Assessment of the causes of failure among small and medium ...

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/

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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.

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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

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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.

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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

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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


2.7. Expansion factors in the USA small and medium


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

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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

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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

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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

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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

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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

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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



� 42 000 registered companies in July 2007

3


� 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

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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

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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).


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).


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.


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);

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• 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.

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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


• 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


• 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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238

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





14. What were the problems of such programmes?





15. How did the program improve in your companies’ development?




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


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


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?



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?



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?



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?



YYYYYYYYYYYYYYYYYYYYYYYYYYYYY.

20.3. Did government policies, regulations and legislations affect your company?

Yes 1

No 2

249

If yes, how & if not why not?



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?





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



24. In your view how can these challenges and problems be overcome?




25. What can government do to promote greater involvement of small contractors in

the South African Construction sector?

YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY



Thank you for your co-operation in completing this questionnaire. This will go a long

way in improving the South African Construction Industry.

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