of the company or family members. The two leading professions that were within the
companies were the Quantity Surveyors and Civil Engineers at 20% and 12%
respectively, while there were 7% registered as Construction Project Managers, 10%
registered as Construction Managers and 4% registered as Architects.
187
Company participation in Contractor Development
programmes
26%
74%
0%
20%
40%
60%
80%
Yes No
% of
respondents
Figure6.12. The companies that participated in development programmes
A lot of contractors in the Free State province revealed that they were not exposed to
the Contractor Development Programmes like in other provinces hence 74% of them
said they did not participate in any development programmes and only 26% did
participate.
Various contractors said they did get benefits from the development programmes and
the common ones were as follows Benefits:
Contractor Development Programmes Benefits
Number mentioned
Rank
Becoming innovative & competent contractors 11.5% 1
Having business sustainability 9.4% 2
Financial control and competitive tendering 9.4% 2
Making partnerships and working together 7.3% 3
Better Technical & Business understanding of the construction commerce.
5.2% 4
Ability to identifying Risk vs Opportunity better 4.2% 5
Table 6.1. Contractor Development Programmes Benefits
From the 26% respondents who mentioned that they attended the development
programmes, 11.5% of them said the benefits were that they became innovative in their
188
business and became competent contractors. 9.4% said they learnt how to sustain their
business, 9.4% also said knowing how to control their companies’ finances as well as
having the ability to tender competitively. 7.3% said the benefits were making
partnerships with the relevant role players (e.g. government entities, financial institutes,
regulatory boards etc) as well as working together with them. 5.2% said they got a
better understanding of the whole industry as well as the technical aspects of running a
construction company. 4.2% mentioned that they could identify risks and opportunities
better than before and how to act on each.
The contractors also said the development programmes had problems and the common
ones were as follows:
Contractor Development Programmes Problems
Number mentioned
Rank
The programmes were not well publicized for everyone to know about them
20.8% 1
There is not enough support given to the contractors after the programmes
12.5% 2
Private companies are not involved enough 9.4% 3
The programmes happen on limited occasions and not regular enough
8.3% 4
The government does not take responsibility for the growth & success of the contractors
6.3% 5
Work and funding is not provided by the department
4.2% 6
Table 6.2. Contractor Development Programmes Problems
From the 26% respondents who mentioned that they attended the development
programmes, 20.8% said the programmes available were not well publicized and a lot of
contractors did not know about them when they took place. 12% said that there was not
189
enough support given to the contractors after the programmes. 9% said they have only
seen government host these programmes without private companies therefore they are
not involved enough. 8% said that these programmes do not happen regular enough as
they feel they need constant training to hone their skills. 6% and 4% said government
did not take responsibility for the growth and success of the contractors as well as
providing work and funding respectively.
35.4
22.9
71.9
12.517.7
35.4
7.3
0
20
40
60
80
% of
respondents
Course attended
Courses attended by company employees
Business Management
Project Management
Health & Safety
Risk Management
Tendering
Financial Management
Other
Figure6.13. The course that were attended by employees in the companies
For a business to keep in touch it is important that the management of a company
attends to some sort of course for keeping them with the trends that are required to be
sharp in terms of being successful. Within the companies, majority of the respondents
did attend different courses. The course that was highly attended was the Health &
Safety with 71.9% of the respondents attending, and then followed by the Business
Management and Financial Management with 35.4% of the respondents each
attending. Project Management had 22.9% of the respondents who attended, Tendering
had 17.7% of the respondents who attended and Risk Management had 12.5% of the
190
respondents who attended that course. 7.3% of the respondents attended other
courses.
14
27
40
127
0
10
20
30
40
% of
respondents
Years of experience
Respondents number of years in the construction
industry
Less than 3yrs
Between 3 & 5yrs
Between 6 & 10yrs
Between 11 & 15yrs
Above 15yrs
Figure6.14. The respondents number of years within the construction industry
In every industry it is important to have experience for the role to be performed to
excellence. The majority of the respondents are people who have a lot of experience in
the industry which they acquired from working for other companies and then decided to
go and establish their own companies. 40% of the respondents had experience of
between 6years & 10years, followed by 3years & 5years at 27%. 14% of the
respondents had less than 3years and 12% had experience between 11 years &
15years in the industry while 12% had been in the industry for more than 15years.
191
Respondents highest educational
qualifications
3% 3%21%
22%34%
13% 4%
No Education
Primary School
Secondary School
Grade12 (Matric,Std10)
Post-Matric Diplomaor Certificate
Bachelor's Degree(s)
Post-GraduateDegree(s)
Figure6.15. The respondents’ highest educational qualification
It is anticipated that the higher the level of small and medium contractors’ education the
more skills they will have in managerial positions. Notably the small and medium
contractors mostly hold matric certificates and post matric diplomas or certificates.
These comprise more than half of the population sample with post matric diploma or
certificate making up 34%. It was followed by matric qualifiers at 22%. 21% is of those
who have secondary school education, 13% hold a bachelors degree, while 4% have
post graduate degrees. Evidently this is a group of educated people hence the
assumption is that they are aware of methods of running a company in relation with
experience. It is expected that the small and medium contractors should have
qualifications in construction in order to run their businesses. Respondents with an
education of primary school and no education was only at 3% each.
192
22
46
23
9
01020304050
% of
respondents
None
Less
than
Hal
f
More
than
Hal
fAll
Upper Management Capabilities
Figure6.16. The key staff members that left the companies
Chilipunde (2010) stated that it is very important to have in-depth knowledge of a
business that one undertakes. With such in-depth knowledge, it is easy to manage
business rather than working on trial and error. Trial and error brings undesirable
results;
• It is always costly;
• Loss of profit is evident; and
• Clients lose confidence in the firm.
46% of the respondents said that less than half of the upper management in the
company were not capable or did not have sufficient experience to perform their roles.
23% said that more than half did have sufficient experience and capability to fulfil their
roles. 22% of the respondents said none of their upper management staff did not have
the capabilities, while only 9% said all their upper management personnel had sufficient
experience and could perform their roles.
193
Companies key staff members that left
42
58
0
10
20
30
40
50
60
70
Yes No
% of
respondents
Figure6.17. The key staff members that left the companies
From all the respondents, 42% had key staff members that left the companies, while
58% did not leave the companies. From the 42% that left, 80% of them said that it
affected the company negatively because they could not just fill the positions and 20%
said it did not affect the company at all.
23
77
0
20
40
60
80
% of
respondents
Yes No
Companies Cost & Accounting Systems
Yes
No
Figure6.18. The cost and accounting systems adequacy in the companies
It is of vital importance that any company, whether small or large that it has got proper
cost and accounting systems in place because it is were the companies’ finances are
directed. 77% of the respondents said that their companies did not have adequate cost
and accounting systems in place while the other 23% said that their companies did have
adequate cost and accounting systems in place. From the 77% who said that they did
not have, they said it was because they could not afford it and were a small company.
194
The 23% that said they did have, said they had a designated department within the
company.
Companies proper and efficient estimating &
procurement systems
40
60
0
20
40
60
80
Yes No
% of
respondents
Figure6.19. The companies’ proper and efficient estimating and procurement systems
The estimating and procurement systems of a company are vital because under
estimating can cause a lot of damage for the companies’ earnings. This can also be
said for procurement as it is a critical aspect of a company. In this case 60% of the
respondents said that their companies did not have proper and efficient estimating and
procurement systems in place, while 40% said that they did have. The 40% that said
that they did have, said because they had a good quantity surveyor and estimator.
195
3 7 917
64
010203040506070
% of
respondents
Period of payment
Period of client to make payment
Less than 7days
Between 7 & 14 days
More than 14days butless than 21days
1 month
More than 1 month
Figure6.20. The period it takes for the client to make payments
Payments from clients are very important, and it is even more important that it is paid as
soon as possible. 17% of the respondents said that it took their clients 1month to make
payments to them. 3% of the respondents said that it took less than 7days, 7% said it
took between 7days & 14days, and 9% said more than 14days but less than 21days.
64% of the respondents said that it took their clients more than a month to make
payments to them.
3
17
33
47
0
10
20
30
40
50
% of
respondents
Nev
er
Rar
ely
Often
Alw
ays
Companies cash flow problems
Figure6.21. The companies’ cash flow problem
196
Construction companies are driven by cash flow to run sufficiently and if the cash flow is
negative it spells out problems. In this case 47% of the respondents said they always
had cash flow problems, 33% said they often had cash flow problems, 17% said that
they rarely had cash flow problems. While only 3% said they never had cash flow
problems.
Companies debts to suppliers
65
35
0
10
20
30
40
50
60
70
Yes No
% of
respondents
Figure6.22. The companies’ debts to suppliers
65% of the respondents said that they did not have heavy debts to their suppliers while
35% said they did have heavy debts to their suppliers.
197
51
25
1410
0
10
20
30
40
50
60
% of
respondents
Change of work
Companies change in type of work
Never
Rarely
Often
Always
Figure6.23. The type of work which the companies changed to
51% of the respondents said that they never changed their normal type of work, 25%
said that they rarely did change the type of work they perform normally. 14% said that
they often changed and while the other 10% said that they always changed the type of
work they performed.
40
34
18
8
0
10
20
30
40
% of
respondents
Different geographical areas
Companies work outside the Free State Province
Never
Rarely
Often
Always
Figure6.24. The companies working in a different geographical area outside the Free State Province
198
It is common in the construction industry that a construction company will get work in
different geographical areas apart from their normal area. Therefore 40% of the
respondents said that they never got work outside the Free State Province, 34% said
they rarely got work outside the Free State Province, 18% said that they often got work
outside, while 8% said they would always get work outside the FS province.
45
33
22
0
10
20
30
40
50
% of
respondents
Work opportunities
Frequency of work opportunities
Rarley
Often
Always
Figure6.25. The frequency that the companies get work opportunities
For any construction company to be alive it has to get work on a regular basis. From the
respondents only 22% said that they always received work opportunities, and 33% said
they often received work, while 45% said they rarely received work.
199
Companies projects at a certain point
69, 69%
20, 20%8, 8%
1, 1%2, 2%
None
Between 1 & 2
Between 3 & 5
Between 6 & 9
Ten or more
Figure6.26. The companies’ projects running at a point in time
69% of the respondents said that they had between 1 & 2 projects running at one point
in time, 20% said they had between 3 & 5 projects running, 8% said they had no
projects running, while only 2% had between 6 & 9 project running. Only 1% of the
respondents had more than 10 projects running a one point in time.
20
34
1416
9
4 30
5
10
15
20
25
30
35
% of
respondent
s
Project Values
Total values of each project Between 5k & 20k
Between 20k &50k
Between 50k &100k
Between 100k &200k
Between 200k &500k
Between 500k &1million
More than1million
Figure6.27. The companies’ projects running at a point in time
200
The respondents had different project values whilst they were still running. 20% of the
respondents said their projects values were R5000 & R20 000, the highest was 34%
who said it was between R20 000 & R50 000, 14% said their project values were
between R50 000 & R100 000. 16% of the respondents said they were between R100
000 & R200 000, 9% said theirs were between R200 000 & R500 000. The two lowest
numbers of respondents were at 4% and 3% which had project values of between R500
000 & R1million and more than R1million respectively.
58
27
7 8
0
10
20
30
40
50
60
% of
respondents
Increase of projects sizes
Companies increase in projects sizes
Never
Rarely
Often
Always
Figure6.28. The increase in the companies’ project sizes
For a company to show improvements in their capabilities it needs to somehow move
from their current size or value of projects they complete. In this regard,58% of the
respondents said they never increased the sizes or value of projects they did, 27% said
they rarely increased, while 7% said they often increased, and only 8% said that they
always increase on the size and value of projects they perform.
201
Economy and Inflation affecting company
5%
20%
32%
43%Never
Rarely
Often
Always
Figure6.29. The national economy, inflation and recession affecting the companies
The economy and inflation of the country affects everyone who lives in it, as this will
dictate the prices of everything that is used in the industry as a whole. The recession
that the country went through had a huge negative effect in the construction industry
whereby the majority of private and public construction projects were put on hold. 43%
of the respondents said they always got affected by the economy and inflation, and 32%
said that they often got affected. 20% said they rarely get affected and 5% said that they
never got affected.
73
27
0
20
40
60
80
% of
respondents
Yes N
o
Competition with other Companies
Figure6.30. The competition amongst companies
202
73% of the respondents said that the competition with other small and medium
construction companies did affect them, while 26% said that it did not affect them at all.
The common reasons that came up about why it affected them, the respondents said
corruption was rife, the procurement procedures favoured a selected few and the
market was over flooded with small companies bidding for the same work all the time.
84
16
0
20
40
60
80
100
% of
respondents
Yes No
Government policies, regulations and
legislations affecting company
Figure6.31. Governments’ policies, regulations and legislations affecting companies
84% of the respondents said that governments’ preferential procurement policies did
affect them at all times, while only 16% said that it did not affect them. When asked how
did the policies and regulations affect them, the common responses were that they had
to meet certain CIDB requirements, BEE targets, and NHBRC regulations. And those
that were not affected said that they did not do much government work.
203
8
3632
24
0
10
20
30
40
% of
respondents
Nev
er
Rar
ely
Often
Alw
ays
Companies Project Delays & Disruptions
Figure6.32. The project delays encountered by the companies due disruptions
Some disruptions like the weather and industrial strikes are sometimes unavoidable and
they often cause delays in projects and they affect their end dates. 36% of the
respondents said that they rarely encountered disruptions, while 32% said that they did
encounter disruptions often. 24% of the respondents said they always encountered
some sort of disruptions, and only 8% said they never encountered any disruptions.
94
6
0
20
40
60
80
100
% of
respondents
Theft of Material & Equipment
Effects of theft to companies equipment and
material
Yes
No
Figure6.33. Theft of the companies’ material and equipment
Crime affects everyone, and there is no exception from the construction companies.
94% of the respondents said that theft of equipment and material had detrimental
204
affects to the company while only 6% said that it did affect them because of the size of
their company and they did not have much equipment.
6.2. The Challenge & Problem Mean Item Score (MIS)
A 5-point Likert type scale was used to determine the challenges and problems when
implementing construction projects. The adopted scale read as follows, 1=To no extent,
2= To small extent, 3=Moderate, 4=To large extent, and 5=To very large extent. The
five-point scale was transformed to a Mean Item Score (MIS) for each of the factors
which challenges and problems were faced by the respondents. The indices were then
used to determine the rank of each item. These rankings made it possible to cross
compare the relative importance of the items as perceived by the respondents. The MIS
was based on the previous studies as conducted by Aibinu and Jagboro (2002),
Ayodele and Alabi (2011) and Kometa et al. (1995) that used the ‘Mean Item Score
index’ method in rating their study criterions. This method was also adopted to analyze
the data collected from the questionnaire survey.
The computation of the MIS was calculated from the total of all weighted responses and
then relating it to the total responses on a particular aspect. This was based on the
principle that respondents’ scores on all the selected criteria, considered together, are
the empirically determined indices of relative importance. The index of MIS of a
particular factor is the sum of the respondents’ actual scores (on the 5-point scale)
given by all the respondents’ as a proportion of the sum of all maximum possible scores
205
on the 5-point scale that all the respondents could give to that criterion. Weighting were
assigned to each responses ranging from one to five for the responses of ‘to no extent’
to ‘to very large extent’. This is expressed mathematically below. The MIS index (MIS)
was calculated for each item as follows, after Lim and Alum (1995):
MIS = 1n1 + 2n2 + 3n3 +4n4+5n5YYYYYYYYYYY..equation 1
∑N Where;
n1 = number of respondents for To no extent;YY.YYYYYY..1
n2 = number of respondents for To small extent;YYYYY..Y...2
n3 = number of respondents for Moderate;YYYYYYY..YY.3
n4 = number of respondents for To large extent;YYYYY..Y..4
n5 = number of respondents for To very large extent;YYYYY5
N = Total number of respondents
Following the mathematical computations, the criteria are then ranked in descending
order of their MIS (from the highest to the lowest). The table below presents the
analyzed responses of the respondents in question 22.
The Challenge & Problem (MIS)
Standard
Deviation
Rank
Lack of cash flow 4.40 1
Lack of Financial Management 4.15 2
Lack of skilled people 4.14 3
Deficiency in Tendering 4.12 4
Lack of business management 4.05 5
Lack of estimating 3.94 6
Lack of marketing 3.85 7
Lack of project planning 3.73 8
Lack of implementation of Health and safety issues 3.53 9
206
Lack of project administration 3.00 10
Lack of communication 2.20 11
Lack of delegation 2.08 12
Lack of inventory management 1.63 13
Table 6.3. The Challenge & Problem Index table
In the open ended questions there were common responses which were mentioned by
a majority of the respondents and were categorized according to their similarity and the
number of times they were mentioned. The percentages were calculated using the
standard statistical formula for percentage as follows:
% = α x 100 ∑µ
α = Number of times Mentioned
∑µ= Total respondents
The number of times they were mentioned was showed as follows:
• The main causes of small contractors to fail
Causes Number mentioned
Rank
Not enough work 44.8% 1
Lack of finance or enough money to run a business 38.5% 2
Late Payments from Clients 35.4% 3
Financial mismanagement for personal usage 32.3% 4
Managerial skills & bad leadership 28.1% 5
Lack of skilled people 20.8% 6
Lack of experience in the industry 15.6% 7
Meeting government expectations as small companies 13.5% 8
Not working hard enough 10.4% 9
Table 6.4. The main causes of small contractors to fail
207
0
10
20
30
40
50
% of
Respondents
Not e
nough work
Lack
of f
inance
or e
nough...
Manageria
l skill
s & b
ad lea...
Financi
al mism
anagement f
..
Lack
of s
killed p
eople
Late
Paym
ents fr
om C
lients
Lack
of e
xperie
nce in
the i.
..
Meetin
g govern
ment e
xpec.
..
Not w
orkin
g hard
enough
Not enough work
Lack of finance or enough money to run a
business
Managerial skills & bad leadership
Financial mismanagement for personal
usage
Lack of skilled people
Late Payments from Clients
Lack of experience in the industry
Meeting government expectations as
small companies
Not working hard enough
Figure6.34. The main causes of small contractors to fail
The findings were confirmed in studies by Uriyo et al. (2004); Shakantu et al., (2007);
Carson (2006): ILO (1987); Motlanthe (1990); Kapulula (2008) and Khoza (2008).
Kayanula and Quartey (2000) also agreed with the findings and stated that access to
finance remained a dominant constraint to SMME contractors in the Free State
Province.
When asked about the main causes of small contractors to fail in the open ended
questions, most respondents reported that Not Getting Work was the greatest
208
contributor to causes of contractors to fail, and 44.8% of the respondents correlated in
that statement, 38.5% of the respondents said that Lack Of Finance or Enough Money
to Run a Business, 28.1% said Managerial Skills & Bad Leadership. 32.3% of the
respondents said Financial Mismanagement For Personal Usage whereby the owners
of the companies would use substantial amounts for personal usage before the project
would be complete. 15.6% of the respondents said Lack of Experience in the industry,
and 20.8% said that Lack Of Skilled People. 10.4% respondents said Not Working Hard
Enough while 13.5% said Meeting Governments Expectations as Small Companies.
35.4% respondents said Late Payments from Clients especially the Free State
Department of Human Settlements, contributed to the main causes of small contractors
to fail.
38.531.3 27.1
16.7 13.5 10.40
20
40
% of
Respondents
Ch
all
en
ge
s
& P
rob
lem
s
Challenges & Problems 38.5 31.3 27.1 16.7 13.5 10.4
Getting
Work/Proj
ects
Corruption
& Political
interferenc
Getting
Paid on
Time
Lack of
Technical
Knowledge
Theft
DelaysCID
B Low
grading
Figure6.35. Challenges and problems
209
The responses below were the common solutions which were described by the
respondents and they thought should be implemented.
• How the challenges and problems can be overcome
Challenges and Problems Number mentioned
Rank
By expediting payments from clients and government must intervene.
34.4% 1
Take part in skills development programmes, workshops & courses.
27.1% 2
Government must root out corruption in its department and transparent tender & procurement processes.
21.9% 3
Tendering more competitively for private jobs and not only government jobs.
16.7% 4
CIDB should reach out to the small contractors and assist them with getting upgrades.
11.5% 5
Small contractors with more skills must merge to have one skilled company in the industry
9.4% 6
Table 6.5 How Challenges can be overcome
34.4% of the respondents said that the challenges and problems they experienced
could be overcome by expediting payments from clients and government must intervene
to ensure that they do get paid on time because long periods waiting for payments are a
big problem for small and medium contractors. 27.1% of the respondents said that
taking part in skills development programmes, workshops & courses will also tackle
their challenges and problems they face. Shakantu and Chiocha (2009) stated that
collusion and corruption impact negatively on the economy as a whole, on the well
being of the industry and on its capacity to address development imperatives. 21.9% of
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the respondents said that government must root out corruption within its departments
and there must be transparent tender & procurement processes. 16.7% of the
respondents said tendering more competitively for private jobs and not only government
jobs will help as they only tendered for government jobs. 11.5% of the respondents said
that the CIDB should reach out to the small contractors and assist them with getting
upgrades because they are unable to get bigger jobs because they have low CIDB
grades. 9.4% of the respondents said small contractors with more skills must merge to
have one skilled company in the industry because in that way they will be more
competitive when tendering and doing projects and this will help overcome the
challenges they faced.
• What government can do to promote great involvement in small
contractors in the South African construction sector
Governments involvement Number mentioned
Rank
Invest more projects in small & medium contractors 42.7% 1
Train small contractors and transfer skills of running a company as well as their development.
30.2% 2
Put in penalty measures for clients who do not pay the contractors on time
26% 3
Train more artisans and skilled people for small contractors.
19.8% 4
Forums and discussions between government and small contractors must be held when there are problems.
9.4% 5
Encourage Joint Ventures with big contractors and not only come as sub-contractors.
8.3% 6
Table 6.6 Governments involvement with Small Contractors
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6.3. Interpretation of Results
From the research conducted amongst a range of contractors in the Free State
construction industry, it could be deduced that there is indeed a high number of
companies that have failed due to various reasons.
Most respondents had hope and were confident that they could get back although they
will need assistance in the different facets of running a company.
The good thing is that all responses from the questionnaires indicated that all the
contractors in the Free State are aware of the challenges and problems which the small
contractors are facing and that they are having a negative impact in the industry as a
whole.
In addition, this survey revealed that most of these companies relied only on
government projects and did not tender on any private sector jobs.
The research confirmed that not all companies had the same problems and challenges,
but the major challenges they faced were getting projects as well as lack of finances.
Another important disclosure was that most respondents believed that governments
involvement would help the smaller companies to survive even better by investing more
projects in the smaller sector. Despite having confidence in the government, most
respondents believed that their success would be better if they went to go and tender in
the private sector as well.
212
The research also revealed that there were alternate ways to deal with the problems the
small and medium companies are facing and one of them was expediting payments
from clients and government taking a big stance in rooting out corruption.
6.4. Findings and Discussions
The findings provided will be in respect of primary objective of the study which is to
investigate the causes of failure among small and medium construction companies in
the Free State Province and some of the possible factors were mentioned in the
literature review in chapters two, three and four. As the problem statement brought it to
light that there is a high failure rate of small and medium construction companies in the
industry, the analysis will therefore provide evidence that there is indeed a high
company failure rate and in the Free State Province in this regard and the possible
causes.
In order to conduct the investigation of the problem statement of the main research topic
and to answer the objectives they were as follows:
Objectives:
• To investigate the factors that causes failure amongst small medium contractors
in the Free State Province.
• To investigate what strategies are employed by small and medium contractors in
countering the challenges they are facing.
213
• To investigate the state of competition amongst small and medium contractor’s
in the Free State Province.
• To investigate if educational qualification and experience in the construction
industry have an effect in a company’s failure or success.
• To assess the mentorship programmes in place to support the small and medium
contractors in the Free State.
Based on the first objective of the study “to investigate the factors that cause failure
amongst small medium contractors in the Free State Province” financial factors were
found to be amongst the leading causes of company failures, whereby: 44.8% said that
there was no work for the contractors and it was one of the main causes. 77% of the
respondents said that their companies did not have adequate cost and accounting
practices and systems in place; 60% of the respondents said that estimating and
procurement systems were not done properly and efficiently; 64% of the respondents
said that it took the client more than 1month to pay them after an invoice was submitted;
47% of the respondents said their companies always had cash flow problems and 65%
of the respondent said that their companies had heavy debts to their suppliers. In
addition 43 respondents said that lack of finance or not having enough money to run a
business contributed to the failure of company and 31 respondents correlated to that
statement by adding that financial mismanagement for using company funds for
personal usage also contributed because these companies are not always audited and
it was easier for them to use and therefore the companies suffered in that regard.
214
The second objective “to investigate what strategies are employed by small and
medium contractors in countering the challenges that they face” . The survey revealed
that the challenges they encountered could be overcome by
• Expediting payments from clients and government must intervene.
• Take part in skills development programmes, workshops & courses
• Tendering more competitively for private jobs and not only government jobs
• Government must root out corruption in its department and transparent tender &
procurement processes.
The third objective of the study, “to investigate the state of competition amongst small
and medium contractor’s in the Free State Province” the research revealed that 73% of
the respondents said that the competition with other small and medium construction
companies did affect them, while 26% said that it did not affect them at all. The common
reasons that came up about why it affected them, the respondents alleged that
corruption was rife and the procurement procedures favoured a selected few,
furthermore that in order to get work you have to be connected to the people who deal
with tenders and procurements. The respondents also said that the market was over
flooded with small companies bidding for the same work all the time.
The fourth objective “to investigate if educational qualification and experience in the
construction industry have an effect in a company’s failure or success.” the findings
215
established that educational qualification and experience in the construction industry
have an effect in a company’s failure or success. The study revealed that a substantial
amount of respondents had a lot of experience in the construction industry and more
than half were educated to a certain level, but the experience they had was not spent in
the managerial positions. This demonstrated that their managerial skills lacked to a
certain extent, and this was supported when 46% of them said that less than half of their
upper management were capable or had sufficient experience to perform their roles.
Managerial experience is vital to the success or failure of any kind of company as
mentioned in the literature review in chapter two. It was also found that 40% of the
respondents had 6 to 10 years experience in the industry and 7% had above 15 years
experience in the construction industry. A large number of the respondents did not have
experience in running a company. In the educational front, 27% had secondary
education or lower and 73% had matric and above. This can tell us that having
experience of working in the construction industry is merely not the same as running a
company as the dynamics are totally not the same. The same can also be said about
having the educational qualifications, as that will help in the technical aspect of doing
the job but not running a successful business.
The last objective “to assess the mentorship programmes in place to support the small
and medium contractors in the Free”. The study revealed that there are Contractor
Development Programmes available for small and medium contractors in different
provinces in South Africa, but a lot of contractors in the Free State province revealed
that they were not exposed to the Contractor Development Programmes like in other
provinces hence 74% of them said they did not participate in any development
216
programmes and only 26% did participate and from the 26% that attended said that they
were benefits. The study also revealed that the CIDB is the main driver of these
development programmes and is also supported by the department of Public Works as
well as other private organizations. These programmes are implemented in various
methods from province to province as they are well explained in chapter4.
The respondents, who mentioned that they attended the development programmes,
said the programmes available were not well publicized and a lot of contractors did not
know about them when they took place. They also said that there was not enough
support given to the contractors after the programmes. The respondents mentioned that
they have only seen government host these programmes without private companies
therefore they are not involved enough. They also said that these programmes do not
happen regular enough as they feel they need constant training to hone their skills. In
addition the respondents said government did not take responsibility for the growth and
success of the contractors as well as providing work and funding respectively.
6.5. Summary of the Findings
The study focused on four different factors which where Managerial, Financial,
Expansion and Economic Environmental factors. The study proved that managerial
factors are very important and play a crucial role in ensuring that a business succeeds
or fails. Lack of experience in running a company in the constructions industry can
make the manager to make bad business decisions. This shows that SMME contractors
lack business management skills in running their firms. The results were confirmed in
217
studies by Uriyo et al. (2004): Dlungwana et al. (2003); Shakantu et al. (2007); Fraser
(1989); Myers (2004); Griffin (1990); Merrifield (1990), and Daniels and Ngwira (1993)
that stated that SMME contractors lack business management skills.
The level of education and business performance plays a role in the operation of a
company as well. The study also proved that financial factors are crucial in the success
or failure of a company. It also showed that if there are no proper systems in place to
ensure that the company finances are in order, it will cause it to have detrimental
problems. Lack of financial management skills was recognised as a major difficulty by
the respondents, robustly concurring that finance and cash-flow management skills are
high amongst their challenges and problems. The findings in this research illustrated
Expansion factors did not have much influence like the managerial and financial factors
in the failure of the company. Expanding to different areas and a change in the type of
work and where work was going to be done did not show a lot of contribution to the
failure of the company. Economic Environmental factors did play a big role since a lot
of these companies depended hugely on the government jobs to survive. The South
African construction industry in normal cases is controlled by the state of the national
economy. This meant that the economy as well as inflation does affect the small,
medium and even the large construction companies.
6.5. Recommendations
From the research findings, it is clear that the South African construction industry in a
whole needs to address the challenges and problems the small and medium contactors
218
are facing. The study recommends that contractor development programmes go deeper
in smaller provinces as well. The findings revealed that there are governments and
private companies that give the necessary support with relative programmes, more of
these programmes and models could make a major difference in reducing the
challenges of small contractors, as well as that of the construction industry as a whole.
The findings of the study also revealed that there is a tremendous need for training in
the Free State Province construction industry. Added to this, the study highlights
strongly the lack of business management skills. Furthermore it identified that the
financial factors like cash flow and financial management are constraints and a
challenge.
It is recommended that the following are interventions are made:
1) The government and the CIDB must have measures in place to screen
people who want to be construction contractors because currently anyone
can just enter and flood the market without having to succeeded.
2) Training and development of small and medium contractors in the Free State
ranks as the most important intervention at this stage by the Free State
government in particular. The procedure must ensure that these contractors
as well as emerging contractors will benefit from these development
programmes to promote the development of skills in areas of management,
estimating and tendering skills to enable entrepreneurs run their firms
profitably and in a sustainable manner.
219
3) The development and mentoring programmes available must be well
advertised to all the small and medium contractors as many of them are not
aware when they happen.
4) The companies must market themselves more and must not only depend on
government jobs but must also tender in the private sector.
5) Stringent rules and regulations must be put in place for the clients who do not
pay the companies in time.
6) The registration of small contractors by the Construction Industry
Development Board (CIDB) needs to be according to the contractors’
performance and ensure skills that are improved enabling contractors to grow
in the construction market.
7) The government and private organizations should focus on the advancement
of SMMEs. There should be a more prominent way in the distribution of
information to SMMEs; local government structures can be used to pass on
information to the targeted groups, which are the small contractors. There
should be synergy between National government, Provincial government,
Local government and the Private sector regarding empowerment. Currently,
it seems like these bodies operates in a silo, which causes frustration to the
SMMEs as they are not always aware of what is happing.
8) There should be one database with one registration form that will give any
small or medium contractor access to opportunities from all the structures and
must also include all the micro contractors who are operating in the informal
220
sector. This database should be accessible by both the public and private
sectors.
9) There must be goals set by organizations both public and private, whereby
each organization has to establish clear goals on the percentage spent per
annum on small and medium contractors of all procurement during a specific
year. The goals should be specific, measurable, attainable, realistic and time
bound. The focus should shift from having a huge database of suppliers with
little work opportunities forthcoming to any single one where the smaller
group could really access these opportunities. This will also give those
contractors to progress from sub-contractors within a certain period to being a
the main contractor, and must be rotated with other contractors
10) Government should avail more funds to roll out the ECDP to both public as
well as private institutions, these private sector institutions has to be
incentivized to become more involved, for example in the form of tax rebates
or preferential status in the tender process.
6.7. Conclusion
The conclusion drawn by the researcher based on the problem statement is that the
majority of small and medium construction companies in the Free State Province lack
the managerial skills and are often challenged when it comes to the financial capability
as well as financial management. Economic Environmental factors also have a huge
impact in a small company as the economy and inflation affects everyone. These
221
factors have an effect in the failure of a company and they can be improved and
changes can be made in some areas.
Indeed it was established that there are forms of training like the Government Support
Programmes for SMMEs’, but the majority of small and medium contractors in the Free
State Province are not exposed to these skills development trainings. Fortuin (2004)
stated that The Emerging Contractor Development Programme is not based on
awarding work, but rather on providing opportunities for emerging contractors to
participate in the procurement process. In order to sustain these contractors,
opportunities should be made available on a regular basis and also to create an
environment of learning. Based on responses by the respondents, opportunities that will
allow them to actively participate and grow are not informative. Most of the respondents
indicated that they were not afforded opportunities to attend these due to lack of
information. Although programmes are currently in place to foster growth in the sector,
no provision has been made for micro contractors in the Preferential Procurement
Policy Framework.
The findings have also revealed that the small and medium contractors in the Free
State Province do not get work regularly and that also contributes to the appropriate
function of the companies, however the jobs that they do get are just to keep them
surviving till the next job comes along. This means that the current state of many of
these companies are not healthy because for a construction company to make a profit
they need to participate meaningfully in the available construction job market.
222
6.8. Areas for further research
Based on this study, the researcher identified areas that need further attention. This
means that future studies should therefore explore the reasons for difficulties that the
Free State government is experiencing to offer more comprehensive and long term
training for the small and medium construction contractors. This is to equip themselves
with fundamental management skills needed within the construction business industry
and not just the basics. This with the attention drawn to the fact that not all the
contractors are exposed to skills development programs that are available in the
country.
Another area for further study is, finding out what are the problems that make clients or
government institutions to take long in paying contractors
Also a further study may be needed to investigate small contractors’ opinion on the
need to develop their quality marketing strategy and tender more in the private sector.
223
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APPENDIX A: Questionnaire
Research Topic:
Investigating causes of failure amongst small and medium contractors in the
Free State Province.
THIS QUESTIONNAIRE IS ONLY GOING TO BE USED FOR THIS RESEARCH PAPER. PLEASE ANSWER THE FOLLOWING QUESTIONS BY CROSSING (X) THE RELEVANT BLOCK OR WRITING DOWN YOUR ANSWER IN THE SPACE PROVIDED.
EXAMPLE OF HOW TO COMPLETE THIS QUESTIONNAIRE:
Your gender ?
If you are female:
Male 1
Female 2
Section A – Background information
This section of the questionnaire refers to background or biographical information.
Although we are aware of the sensitivity of the questions in this section, the information
will allow us to compare groups of respondents. Once again, we assure you that your
response will remain anonymous. Your co-operation is appreciated.
1. Gender
Male 1
Female 2
239
2. Age (in complete years)
3. Ethnicity
African 1
White 2
Coloured 3
Indian or Asian 4
4. What is the current state of the company?
Inactive 1
Temporarily inactive 2
Permanently inactive 3
If temporarily inactive, do you think the company can be restored to productive levels?
YYYYYYYY..................................................................
5. What was your position in the company?
Managing Director 1
Managing Partner 2
Construction Project
Manager
3
Construction Manager 4
Other, please specify 5
240
6. What type of work did your company specialize in?
Civil works 1
General building 2
Road & earthworks 3
Other (specify) 4
7. Mark with an X your contractor Construction Industry Development Board (CIDB)
grading?
Grade 1 1
Grade 2 2
Grade 3 3
Grade 4 4
Grade 5 5
Grade 6 6
Grade 7 7
Grade 8 8
Grade 9 9
8. How would you describe the area in which your company was based?
Urban 1
Rural 2
241
9. Number of family members or relatives that worked in the company, excluding you?
None 1
1 2
2 3
3 4
4 or 5 5
More than 5 6
10. How many full-time employees were employed by the company?
YYYYYYYY..................................................................
11. How many people in your company were registered under the following?
Number of
employees
Construction Project Manager 1
Construction Manager 2
Quantity Surveyor 3
Architect 4
Civil Engineering 5
12. Did your company participate in any contractor development programme organized
by the Department of Public Works?
Yes 1
No 2
242
13. What were the benefits of such programme?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
14. What were the problems of such programmes?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
15. How did the program improve in your companies’ development?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
16. Which of the following courses have you attended? (Mark all applicable)
Name of Courses Courses attended
Construction Management 1
Business Management 2
Project Planning 3
Tendering 4
243
Project Management 5
Inventory management 6
Finance 7
Health and Safety 8
Site Management 10
Contract documentation 12
Project Administration 13
Risk management 14
Time management 15
Enterprise Marketing & Development 18
Other, please specify 19
244
Section B
This section of the questionnaire explores the factors that are involved in running a
construction company.
17. Managerial factors
17.1. How many years of experience do you have in the construction industry?
Less than 3 years 1
Between 3-5 years 2
Between 6-10 years 3
Between 11-15 years 4
Above 15 years 5
17.2. Your highest educational qualification?
No Education 1
Primary School 2
Secondary School 3
Grade 12 (Matric, std 10) 4
Post-Matric Diploma or certificate 5
Bachelor’s Degree(s) 6
Post- Graduate Degree(s) 7
Other, please specify 8
17.3. How many of the personnel at upper management were capable or had sufficient
experience to perform their roles?
None 1
245
Less than half 2
More than half 3
All 4
17.4. Did any of your company’s key staff member(s) leave the company at critical
times?
Yes 1
No 2
If yes, did it affect the company?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
18. Financial factors
18.1. Did your company have adequate cost and accounting practices and systems in
place?
Yes 1
No 2
If no, why not & if yes how were they implemented?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
18.2. Were the estimating and procurement systems done properly and efficiently?
Yes 1
No 2
If no, why not & if yes how were they implemented?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
246
18.3. How long did it take for the client to pay from the day you submitted an invoice?
Less than 7 days 1
Between 7 and 14 days 2
More than 14 days but less
than 21 days
3
1 month 4
More than 1 month 5
18.4. Did your company have cash flow problems?
Never 1
Rarely 2
Often 3
Always 4
18.5. Did your company have heavy debts to suppliers?
Yes 1
No 2
19. Expansion factors
19.1. Did your company change the type of work it performed? (e.g. a changed from
civil works to road works)
Never 1
Rarely 2
Often 3
247
Always 4
19.2. Did your company get work in different geographical areas outside the Free State
Province?
Never 1
Rarely 2
Often 3
Always 4
19.3. How often did your company get work?
Rarely 1
Often 2
Always 3
19.4. How many projects did you have running at any point in time?
None 1
Between 1-2 2
Between 3-5 3
Between 6-9 4
Ten or more 5
If there were what was the total value of each?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
248
19.5. Was there a significant increase in the size of individual projects that your
company took on? (e.g. increasing from R1 million project to R3 million project)
Never 1
Rarely 2
Often 3
Always 4
20. Economic Environmental factors
20.1. Did the national economy and inflation as well as the recession affect your
company in terms of the number of projects that are available, both private and
government projects?
Never 1
Rarely 2
Often 3
Always 4
20.2. Did competition with other companies in your area affect your business?
Yes 1
No 2
Please give a reason for your answer?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYY.
20.3. Did government policies, regulations and legislations affect your company?
Yes 1
No 2
249
If yes, how & if not why not?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.YYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYY.
20.4. How often did your company suffer from disruptions and delays during the project
execution period?
Never 1
Rarely 2
Often 3
Always 4
20.5. Did theft of material and equipment have a detrimental effect on your company?
Yes 1
No 2
250
Section C
21. Based on your experience what are the main causes of small and medium sized
contractors to fail?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
22. To what extent did you encounter each of the following challenges and problems when implementing construction projects? Please indicate your answer using the following 5- point scale where
1. = To no extent
2. = To small extent
3. = Moderate
4. = To large extent
5. = To very large extent
To no
extent
To small
extent
Moderate To large
extent
To very
large extent
Deficiency in Tendering 1 2 3 4 5
Lack of cash flow 1 2 3 4 5
Lack of business
management
1 2 3 4 5
Lack of inventory
management
1 2 3 4 5
Lack of Financial
Management
1 2 3 4 5
Lack of implementation of
Health and safety issues
1 2 3 4 5
251
Lack of marketing 1 2 3 4 5
Lack of communication 1 2 3 4 5
Lack of estimating 1 2 3 4 5
Lack of project planning 1 2 3 4 5
Lack of delegation 1 2 3 4 5
Lack of project
administration
1 2 3 4 5
Lack of skilled people 1 2 3 4 5
23. List the main challenges and problems facing in running your company?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
24. In your view how can these challenges and problems be overcome?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
25. What can government do to promote greater involvement of small contractors in
the South African Construction sector?
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
Thank you for your co-operation in completing this questionnaire. This will go a long
way in improving the South African Construction Industry.