Research Report; Mapping the Path to Becoming a Grade 9 … · 2015-08-19 · i Executive Summary...

Mapping the Path to Becoming a Grade 9

Documentation of Literature and Results of the Upgraded

Established Contractor

Dr. Abimbola Windapo and Prof

Department of Construction Economics and Management

Faculty of Engineering and the Built Environment

On behalf of the Construction Industry Development Board

Research Report:


Contractor

Documentation of Literature and Results of the Upgraded

Established Contractor Interviews

Performed by:

Abimbola Windapo and Prof. Keith Cattell



University of Cape Town


August 2011


Documentation of Literature and Results of the Upgraded &

Keith Cattell




i

Executive Summary

Presented below is the executive summary of the cidb commissioned Path to Grade 9

Contractor Project. The cidb was established by an Act of Parliament, (Act 38 of 2000), with

a mandate, inter alia, to:

...promote the contribution of the construction industry in meeting national construction

demand and in advancing:

i) national, social and economic development objectives;

ii) industry performance, efficiency and competitiveness; and

iii) improved value to clients

The Department of Construction Economics and Management at the University of Cape

Town undertook this work between January and May 2011 on behalf of the cidb as the main

component of a project entitled “Path to Grade 9 Contractor Project”. The objectives of this

work were to:

• research the typical various stages to becoming a “large” contractor (i.e. cidb Grade 7

to 9 contractor); and

• synthesise the factors that would encourage the growth and development of new

large contractors – but clearly set out realistic expectations and highlight the dangers

of unreasonable expectations.

The study investigated the experiences of some large contractors with a view to outlining a

typical road map to becoming a large contractor. Further, a qualitative analysis was

undertaken of the contractors that have been upgraded on the cidb Register of Contractors,

with a focus on the mechanisms (such as ownership profile, time scale taken to upgrade,

financial capacity, competence, experience and typical business models adopted) that

assisted their development and transformation and how the mechanisms were influential.

The study is premised on the assumption that it is in South Africa’s interest for there to be

strong growth by emerging black owned contractors towards higher grades on the cidb

Register of Contractors. Further, the study is based on the conviction that the cidb is

concerned about the capabilities of lower grade firms on its Register of Contractors to

develop, questioning therefore the effectiveness of its contractor development programmes

and other strategic policies. Finally, the study will inform contractors, especially those

registered in the lower grades (i.e. 2 to 6), about the factors that give rise to contractor

development and growth and that a lack of clarity about these factors in growth strategies

may have impaired their ability to meet the requirements for upgrading to the higher

grades.

In order to do achieve the objectives set out, the document:

a. reviews the structure of the construction industry and the supply and demand

pyramid/hierarchy structures – and discusses reason therefor;

b. reviews information provided by the cidb to sketch a picture of the state of

transformation in the ownership profile of contractors in the construction industry,

and to indicate areas of progress and lack of progress,

c. descriptively analyses: the number of successful contractors that have been upgraded

by the cidb at least three times from the inception of contractor registration in 2004;

the time scale taken to upgrade; and their growth patterns;

ii

d. identifies success factors from interviews with successful contractors, focusing on

factors such as ownership profile, strategic decisions made, financial capacity,

competence, experience and typical business models adopted that assisted their

development and transformation;

e. discusses the types, characteristics, nature, qualities and quantities of growth

mechanisms necessarily required by contractors to progress up the grades on the cidb

Register of Contractors; and

f. proposes realistic expectations for lower ranked contractors and measures that would

encourage their growth and development into Grades 7 – 9 on the cidb Register of

Contractors.

The findings, conclusions and recommendations reported in the document are summarized

as follows: -

• A significant percentage of public sector contracts are awarded to large contractors

who constitute less than 8% of those registered on the cidb Register of Contractors.

This is consistent with the nature of the construction industry, in that most of its high

value contracts are often large-scale projects, which cannot be sub-divided and which

often require a high level of business management and technical capability, as well as

financial solvency, which skills are more frequently found amongst large-scale

contractors.

• The racial and gender ownership profile of contractors listed on the cidb Register of

Contractors reflects a gradual and consistent transformation from predominantly

white owned companies to more black and Women-owned companies.

• It takes a General Building contractor listed on the cidb Register of Contractors an

average of 10 months to move up one Grade and 27 months to move up three Grades,

whilst it takes a Civil Engineering contractor an average of 12 months to move up one

Grade and 35 months to move up three Grades.

• The growth pattern of the upgraded contractors on the cidb Register of Contractors

revealed that growth is typically organic, steady and gradual.

• The success factors responsible for the growth and upgradability of contractors

include: environmental and organizational factors; and management capabilities, role

played by, personality of, and strategic decisions made by the leaders/owners.

• South Africa is an emerging economy and therefore, there are tremendous

opportunities available to small construction companies desirous of growing and

developing into large successful contracting firms as the economy grows and the

country develops.

• Large successful companies are able to: achieve and maintain huge turnovers;

generate huge profits/return on investments and are able to rebound after major

setbacks; build up and maintain a healthy cash position; invest in plant and other

fixed assets; maintain a happy and contented work force; identify and diversify into

new and more profitable markets; penetrate the construction market using diverse

products and services; and manage and co-ordinate the various construction activities

and numerous personnel using a three-step hierarchical chain-of-command and an

organization structure divided into at least three main sections.

iii

• The recommendations suggest that lower graded contractors should: allow sufficient

time for their companies to grow and develop organically, steadily and gradually;

ensure that company owners/leaders acquire the necessary management experience,

and develop a sound work ethic; invest in fixed assets and maintain cash reserves of

at least double their monthly turnover; and continually motivate their workers.

• The cidb should consider adding an escalation factor corresponding to the yearly

inflation rate into its Contractor Grading System and tender limits.

• The tender adjudication procedures used by the government and its agents should be

made more transparent and both government and private sector clients should

ensure that contractors’ invoices are honoured within the time period specified in the

Construction Contract.

iv

Main Report

TABLE OF CONTENTS

1. Structure of the South African Construction Industry ............................................................................... 1

1.1 Composition of the Supply and Demand for Construction Activities in South Africa ............. 2

1.2 Types of Firms ................................................................................................................................................... 3

1.2.1 Type 1 firms .................................................................................................................................................................. 3

1.2.2 Type 2 firms .................................................................................................................................................................. 4

1.2.3 Type 3 firms .................................................................................................................................................................. 4

1.2.4 Type 4 firms .................................................................................................................................................................. 4

2. State of Transformation in the Ownership of Grades 5, 6, 7 & 8 Contractors .................................... 4

3. Survey Method .......................................................................................................................................................... 6

4. Growth Path of Upgraded Contracting Firms ................................................................................................ 8

5. Success Factors Responsible for the Growth of Construction Contractors ...................................... 11

1.3 Environmental Factors ................................................................................................................................ 11

1.3.1 Opportunities available at company inception: ......................................................................................... 11

1.3.2 Demand Factor: ........................................................................................................................................................ 12

1.3.3 Government Policies: ............................................................................................................................................. 12

1.4 Organizational Factors: ............................................................................................................................... 13

1.4.1 Founding Top Management Team: .................................................................................................................. 14

1.4.2 Size and Experience of Team Members: ........................................................................................................ 14

1.4.3 Education: ................................................................................................................................................................... 15

1.4.4 Professional qualification: ................................................................................................................................... 15

1.5 Founder’s Aspirations and Ability to make use of Company Potential ..................................... 15

1.5.1 Founders’ Aspirations: .......................................................................................................................................... 15

1.5.2 Ability of founders to make use of the company strengths/potential for growth: .................... 16

1.5.3 Weaknesses of the company and founder at inception: ......................................................................... 17

1.5.4 Threats to business survival at inception: .................................................................................................... 17

1.6 Founder’s Leadership Role, Leadership Style, Behaviour and Personality ............................. 18

1.6.1 Founder’s Leadership Role: ................................................................................................................................ 18

1.6.2 Company Leadership Type: ................................................................................................................................ 18

1.6.3 Leadership Style:...................................................................................................................................................... 19

1.6.4 Leader’s Behaviour and Personality: .............................................................................................................. 19

1.7 Strategic Decisions Made by Company Founders/Leaders ........................................................... 20

1.7.1 Developing a Strong Financial Base ................................................................................................................ 20

1.7.2 Track Record .............................................................................................................................................................. 20

1.7.3 Acquisition of construction equipment and other fixed assets ........................................................... 21

1.7.4 Procurement strategy: ........................................................................................................................................... 21

1.7.5 Developing and maintaining a strong workforce: ..................................................................................... 21

6. Typical Characteristics of Large Contractors (Grade 7, 8 and 9)......................................................... 22

1.8 Annual Gross Turnover of the Construction Companies ................................................................ 22

1.9 Profit .................................................................................................................................................................. 23

1.10 Cash Position ................................................................................................................................................ 23

1.11 Fixed Assets .................................................................................................................................................. 24

1.12 Technical Capacity/Number of Employees ....................................................................................... 25

1.13 The Geographical Spread of Company Operations ........................................................................ 26

1.14 Diversification of Companies by Products and Services .............................................................. 26

1.15 Company Organization ............................................................................................................................. 27

7. Conclusions ............................................................................................................................................................. 28

8. Recommendations ................................................................................................................................................ 30

1.16 Realistic Expectations of Lower Ranked Contractors ................................................................... 30

v

1.17 Measures that would encourage the growth and development of lower ranked

contractors into large successful contractors ................................................................................................ 31

1.18 Theoretical Implications of the Study ................................................................................................ 31

9. References ............................................................................................................................................................... 33

10. Appendix A ........................................................................................................................................................... 35

vi

List of Tables

Table 1 Distribution of Number of Contractors by Grade and public sector awards and by value .................... 2

Table 2 Distribution of cidb registered general building contractors by black and women-ownership from

October 2008 - October 2010 ............................................................................................................................................................ 4

Table 3 Distribution of cidb registered civil engineering contractors by black and women-ownership from

October 2008 - October 2010 ............................................................................................................................................................ 5

Table 4 Distribution of successful upgraded contractors by location and response ................................................ 6

Table 5 Year in which contracting companies commenced operations .......................................................................... 8

Table 6 Distribution of the Contractors that have been upgraded on the cidb register by initial Grade of

Registration ................................................................................................................................................................................................ 9

Table 7 Opportunities at Company Inception .......................................................................................................................... 11

Table 8 Background Profiles of Founding Members & Size of the Founding Team ................................................ 14

Table 9 Company Mission and Vision Statements ................................................................................................................. 16

Table 10 Strengths of the company at inception .................................................................................................................... 16

Table 11 Distribution of companies by their weaknesses at inception ....................................................................... 17

Table 12 Threats to Business Survival at the Inception Stage ......................................................................................... 17

Table 13 Leadership Behaviour ..................................................................................................................................................... 19

Table 14 Strategic Decisions............................................................................................................................................................ 20

Table 15 Distribution of contractors by Grade and Characteristics .............................................................................. 22

Table 16 Growth of Gross Turnover in Construction Companies ................................................................................... 22

Table 17 Profits Before Tax ............................................................................................................................................................. 23

Table 18 Cash Position ....................................................................................................................................................................... 24

Table 19 Growth in Value of Fixed Assets of Construction Companies........................................................................ 25

Table 20 Technical Capacities ......................................................................................................................................................... 25

Table 21. Distribution of Companies by Geographical Spread ......................................................................................... 26

Table 22 Company distributions by product diversification ............................................................................................ 27

Table 23 Company distributions by divided function .......................................................................................................... 28

vii

List of Figures

Figure 1 Sectors in the Construction Industry ........................................................................................................................... 1

Figure 2 Distribution of Number of Contractors by Grade and public sector awards and by value .................. 2

Figure 3 Distribution of cidb registered general building contractors by black and women-ownership

from October 2008 - October 2010 ................................................................................................................................................. 5

Figure 4 Distribution of cidb registered civil engineering contractors by black and women-ownership

from October 2008 - October 2010 ................................................................................................................................................. 5

Figure 5 Survey Interview/Instrument Schematic Framework ......................................................................................... 7

Figure 6 Growth Pattern of General Building Contractors on the cidb Register of Contractors .......................... 9

Figure 7 Growth Pattern of Civil Engineering Contractors on the cidb Register of Contractors ...................... 10

Figure 8 Cyclical nature of construction demand .................................................................................................................. 12

1. Structure of the South African Construction Industry

The construction industry,

towards economic and technological progress (Brech, 1971).

construction industry may be defined as that sector of the economy which plans, designs,

constructs, alters, maintains, repairs and eventually demolishes buildings of all kinds,

architectural, structural and civil engineering works, mechanical and electrical engineering

structures and other similar works

a) Persons, enterprises and age

construction; both those whose main activity is construction and the relevant part of

entities engaged in other field

as the maintenance unit of a bank or manufacturing enterprise).

b) Those providing all kinds of planning, design, supervisory and managerial services

related to construction.

The construction industry’

operating and/or resulting in difficult and complicated circumstances involving multiple

participants operating from inside and out

systems that may be assembled with completely new and never ending combinations and

variations. The construction industry is therefore usually portrayed in terms of the

following different sectors

• Professional services sector

• Contracting sector

• Public sector

• Finance and Investment sector

• Material manufacturers and supply sector

• Equipment manufacturers, supply and hire sector

Figure 1 Sectors in the Construction Industry

The focus of this document

major groupings - building and civil engineering contractors and

Materials manufacturers

and Supply

Equipment Manufacturers, Supply and Hire

tructure of the South African Construction Industry

The construction industry, as is now widely acknowledged, is a major factor in the drive

towards economic and technological progress (Brech, 1971). According to Ofori (1990), the


, maintains, repairs and eventually demolishes buildings of all kinds,


structures and other similar works. Thus the industry includes:

Persons, enterprises and agencies, both public and private, involved in physical


entities engaged in other fields of activity who retain some construction activity (such


Those providing all kinds of planning, design, supervisory and managerial services

related to construction.

The construction industry’s delivery chain consists of many complex composite parts, often


participants operating from inside and outside the industry, and result

ay be assembled with completely new and never ending combinations and


following different sectors and as shown in Figure 1: -

Professional services sector

Finance and Investment sector

Material manufacturers and supply sector

Equipment manufacturers, supply and hire sector

in the Construction Industry

The focus of this document however, is on the contracting sector, which encompasses

building and civil engineering contractors and

CONSTRUCTION INDUSTRY

Professional Services

Contracting

Public

Finance and Investment

Materials manufacturers

and Supply

Equipment Manufacturers, Supply and Hire

1

is now widely acknowledged, is a major factor in the drive

According to Ofori (1990), the


, maintains, repairs and eventually demolishes buildings of all kinds,


ncies, both public and private, involved in physical


of activity who retain some construction activity (such


Those providing all kinds of planning, design, supervisory and managerial services

s delivery chain consists of many complex composite parts, often


results in a system or

ay be assembled with completely new and never ending combinations and


which encompasses two

building and civil engineering contractors and to a lesser extent,

specialist subcontractors.

small sizes interact not only with each other, but also w

industry.

1.1 Composition of the Supply

Africa

A major characteristic of the construction industry is that government has consistently been

its largest client the world over (Hillebrandt, 1975). Government can therefore be said to be

the stimulator of demand, but there is nevertheless a wide range of ac

with outputs mainly in building and civil engineering projects for new work, minor works,

capital and maintenance work that effectively constitute the demand for the construction

industry.

This document draws on the Construction Indu

explaining the composition and demand for construction in the South African construction

industry. The cidb has refined a system that documents the workload and number of

contractors registered in the industry ov

For example, the October 2010 Quarterly Monitor presents the distribution of public sector

contracts awarded for South Africa as a whole between the 4

quarter 2010 for Grades 2

the distribution of tenders to the Grade 1 contractors is noted to be very limited and

unreliable (cidb, 2010b).

The percentage distribution of the public sector awards by value and the num

recipients of these awards is presented in Table 1 and Figure 2.

Table 1 Distribution of Number of Contractors

value

Project

Grade

No of Contractors

General

Building

Civil

Engineering

9 40 50

7 & 8 279 310

5 & 6 1033 1173

2 to 4 3501 2853

Total 4853 4386

Source: cidb (2010a)

Figure 2 Distribution of Number of Contractors by Grade and public sector awards

Source: cidb (2010a)

The composition of the supply and demand for public sector construction activities in South

Africa, presented in Table 1 and Figure 2, is consistent with the nature of the construction

industry. Despite the fact that some basic principles of sound business

Grade 9 -90

Grade 7 & 8 - 589

Grade 5 & 6 -2206

Grade 2 to 4 -6354

specialist subcontractors. These contracting enterprises ranging from large,

small sizes interact not only with each other, but also with other enterprises outside the

of the Supply and Demand for Construction

major characteristic of the construction industry is that government has consistently been


the stimulator of demand, but there is nevertheless a wide range of ac



This document draws on the Construction Industry Development Board (cidb) literature in



contractors registered in the industry over time and publishes this in its Quarterly Monitor.


contracts awarded for South Africa as a whole between the 4th quarter 2009 and the 3

2010 for Grades 2 to 9 contractors on the cidb Contractor Register. Information on


The percentage distribution of the public sector awards by value and the num

awards is presented in Table 1 and Figure 2.

Number of Contractors by Grade and public sector awards

No of Contractors on Register Public Sector Awards by Value

Engineering

Total No of

Contractors

Percentage General

Building

50 90 1% 32%

310 589 6.4% 52%

1173 2206 23.8% 12%

2853 6354 68.8% 5%

4386 9239 100% 100%

Number of Contractors by Grade and public sector awards



industry. Despite the fact that some basic principles of sound business

6354 Grade 2 to 4 - 5.5%

Grade 5 & 6 -10.5%

Grade 7 & 8 - 42%

Grade 9 - 42%

2

These contracting enterprises ranging from large, to medium and

ith other enterprises outside the

and Demand for Construction Activities in South

major characteristic of the construction industry is that government has consistently been


the stimulator of demand, but there is nevertheless a wide range of activities countrywide,



stry Development Board (cidb) literature in



er time and publishes this in its Quarterly Monitor.


quarter 2009 and the 3rd

to 9 contractors on the cidb Contractor Register. Information on


The percentage distribution of the public sector awards by value and the number of

and public sector awards and by

Public Sector Awards by Value

Building

Civil

Engineering

32% 52%

52% 36%

12% 9%

5% 4%

100% 100%

Number of Contractors by Grade and public sector awards and by value



industry. Despite the fact that some basic principles of sound business management are

3

common to all enterprises, a lower level of capital is typically required to start and operate

a contracting firm compared with, for example, a manufacturing firm. An entry-level

contractor needs little more than a car, mobile phone and contacts in the right places. The

industry tends to attract entrepreneurs, many of who do not have adequate technical

training, nor business culture, capacity or maturity.

Another characteristic of the construction industry is that most of its high value contracts

are large-scale projects which cannot be sub-divided or awarded piecemeal and typically

require a high level of management, financial solvency and technical capability. These are

qualities and skills more frequently found amongst the Grade 7 to 9 contractors in South

Africa. Further, only these grades of contractors can undertake large projects, because

lower grade contractors typically find it more difficult to meet the requirements of the

financial institutions necessary for the award of tenders.

The data presented in Table 1 and Figure 2 show that 84% of the value of public sector

contracts in the General Building sector were awarded to Grade 7, 8 or 9 contractors, who

make up 6.6% of the contractors registered in that sector. According to Rush et al. (2007), it

is unlikely that there will be more than a few firms in this category at any given time. It also

shows that 15% of the value of public sector contracts was awarded to 92.6% of registered

contractors in Grades 2 to 6 across both the General Building and Civil Engineering sectors

(cidb 2010a).

The data in Table 1 and Figure 2 is concerning to Government, who wishes to see a stronger

presence of emerging black owned construction companies in Grades 7 to 9, in order to

reverse historical economic imbalances in income distribution and employment. The

absence of such a presence is a concern for the cidb, the government agency charged with

ensuring construction industry development, in that the effectiveness of its contractor

development programmes and other policies could be questioned. Lastly, a significant

number of these contractors may genuinely aspire to advance to higher grades where the

competition is lower and project values are higher (cidb, 2009a).

In order for a contractor to upgrade to a higher grade on the cidb Contractor Register,

certain capabilities need to be developed and demonstrated. Capability is not a natural

endowment - it requires the ability to do something. According to Rush et al. (2007), it

results from an extended learning process gradually accumulating processes, procedures,

routines and structures, which when embedded, is often referred to in practice as “the way

we do things around here” or culture. This document further explores the success factors

for growth, and those capabilities acquired by contractors that have been upgraded on the

cidb Contractor Register.

1.2 Types of Firms

According to Rush et al. (2007), as firms move into more complex environments, they need

a richer set of capabilities to deal effectively with the threats and opportunities that

confront them. Rush et al. (2007) located firms within four archetypes based upon their

level of maturity and on nine key dimensions of the management of technology, as follows:

1.2.1 Type 1 firms

These are labelled as “unaware” or “passive” and are characterized as being unconscious or

unaware of the need for technological change in what may be a hostile environment, where

technological know-how and ability may be vital to survival. Grade 1 contractors on the cidb

register are typically Type 1 firms.

4

1.2.2 Type 2 firms

These are defined as “reactive”, in that they recognize the challenge of change and the need

for continuous improvements in their technological capabilities, but are uncertain about

how to respond effectively. Grades 2 to 6 contractors on the cidb register are typically Type

2 firms

1.2.3 Type 3 firms

These firms have a well-developed sense of the need for technological change. Rush et al.

(2007) referred to these firms as “strategic”, in that they are capable of implementing new

projects and of adopting a strategic approach to continuous innovation. They have a clear

idea of what has to be done, when and by whom, and have the internal capabilities in both

the technical and managerial areas to implement changes with skill and speed. Grade7 and

8 contractors on the cidb register are typically Type 3 firms

1.2.4 Type 4 firms

These are said to have well-developed sets of technological capabilities and are able to help

define the international frontier. Rush et al. (2007) refer to these firms as “creative”, in that

they are able to adopt a proactive approach to exploiting technology for competitive

advantage. They are said to be at ease with modern strategic frameworks for innovation

and understand how to use technology, markets and organization to improve

competitiveness. Grade 9 contractors on the cidb register are typically Type 4 firms.

2. State of Transformation in the Ownership of Grades 5, 6, 7 & 8

Contractors

Over the sixteen years since South Africa’s first democratic elections, the racial and gender

profile of South Africa’s construction industry has been transforming gradually. Martin et

al. (2003), cited in Rush et al. (2007), suggested that transformation is the capability to

develop and fuse new with existing knowledge. The transformation of the construction

industry is due partly to the various laws (notably, the Broad-Based Black Economic

Empowerment Act of 2003) and strategies put in place by the government to assist both

historically disadvantaged people and women to participate in the industry.

The cidb Quarterly Monitor (cidb, 2008a; cidb, 2008b; cidb, 2009; cidb, 2010a) details the

distribution of cidb-registered contractors by black and women-ownership for the General

Building and Civil Engineering sectors - see Tables 2 and 3 and Figures 3 and 4. According

to cidb (2010b), black/women-owned is defined as greater than 50% ownership in the

shares of the company.

Table 2 Distribution of cidb registered general building contractors by black and women-

ownership from October 2008 - October 2010

Grade No of Contractors

Black Ownership Women Ownership

Oct 2008 Oct 2009 Oct 2010 Oct 2008 Oct 2009 Oct 2010

Oct 2008 Oct 2009 Oct 2010 No. % No. % No. % No. % No. % No. %

7 & 8 193 280 279 140 73 175 63 174 62 49 29 76 27 67 24

5 & 6 610 947 1033 521 85 740 78 815 79 268 44 405 43 425 41

2 to 4 3490 4155 3501 3290 94 3786 91 3026 86 1715 49 2007 48 1673 48

Total 4293 5382 4843 3951 92 4701 87 4021 83 2032 47 2488 46 2166 45

Source: cidb (2008b); cidb (2009) and cidb (2010a)

5

Figure 3 Distribution of cidb registered general building contractors by black and women-


Source: cidb (2008b); cidb (2009b) and cidb (2010a)

It can be seen from Table 2 and Figure 3, relating to General Building Contractors, that

between October 2008 and October 2010 the percentage of black owned companies

reduced - from 94% to 86% for Grade 2, & 4 contractors; from 85% to 79% for Grade 5 & 6

contractors; and from 73% to 62% for Grade 7 & 8 contractors. It can also be seen from

Table 2 that a significant number of women contractors are registered as contractors with

the cidb – at a fairly stable level of 45% to 47% in total over the same period. As would be

expected there are relatively fewer women-owned contracting firms at Grade 7 & 8 level.

Interestingly, there was a steady decline in the numbers of both black owned and women-

owned firms over the period.

Table 3 Distribution of cidb registered civil engineering contractors by black and women-


Grade No of Contractors

Black Ownership Women Ownership

Oct 2008 Oct 2009 Oct 2010 Oct 2008 Oct 2009 Oct 2010

Oct 2008 Oct 2009 Oct 2010 No. % No. % No. % No. % No. % No. %

7 & 8 213 371 310 99 46 144 39 151 49 29 14 73 20 69 22

5 & 6 765 1139 1173 566 74 810 71 862 73 229 30 358 31 365 31

2 to 4 2472 3136 2853 2265 92 2787 89 2332 82 461 19 604 19 1197 42

Total 3450 4646 4384 2930 85 3741 81 3351 76 719 21 1035 22 1631 37


Figure 4 Distribution of cidb registered civil engineering contractors by black and women-



50556065707580859095

100

Bla

ck

Ow

ne

rs

hip

(%

)

Date

Grades 7 &

8

Grades 5 &

6

Grades 2 to

4

Overall

0

10

20

30

40

50

60

Oct-2008 Oct-2009 Oct-2010

Fe

ma

le O

wn

er

sh

ip (

%)

Date

20

30

40

50

60

70

80

90

100

Bla

ck

Ow

ne

rs

hip

(%

)

Date

Grades 5 & 6

Grades 2 to 4

Overall

0

5

10

15

20

25

30

35

40

45

Fe

ma

le O

wn

er

sh

ip (

%)

Date

Grades 7 & 8

Grades 5 & 6

Grades 2 to 4

Overall

6

Table 3 and Figure 4 relate to Civil Engineering contractors in Grades 2 to 8. It can be seen

from these sources that the total percentage of black ownership declined from 85% to 76%

between October 2008 and October 2010. This consisted of decreases from: 92% to 82% for

Grade 2, 3 & 4 contractors; 74% to 73% for Grade 5 & 6 contractors; and an increase from

46% to 49% for Grade 7 & 8 contractors. It can also be deduced from Table 3 and Figure 4

that there has been significant growth in women-owned firms. The total percentage of

women-owned firms increased from 21% to 37% over the period, with the strongest

growth occurring in the Grade 2 to 4 divisions (from 19% to 42%). The growth from 14% to

22% in the Grade 7 to 8 divisions was also significant.

The tables and figures above indicate that the racial and gender profile of the building and

civil engineering contracting sectors has transformed among the cidb registered

contractors from predominantly white ownership to now include significant percentages of

black and women-owned companies. This skewness seen in the distribution of black and

women-owned firms across the grades is to be expected and may be due to the factors, such

as technical capability and financial capacity, required by higher grade contractors that are

more evident in well established older firms.

The fluctuations in the percentages of black and women-owned firms over the October

2008 to October 2010 period, particularly where they decline, could have many

explanations. There will always be some migration between ranks that will affect these

numbers, but the overall economic climate during this period was characterised by the

effects of the global financial crisis, not least, of which has been a sharp decline in building

and construction.

3. Survey Method

All the 62 successful contractors that have been upgraded at least three times within the

last five years on the cidb Register of Contractors were sent an invitation for an interview.

Table 4 shows the response to the invitation by geographic distribution and by type of

response.

Table 4 Distribution of successful upgraded contractors by location and response

Areas

Province

Number of: - Total

Email Bounced Accepted Declined No Response

Western Cape 0 2 0 2 4

Gauteng 5 6 1 11 23

North West 0 1 0 4 5

Kwa-Zulu Natal 2 3 1 7 13

Eastern Cape 0 0 0 2 2

Free State 0 2 0 4 6

Mpumalanga 1 0 1 2 4

Limpopo 1 0 0 3 4

Northern Cape 0 0 0 0 0

Unidentified 1 0 0 0 1

Total 10 14 3 35 62

Table 4 also reveals that the respondents covered a wide range of work and location

groupings. Respondents were located in five of the nine provinces namely – Western Cape,

Gauteng, North West, Kwa-Zulu Natal and the Free State. Personal interviews were

conducted with the principal (founding members, CEO, or director) of 12 of the 14 who

accepted, using the interview protocol in Appendix A. A coding system indicating whether

7

firms were white, black, or women-owned, and whether they operated in the General

Building or Civil Engineering divisions, is explained in Appendix A.

The purpose of the interviews was to document and develop an understanding of the

factors responsible for the growth and success of the respondents. In addition to these 12

interviewees, a small sample of four CEOs/Directors of established Grade 9 contracting

organizations were interviewed. These firms were intended as a control group for the

study. The survey interview/instrument was based on the schematic framework shown in

Figure 5.

Figure 5 Survey Interview/Instrument Schematic Framework

The personal interview was the main instrument used in the investigation of the

contractors’ path to development/success. The researchers administered the interviews by

visiting the respondents in their respective places of work. Variables around which a series

of questions were developed included the technical capacity/capability of the firm surveyed

and business maturity. The interview protocol was used to carry out in-depth case studies

and face-to-face interviews. The type of information required was sent to the

CEOs/Directors in advance with the request for interview invite. For each firm, a graphical

representation of the path to success over time and the level of capabilities and

competencies necessary for growth were generated in the form of a line graph. The steps

followed were as follows:

• Historical case material was gathered and a ‘story’ covering technological progress,

business and construction processes was obtained from each company

• Basic information on the company’s history, number of employees, turnover, product

markets, technologies, leadership type and resources required was also checked and

updated during the interview

• Data collected was also supplemented (in advance of the interview if possible) by

secondary sources (e.g. annual reports) or web searches of business news and stock

market analysts’ assessments, etc.

Answers were sought to the following are questions: -

• What is the path most frequently chosen/taken by the contractors in order to

develop?

• How long did it take the contractors to develop from the grade when first registered

with the cidb to their current grade?

8

• What factors aided the growth and success of the construction companies– key

success factors?

• What did the contractors achieve in terms of capabilities and capacities? (i.e. turnover,

cash reserves, profits, assets, number of permanent employees)

• What are the typical business structures that evolved? (e.g. joint venture, partnership,

diversification by location and products, organization structure, etc).

Sample and Result Limitations: It should be noted that the ability to generalize the

findings of this study to the population of cidb-registered contractors is limited by the

smallness of the sample size. The sample of 12 contractors only represents 21% of the 58

contractors that have been upgraded by at least three grades on the cidb Register of

Contractors since its establishment in 2004. Furthermore, the 58 contractors do not

represent the total number of contractors that have been upgraded on the cidb Register of

Contractors. However, the results of the study are probably indicative of what would be

found in the larger population.

4. Growth Path of Upgraded Contracting Firms

To retain its relative position, a business must go through continuous growth and change.

To improve its position, it must grow and change at least “twice as fast as that” (Ansoff,

1957).

In Section 1.2 above the four types of firms identified by Rush et al. (2007) were described.

Their classification was based on the firm’s maturity. Others have identified different stages

of small business growth (Kazanjian and Drazin, 1989; Steinmetz, 1969). According to

Steinmetz (1969), a successful small business is inescapably committed to living through

three critical phases of growth and four stages of growth, which he called “direct

supervision”, “supervised supervision”, “indirect control” and “divisional organization” -

based largely on the development of the manager and founder through these different

stages. This implies that for a manager to be successful he must have trained other

managers. Kazanjian (1988), cited in Kazanjian and Drazin (1989), also suggests that

companies go through four stages of growth, which he called “conception and

development”, “commercialization”, “growth” and “stability”.

The four stages of growth alluded to by Steinmetz (1969) and Kazanjian (1988) are

accepted for the current study, but are referred to as “conception and survival” (1st stage),

“development” (2nd stage), “stability/maturity” (3rd stage) and “commercialization and

expansion” (4th stage). This definition of the stages of contractor growth is based on the

findings of the contractor interviews. All of the firms interviewed (based on their growth

track record) happened to have been established before the cidb Register of Contractors

was established in 2004.

Table 5 presents the year in which the interviewees’ companies started operations.

Table 5 Year in which contracting companies commenced operations

Year of commencement Frequency Percentage

Before 1994 4 33.3

Between 1994 and 1999 4 33.3

Between 2000 and 2004 4 33.3

2005 and after 0 0.00

Total 12 100

9

Table 5 reveals that none of the contractors consulted were incorporated after the coming

into operations of the cidb Register of Contractors in 2004. Four were founded before the

1994 democratic elections, four were founded between 1994 and 2000 and four were

established between 2000 and 2004.

Table 6 presents the grade at which the interviewees were initially registered on the cidb

Register of Contractors.

Table 6 Distribution of the Contractors that have been upgraded on the cidb register by

initial Grade of Registration

Company* Initial Registration Grade

General Building (GB) Civil Engineering (CE)

GB4 GB5 GB6 CE4 CE5 CE6

0131 1 1

0211 1

0111 1

0112 1

0311 1

0113 1

0221 1

0421 1

0114 1

0231 1 1

0212 1

0121 1

Total 5 3 1 5

*See Appendix A for company code

Table 6 shows that five of the contractors interviewed were initially registered in Grade 4 of

the General Building (GB) Class of Works; three were registered in GB Grade 5 and one in

GB Grade 6. All five of the Civil Engineering contractors were registered in Grade 4 of the

Civil Engineering (CE) Class of Works. It should be noted that two of the companies were

registered into both the GB and CE Class of Works. Tables 5 and 6 suggest that the

contractors were past the “conception and survival” stage and were probably in the

“stability/maturity” stage when they registered with the cidb.

Figures 6 and 7 presents the changes in the growth path of the General Building contractors

and the Civil Engineering contractors surveyed, since their registration on the cidb Register

of Contractors in 2004.

Grade 4–5

(Months)

Grade 5–6

(Months)

Grade 6 -7

(Months)

Grade 7 –8

(Months)

Grade 8 –9

(Months)

Total

(Months)

0131 21 30 51

0211 9 9

0112 12 9 21

0311 3 24 27

0113 3 18 3 24

0114 6 18 3 27

Total No. of

Companies

4 5 6 4 1

Figure 6 Growth Pattern of General Building Contractors on the cidb Register of Contractors

10

Grade 4–5

(Months)

Grade 5–6

(Months)

Grade 6 -7

(Months)

Grade 7 –8

(Months)

Grade 8 –9

(Months)

Total

(Months)

0131 21 30 51

0221 6 33 39

0121 6 39 45

Total No. of

Companies

3 3 3 1 0

Figure 7 Growth Pattern of Civil Engineering Contractors on the cidb Register of Contractors

Figure 6 reveals that the highest growth for the General Building Contractors occurred

majorly between the 4th quarters of 2006 (0604) to the 2nd quarter of 2008 (0802) – an

eighteen-month period. Contractor downgrade was also observed in the period 0903 to

1001 (a 12 month period).

Fig. 7 shows that significant growth was recorded for the Civil Engineering Contractors,

between the 3rd quarter of 2006 (0603) and the 3rd quarter of 2008 (0803) – a twenty-four

month period and one downgrade also occurred during the period 0903 to 1001.

Generally, the growth pattern seen in Figures 6 and 7 suggests that most of the companies

had moved past the first stage of growth (the conception/survival stage) by the time they

registered with the cidb. It can be inferred that a significant number of the contractors

interviewed were in the 2nd stage of growth (the development stage) when they registered

with the cidb.

Once registered on the cidb Register of Contractors, it took the General Building Contractor

an average of 10 months to move up one grade and 27 months to move up three grades.

Civil Engineering Contractors took an average of 12 months to move up one grade and 35

months to move up three grades. This could indicate that General Building contractors

grows faster on average than Civil Engineering contractors.

The contracting companies’ growth patterns are consistent with previous findings by

Kazanjian and Drazin (1989) who studied the growth pattern of technology based new

ventures (TBNVs) in the USA, where they found that it took companies at least 18 months to

move between the different stages of growth.

The results also indicated that all the companies were still in the 3rd Stage of growth (the

Stability/Maturity stage). This is so because most of the companies expressed contentment

in their present level of growth and status, having no wish to grow further, while others

were making plans for expansion and commercialization, such as selling shares privately to

willing takers and diversifying and expanding into new territories locally and

internationally and into new products/market strategies.

A significant number of the respondents described their company’s growth pattern as

organic, steady, consistent and gradual, while only two acknowledged that it had been

rapid. It also emerged that a significant number of the respondents acknowledged that the

growth of their companies had surpassed their expectations at inception.

Moving up the cidb Register of Contractors implies that the firm had been able to procure

sufficient and profitable jobs, because turnover and largest contract value completed in the

last five years is a criterion used by the cidb in its grading system. Further, in its path to

growth, the firm must have capitalized on its strengths, overcome its weaknesses, coped

with threats to its survival and taken advantage of opportunities.

We now consider the question of how the contractors were able to grow and what factors

were responsible for their growth.

11

5. Success Factors Responsible for the Growth of Construction Contractors

These success factors are discussed under the following headings:

1.3 Environmental Factors

Stinchcombe (1965), cited in Eisenhardt and Schoonhoven (1990), emphasized the

importance of environmental factors, such as: demand; industry maturity; economic

expansion; and barriers to entry into the industry. They found that:

i. founding environment affects company growth

ii. companies founded in growth-stage markets are more likely to become larger

than those founded in emergent or mature markets

iii. competition at founding stage did not affect firm growth

A review of the founding environment in South Africa is presented here in order to explain

how this factor has aided the growth and success of contractors.

1.3.1 Opportunities available at company inception:

South Africa is a developing country and therefore can be said to be in a growth market

stage. Table 7 shows the distribution of respondents by the opportunities that they

perceived to have aided their growth.

Table 7 Opportunities at Company Inception

Opportunities Frequency Percentage

Increased spending by government and private sector on infrastructure 5 41.7

Government intervention and support – HDI, BEE, favourable

procurement policy

4 33.3

Target group beneficiary in contracts 1 8.3

Chances for technological advancement through Joint Ventures 1 8.3

None 1 8.3

Total 12 100

A significant number (42%) of the respondents indicated that the major opportunity at

inception was Government spending on infrastructure delivery.

The growing construction industry in South Africa provides many opportunities for new

firms. In contrast, mature construction industry markets, as found in developed countries,

provide limited opportunities for new firms, because few firms have advantages over their

established competitors (Eisenhardt and Schoonhoven, 1990). Therefore, according to

Carroll (1984), cited in Eisenhardt and Schoonhoven (1990), while new firms in mature

markets may become profitable, they are unlikely to become large.

The South African economy, being a growth market, is large and can thus accommodate the

entry of new firms. Although, as in all construction sectors, demand in the South African

construction sector is cyclical (see Figure 8 below), growth phases provide opportunities

for all competitors, both new and established. Additionally, the contribution by Government

to such opportunities can be significant and this has been especially true for historically

disadvantaged individuals and firms. The interviewees for this study indicated that they had

indeed taken advantage of such growth in the South African construction sector.

12

Source: Snyman (2009)

Figure 8 Cyclical nature of construction demand

1.3.2 Demand Factor:

An analysis of the event history from the interviewees’ narrative revealed that most of the

large contracts on which they experienced significant milestones or turning points occurred

in the years immediately preceding 2010. Specifically several of the firms upgraded

between the 2005 and 2007 and reported having surpassed their growth expectations. This

can be seen from Figure 8 to have been a period of strong upswing in construction demand.

Characteristically, these firms reportedly carved out small, and often profitable, niches.

To move up the Register of Contractors implies also that the contractors were able to

achieve significant market penetration (Ansoff, 1957). It was observed that all the

contractors interviewed moved from executing low value projects (less than R1m) to multi-

million Rand jobs within a few years of registering with the cidb.

1.3.3 Government Policies:

It might be expected that government policies such as the Black Economic Empowerment

(BEE) preference score of 10% used in tender adjudication and the preference for Historical

Disadvantaged Individuals (HDIs) in tender procurement would have aided the market

penetration of black and women-owned construction companies. On the contrary, visual

inspection of the graphs in Figures 6 and 7 shows no significant difference in the growth

paths of the white-owned and the black and women-owned firms. There is also no

noticeable difference in the time taken by such firms to reach their present grades.

For example, the average black-owned GB company upgraded 3 times and spent 27 months

getting to its present grade, while the only white-owned GB company in the survey

upgraded 3 times also and spent 27 months getting to its present grade. It took the black

woman-owned GB Company 30 months to upgrade three times from its initial registration

grade to its present grade.

In the Civil Engineering division, the same trend was observed as in the General Building

division. It took the white male-owned firm 39 months to upgrade three times to its

TOTAL CONSTRUCTION WORKS ANNUAL PERCENTAGE CHANGE ( 3 QUARTER MOVING AVEARAGE )

-30

-20

-10

0

10

20

30

40

50

| 61 | 64 | 67 | 70 | 73 | 76 | 79 | 82 | 85 | 88 | 91 | 94 | 97 | 20 | 03 | 06 | 09 |

Source: SARB; MFA DATABASE (ECONOMIC UPSWINGS SHADED)

ANNUAL PERCENTAGE CHANGE

13

present status, whereas it took the black male-owned firms an average of 33 months to

upgrade three times to their present positions.

The government intervention seen to have aided the market penetration of the contractors

in the construction industry, is the cidb legislation. According to some of the contractors

interviewed, “the cidb has made the construction industry legitimate in that it has been able

to keep ‘fly by night’ contractors from tenders and has also been able to ‘separate the men

from the mice’”.

The above analysis suggests that, while favourable government policies (concerning BEE

and HDI status) are essential to the creation of opportunities for construction firms

entering the sector, other factors are required for contractors to: be effective and efficient;

run their firms smoothly; improve their chances of procuring more jobs; improve their

visibility; and aid their market penetration. A firm needs to realise its potential, use its

strengths and overcome its weaknesses and threats by using the capacities/capabilities

embodied in the organization, which are personified in the leader or founder.

1.4 Organizational Factors:

Another factor responsible for company success, identified by Stinchcombe (1965), cited in

Eisenhardt and Schoonhoven (1990), is the organisational factor. The roles of founders are

identified as critical in shaping young firms and the success of companies has been

attributed to the unique abilities of the founder, his/her personality, dreams and flaws.

Eisenhardt and Schoonhoven (1990) found that:

i. the founding top-management team influences the growth of new firms.

Specifically, the members of the team, their past experience together and the

diversity of their industry experience, are linked with higher growth.

ii. there is a strong relationship between the founding market stage and the

strength of the founding senior management team. Superior teams are especially

skilful at exploiting growth markets. In contrast, weak teams are generally less

successful in growth markets than strong teams and perform particularly poorly

in non-growth markets.

iii. the effects of founding team and environment grow, rather than fade, with time.

Large teams initially have more skills to build strategic alliances, raise money,

and meet potential customers. Once their firms are successful, other customers,

investors and allies are attracted to what appears to be a successful venture. In

turn, suppliers become more willing to do business with these apparently

successful ventures. Over time, firm growth becomes a self-fulfilling prophecy

for many of these firms, as success breeds success.

In summary, firms have to be established on a strong footing comprising a strong

founding team, in order to be successful in any type of market, whether growth or non-

growth markets.

The findings from the interviews with contractors are presented below. A comparison is

made to see if the characteristics of their founding team are consistent with the findings

of Eisenhardt and Schoonhoven (1990). Further, an evaluation is undertaken to see if

these founding team factors can be used to explain the successes and growth patterns of

the upgraded construction companies – i.e. whether those that grew the most had

combined synergistically founding in a growth market with a superior top-management

team.

14

1.4.1 Founding Top Management Team:

Table 8 presents the founding members’ background profiles and sizes of the founding

teams.

Table 8 Background Profiles of Founding Members & Size of the Founding Team

Profile Frequency Percentage

Size of the Founding Team at Inception (N = 12)

Sole owner 4 33.3

Two owners 3 25.0

Three owners 5 41.7

Members Experience before setting up company (N = 23)

None 1 4.4

Less than 5 years 2 8.7

Between 6 and 10 years 6 26.1



More than 20 years 5 21.7

Members Past Experience Together (N = 12)

None 7 58.3

Less than ten years (8 & 6 years of experience) 2 16.7

Between 10 and 20 years (14 years) 1 8.3

More than 20 years (20 & 25 years) 2 16.7

Members Diversity of construction industry experience (N= 8)

Same experience 2 25

Varied experience (human resources, construction, finance etc) 6 75

Member Educational Qualification (N = 22)

None 1 4.5

Standard six 2 9.1

Matric 8 36.4

National Diploma 3 13.6

Higher National Diploma 2 9.1

Bachelors Degree 6 27.3

Member Professional Qualification (N = 23)

SACPCMP, Pr. Eng, PRISA, MCIOB/FCIOB 6 26.1

None 17 73.9

1.4.2 Size and Experience of Team Members:

Table 8 shows that at founding: -

i. 67% of the firms were owned by either two and three owners who had more

than six years of work experience in the construction industry;

ii. 42% of the firms had team members who had past experience of working

together in a construction company; and

iii. importantly, the experience acquired by the team members was varied but

relevant. Some acquired experience in human resources, while others were

adept at tendering, financial management, construction operations and plant

management.

15

1.4.3 Education:

Table 8 indicates a range of the highest educational qualifications possessed by the

founders. When cross-tabulated in company terms, there are only four companies out of the

12 companies in which there are owners with no tertiary education at all and these are

found in the firms with sole owners, three of which were founded before 1994.

According to Snell and Dean (1992), cited in Wiklund and Shepherd (2003), the human

capital of a small manager consists of skills and knowledge - obtained through education

and experience – that assist in running the business successfully. A consistent finding for

general human capital is that educated individuals are more likely to run faster-growing

small businesses than those who are less educated (Wiklund and Shepherd, 2003). Applied

to this study, it implies that competencies are required to grow a company, but having an

educated founder will enable the company to grow at a faster rate.

1.4.4 Professional qualification:

Table 8 also reveals that a significant number of the founding owners do not possess

professional qualifications, suggesting that this is not important in establishing a successful

construction company.

The results of the study imply that the size of the founding team, founding owners’ past

experience and past experience together, and diversity of members’ in the construction

industry are responsible for the companies’ growth. This is consistent with Eisenhardt and

Schoonhoven’s (1990) findings that top executives make a difference in how companies

grow and that strong teams – having the requisite experience and education - appear to

move more quickly, get more done and make fewer mistakes than other teams.

1.5 Founder’s Aspirations and Ability to make use of Company Potential

It is a founder’s job to lead a team, to combine human resources and obtain the best from

them. The founders who are managers of the team should therefore be people of

experience, understanding and vision, and should have enough confidence to delegate

responsibility and stand by decisions (Harris and McCaffer, 2001). Thus, founders can

influence the survival and growth of their companies.

1.5.1 Founders’ Aspirations:

Wiklund and Shepherd (2003), in their study of small business managers’ growth

aspirations and the level of growth achieved, discovered that small business managers’

aspirations to expand their business is positively related to actual growth.

To measure their aspirations, the respondents were asked to give an indication of their

mission statement and vision for the company at inception. Table 9 presents these results.

16

Table 9 Company Mission and Vision Statements

Frequency Percentage

Mission Statements (N = 12)

To build a business 6 50

To make money/profit/income and empowerment 6 50

Vision Statements (N = 12)

Survival 4 33.3

Leave a legacy 3 25

Grow a large/medium sized company 3 25

Leaders in construction in a specific geographical location 1 8.3

To be able to competitive 1 8.3

Table 9 indicates that, at inception, all of the contractors either set out to build profitable

businesses, which would empower them, help them in their quest for a share of the

construction industry business and to make money.

The aspirations of some of the founding owners embodied in their vision for their

companies show that contractors want: the company to grow (25%); to be leaders in the

industry (8%); to be competitive (8%); and perhaps more importantly, to leave a legacy

(25%). Four (33%) of the founding owners intended only to survive on a monthly basis and

later on, on a yearly basis.

1.5.2 Ability of founders to make use of the company strengths/potential for growth:

Stinchcombe (1965), cited in Eisenhardt and Schoonhoven (1990), found that a factor

underlying the failure of young organizations is their limited resources and consequently, if

resources are abundant, they will grow. At inception of the companies, there were key

resources possessed by the founders that enabled them to grow. The findings of the

interviews are presented in Table 10.

Table 10 Strengths of the company at inception

Company Strengths Frequency Percentage

Project Management Capability 4 33.3

Knowledgeable and qualified employees 4 33.3

Small company size 2 16.7

Technical ability/Technological advantage 1 8.3

Black Company 1 8.3

Total 12 100

Most of the respondents confirmed that both the founders and company possessed

strengths that were used at inception. The key strength for each company was identified, as

shown in Table 10. Four (33%) of the founders referred to their project management

capability and organizational skills, plus their ability to put together a strong business and

technical team and to attract and place good people. A further four (33%) firms considered

their main strength to have been their knowledgeable and qualified employees. Two (17%)

identified their key strength to have been the small company size that allowed them to give

personal attention to clients.

It can be inferred from the foregoing that all the companies lacked access to finance, a

primary construction resource, at inception. This mirrors Stinchcombe’s (1965), cited in

Eisenhardt and Schoonhoven (1990), finding that lack of access to finance is often a factor

underlying the failure of young organizations and that company growth is dependent on

sufficient finance.

17

According to one of the respondents, “year by year, construction companies need more money

in order to start a project and this translates into tough times for construction companies who

have recently entered into the market and do not have the financial backing of older firms”.

1.5.3 Weaknesses of the company and founder at inception:

Table 11 presents the weakness of the construction companies surveyed and founders at

the inception stage.

Table 11 Distribution of companies by their weaknesses at inception

Company Weaknesses Frequency Percentage

Lack of finance 4 33.3

Personal traits – weak, impatience, temper 2 16.7

Woman-owned company 1 8.3

White-owned company 1 8.3

Lack of business experience 1 8.3

Lack of education 1 8.3

Lack of knowledgeable and qualified employees 1 8.3

Operational difficulties (highly dispersed sites) 1 8.3

Total 12 100

Four (33%) companies referred to lack of finance as their main weakness at inception. They

explained that they had had great difficulty in accessing finance and a black-owned

company stated that its application for funding was refused by the National Equalization

Fund (NEF).

Another weakness, reported by two (17%) of the respondents was their personal traits, e.g.

weakness, impatience and irritability. Being a white-owned company (8%) and being

woman-owned (8%) were also felt to have been weaknesses. The owner of the woman-

owned company experienced many challenges trying to market such a company and in

persuading clients that a woman-owned company is capable of producing high quality

work. Others identified: lack of business experience (8%); lack of education (8%); difficulty

in finding and retaining suitably knowledgeable and qualified employees (8%); and

operational difficulties (e.g. managing widely dispersed sites) (8%); as weaknesses at

inception. The interviewee responsible for the latter point explained that “the location of

the site, not only how far it is from a manufacturer of building materials, but the nature of the

site on which the construction took place was a major constraint”.

1.5.4 Threats to business survival at inception:

The interviewees were also asked to identify threats to the survival of their businesses at

the conception and survival stage. The ability of the founders to navigate the threats to

survival determines whether the company grows or not. The threats overcome by the

founders at the inception/survival stage are presented in Table 12.

Table 12 Threats to Business Survival at the Inception Stage

Threats (N = 12) Mean Response

Average

Rank

Lack of adequate financial resources by project owners and payment

methods

0.75 1

Personal traits – weak, impatience, temper 0.17 2

Woman-owned company 0.08 3

White company 0.08 3

Lack of business experience 0.08 3

Lack of education 0.08 3

Lack of knowledgeable and qualified employees 0.08 3

Operational difficulties (highly dispersed sites) 0.08 3

18

Firm owners believed that the greatest threat to the survival of their businesses at the

inception stage was, and still is, the lack of adequate financial resources of their clients, in

both the public and private sectors. Related to this, they cited payment methods as a

problem, referring to delayed payment, which adversely affects their cash flow and

increases working capital requirements. Many cited this threat as almost having caused the

death of their companies. Most of the respondents confirmed that they had to make use of a

severance package from previous employers, mortgage their houses, or obtain personal

loans from relatives or friends in order to raise finance.

1.6 Founder’s Leadership Role, Leadership Style, Behaviour and Personality

It also emerged from the survey that the founder’s leadership role; his/her leadership style,

unique abilities and personality; and the strategic decisions made are considered crucial to

the company’s survival and growth.

While some scholars have voiced scepticism concerning whether or not leaders can make a

difference in organizational performance (Pfeffer, 1977; and Salanick, 1977, cited in

Sharmir et al., 1993), others have found that leadership is very important in the survival of

any organization (Albert, 1981 and Stegall et al., 1976, cited in Covin and Slevin, 1989; and

Eisenhardt and Schoonhoven, 1990). Leadership is very important, especially regarding its

effect on organizational performance. Leadership means success, efficiency, effectiveness,

and improved performance, all of which result in higher profitability. Success is dependent

on the ingenuity of the Chief Executive Officer.

1.6.1 Founder’s Leadership Role:

A role is a pattern of behaviour expected to be associated with a position. It emerged from

the study that the roles of leaders in the companies surveyed are as follows: -

• an ability to increase profits and turnover, to re-invest profits back into the business

and to not use the money for anything that is considered unproductive. For example,

an owner claimed to have been using the same car for the past twenty years, and

several leaders regarded a personal vehicle as a bad investment.

• deliver quality and timely services to their clients

• provide some rewards and benefits to their employees, such as empowerment,

pension funds, death benefits and training. Many respondents emphasised the

importance of employee motivation and retention.

1.6.2 Company Leadership Type:

The survey results indicated that a significant number of the founders provided a

combination of the following leadership types: -

• strategic: one who knows how to achieve the company mission and vision and

• authentic: a leader who is. These are people who do not pretend to be leaders simply

because they hold a leadership position. Rather, as founders of companies, they have

to steer them in the direction they believe they should go.

19

However, it also emerged from the survey that three leaders were described by their

employees as providing, in addition to the above, visionary leadership, i.e. charismatic and

transformational, with the effect of motivating their followers.

Only one of the companies studied gave an example of a leader who appeared to provide

servant leadership, i.e. with a focus on the followers, whereby the followers were the

primary concern and organizational concerns were peripheral.

1.6.3 Leadership Style:

Based on the concept of how leaders execute their functions, i.e. with an employee

orientation, versus a production orientation, leaders can either be employee oriented

(democratic) or production oriented (autocratic).

The responses from the survey suggested that the leadership style in 11 of the 12

companies studied is balanced, with concern being expressed for both the work and for the

workers.

1.6.4 Leader’s Behaviour and Personality:

Human behaviour and attitude is believed to be a combination of hereditary (inherited or

in-born factors such as genetic characteristic) and environmental factors (those things we

learn from other people and places in form of manner of speaking, walking, work ethics,

etc). These factors can affect behaviour.

Well-mannered behaviour in a leader, such as trust, contentment, commitment,

determination, dedication, discipline, savvy, integrity, hard work, fairness, honesty,

empathy and sharing attitude, can lead to positive organizational growth. However,

misplaced behaviour such as acquisition syndrome, greed, envy, jealousy, selfishness,

apathy, unnecessary competition, arrogance and dishonesty, can lead to negative growth.

Following the company interviews, in which the leaders and sometimes, the leaders’

followers were asked to describe the leaders’ values or convictions, it emerged, as shown in

Table 13, that a significant number of the leaders were described as having a well-

mannered behaviour.

Table 13 Leadership Behaviour

Behaviour (N = 12) Mean Response Average Rank

Hard working 0.42 1

Honest & trustworthy 0.33 2

Disciplined 0.25 3

Hopeful & Optimistic 0.25 3

Fair & impartial 0.17 5

Determined 0.17 5

Persevering 0.17 5

Integrity 0.17 5

Humble 0.08 9

Faithful & committed 0.08 9

Thrives on Challenge 0.08 9

Accommodating 0.08 9

Dedicated 0.08 9

Conflict averse 0.08 9

Stubborn 0.08 9

More specifically, Table 13 shows that the key leadership behaviour acknowledged from the

responses given, is that a significant number of the leaders are seen, or see themselves, as

hardworking, followed by honest and trustworthy, then disciplined, hopeful and optimistic.

20

1.7 Strategic Decisions Made by Company Founders/Leaders

To survive and grow, construction companies need to make certain strategic decisions and

develop specific strengths. The respondents were asked to give an indication of which

strategies were responsible for the success of the company. The result of this investigation

is presented in Table 14.

Table 14 Strategic Decisions

Strategies (N = 12) Mean Response

Average

Rank

Developing a Strong Financial Base 1 1

Good Track Record – good quality products at the right time & pleasing the

client and suppliers

0.67 2

Acquisition of construction equipment and other bankable assets e.g. land 0.5 3

Procurement strategy – Design and Build, Joint venture/alliances with other

companies smaller or bigger

0.5 3

Developing and maintaining a strong workforce through training & motivation 0.42 5

Diversification – geographically and by products 0.33 6

Membership of an association (Local Builders Association) 0.08 7

Client selection – good clientele with zero bad debt 0.08 7

Adaptability – no niche market can do any job 0.08 7

Changing the company ownership structure to bring in more partners 0.08 7

1.7.1 Developing a Strong Financial Base

Table 14 reveals that the respondents were unanimous in acknowledging that the specific

strategy responsible for their company’s development, growth and success, was their

decision to develop a strong financial base for the company - knowing that a factor

threatening their existence at the conception stage was both lack of financial resources and

the failure of clients to pay on time. It stands to reason that successful companies should

attempt to build up their financial reserves because this is positively associated with growth

potential.

According to one respondent, “if your monthly turnover is say for instance, one million Rand,

a company needs to have a cash reserve of one and a half million Rand to tide it over till it is

paid (conventionally within 30-days when it presents its invoice) by the client and if not paid

on time – which is the norm not the exception-, the company will not experience the attendant

cash flow problems which might lead to company failure”.

Another respondent noted that “if the company does not have adequate cash reserves, the

company will only be working for the banks and loan sharks because; profits on projects

hardly exceed 10% while bank interest rates are as high as 12%. Allowing for 10% retention,

which takes between now, and never to be paid, the result is the banks take the profit and the

companies are left with nothing”.

1.7.2 Track Record

Another strategy acknowledged by the respondents is having a good track record in terms

of good quality products, delivered at the right time, thereby pleasing the client. Although

some of the respondents declared that this should not be a strategy because it is

fundamental to the purpose of being in business and without a good track record and

reputation for timeous delivery, a business cannot survive.

However, the respondents acknowledged the importance of suppliers and the need to pay

them on time even if the client is yet to pay for services rendered. This, according to them, is

21

because a 5% discount, or increase in credit facility offered by the suppliers goes a long way

in improving company profits and cash flow. One respondent commented: “companies

should maintain good relationships with their suppliers as bulk discounts are helpful in

reaching desired profit levels”.

1.7.3 Acquisition of construction equipment and other fixed assets

A company development and growth strategy employed by some respondents is reportedly

the acquisition of construction equipment and other fixed assets, e.g. land. This is thought to

help in three ways – “one, you can use the equipment to stand as surety for loans and two,

whilst being used as surety, the equipment can be put into use on projects, and when the loan

is obtained, the construction company does not need to go out and hire the equipment. Saving

money both ways”. Thirdly, another respondent noted, “the construction equipment, when

owned, is helpful while tendering for construction jobs in which there is fierce competition. The

company can bid for projects at a very competitive rate because of the knowledge that the

equipment belongs to the company and therefore no losses will be incurred”.

1.7.4 Procurement strategy:

Some respondents revealed that they had made use of certain procurement strategies such

as Design and Build and Joint Venture Alliances in their bid to procure jobs. They offered

clients services in which they would be the designers and constructors, saving the client

money and also effectively helping the company procure the job against other competitors.

Some respondents noted explicitly that Joint Venture Alliances had been used as a strategy

to procure projects and not to access specialized technology or expertise. Those who

employed this strategy claimed that their companies had always gone into Joint Venture

Alliance as equal partners, regardless of the scale of the partner organisation. Otherwise,

according to one respondent, “it is not worth venturing into JVs with large established

contracting firms, who are out to use the small companies just to fulfil their equity

participation requirements and dump them afterwards”.

1.7.5 Developing and maintaining a strong workforce:

This was not found to be a widely used strategy. However, its proponents argued that by

training and retaining its workforce, the company benefitted by improved efficiency in

executing its business operations, thereby leading to success and growth. One respondent

gave an example of a company that had no directly employed workers, tendered on a

project at a very competitive price and won it. When it came to execution, the company had

to entice workers from other companies at a higher level of pay. Consequently, it could not

complete the project, because the tender price did not take the higher pay level into

consideration.

One respondent asserted, “when personnel in an organization are not adequately trained

with technical skills, the right attitude and work ethos, that company would fold up.

Companies making huge profits are in the habit of training their workers”. Another

respondent reported that all of his company’s workers go on a compulsory one-week

retreat/training programme at least once every year.

All the companies investigated can currently be said to be at the stability/maturity stage

(3rd Stage of Growth), having grown successfully. Some companies were established as far

back as 1976 and have established structures resembling that of large companies. The study

therefore sought to investigate the characteristics of large companies? This will be

presented in the following section.

22

6. Typical Characteristics of Large Contractors (Grade 7, 8 and 9)

The cidb Quarterly Monitor (cidb 2010a) gives an indication of the basic characteristics of

contractors on the cidb Register of Contractors as follows: -

Table 15 Distribution of contractors by Grade and Characteristics

Grade Characteristics 9 Typically contractors that operate at a national and international level and sometimes

publicly listed contractors

7 & 8 Typically contractors that operate at a provincial/regional level

5 & 6 Typically contractors in transition from operating at a local to a regional/provincial level

2 to 4 Typically recently established and developing contractors that operate at a local level

The scope of this document is limited to the responses of 13 of the successful contractors

interviewed. The characteristics investigated included:

• annual turnover

• cash position

• fixed assets

• geographical location and spread of company operations

• diversification by services/products

• technical capacity/number of permanent employees

• company organization

The information used were those provided by some of the companies interviewed within the sample cohort from who classified information could be freely obtained.

1.8 Annual Gross Turnover of the Construction Companies

Table 16 shows the annual turnover of the companies from 2006 to 2010.

Table 16 Growth of Gross Turnover in Construction Companies

Company/Year Turnover (In Million Rands) 2006 2007 2008 2009 2010

0131 4.18 12.48 56.14 62.98 95.66

0211 35.88 93.58 12.89

0111 21.025 7.80 5.23

0112 163.00 303.00 398.00 358.19

0221 65.20

0311 13.03 62.74 133.33 167.88 143.42

0121 63.31 68.01 52.20 60.52 85.91

0421 10.06 35.52 33.12 61.10 72.56

0212 109.91 129.87 185.18 193.75 218.83

0231 12.45 27.57 39.57 36.13 50.39

0222 253.14 265.06 187.87 321.83 324.40

0223 407.01 526.48 736.27 1117.11 1303.05

0224 601.00 807.00 685.00 827.90 1110.74

Table 16 shows that five of the companies studied experienced a steady increase in gross

turnover from 2006 to 2010. Three companies experienced annual growth in turnover,

23

followed by a reversal of this pattern in 2010. Three companies experienced growth,

followed by negative growth, followed by growth again during the 2006 to 2010 period. One company experienced a steady decline in growth over the 2008 to 2010 period.

Table 16 also shows a significant difference in turnover between large established Grade 9

contractors and the recently upgraded contractors. The mean annual turnover for all the

construction companies studied grew steadily from 63.31 million Rand in 2006 to 295.88

million Rand in 2010. The findings indicate that successful contractors on the cidb Register

of Contractors have been able to achieve and maintain turnovers within the bands shown.

According to one respondent, “it is best practice for a company to always have 1.5 of its

turnover as order book value, so as to maintain a stable and steady growth”.

1.9 Profit

The value of a business is measured by the profit it makes. The study recorded the gross

profits, before tax, of the companies. The results of this investigation are presented in Table

17.

Table 17 Profits Before Tax

Company/Year Profits Before Tax (In Million Rands) 2006 2007 2008 2009 2010

0131 -1.73 4.00 12.58 3.24 6.85

0211 2.77 2.54 0.40

0111 0.14 0.91 0.70

0112 2.15 9.39 6.46 -2.56

0221 1.70

0311 0.76 1.37 3.22 7.50 6.49

0121 .007 0.15 0.18 5.81 0.57

0421 0.55 1.63 2.10 0.91 3.52

0212 2.56 6.74 17.84 8.22 6.16

0231 0.45 0.52 -0.07 -2.28 2.43

0222 51.18 42.67 15.39 48.14 45.72

0223 48.52 31.58 125.29 211.67 246.85

0224 42.34 87.81

Average 12.8 10.1 17.2 28.0 31.3

Table 17 also shows a great divide between the established companies (0222, 0223 and

0224) and the newly upgraded companies (all others). It is also evident that the successful

large contracting companies can generate large profits. Average profits (actual amounts)

generated by the companies declined from R12.8 million in 2006 to R10.1 million in 2007

and thereafter increased to R17.2 million in 2008, R28 million in 2009 and R31.3 million in

2010.

1.10 Cash Position

A company’s cash position is defined as the amount of cash held by the company and in its

bank account. According to one respondent, “the rule used by the company to measure its

financial strength/capacity is the amount of cash reserves that the company has”. The

respondent further confirmed during the interview that “a million Rand turnover every

month requires a cash in hand of two million Rand as back up because, a million Rand

Turnover will only be recouped ideally after a 30-day invoice has been submitted. Therefore, if

it takes a company 30 days to do the work and it takes another 30 days to be paid for work

24

done it implies a 60-day investment because the company has to continue working to show

efficiency”. The interviewed companies’ cash positions are presented in Table 18.

Table 18 Cash Position

Company/Year Cash Position (In Million Rands) 2006 2007 2008 2009 2010

0131 0.13 0.33 1.891 0.974 2.88

0211 3.032 5.98 2.60

0111 9.60 0.20 0.16

0112 7.04 2.40 1.67 0.003

0221 2.71

0311 0.32 0.90 0.38 2.84 3.51

0121 0.002 1.69 0.42 3.00 10.57

0421 0 0.16 0.26 0.35 0.46

0212 8.31 10.79 15.38 13.44 16.10

0231 0.004 0.02 0.006 0.007 0.03

0222 3.96 6.78 2.74 15.72 15.30

0223 18.30 80.75 142.07 219.43 24.11

0224 128.52 111.24

Average 3.9 12.1 16.2 32.7 14.6

Table 18 shows that although most of the companies started out with very little or no

financial capital, a significant number of these successful contractors have been able to

plough money back into the business. From this it can be inferred that a characteristic of

successful large contractors is their financial capacity. This appears consistent with

Stinchcombe’s (1965), cited in Eisenhardt and Schooven (1990), findings that a factor

underlying the failure of young organizations is their limited financial resources and that

company growth is dependent on the abundance of this.

Table 18 reveals that the average cash position of all the companies studied showed an

increase from R3.9 million in 2006, to R12.1 million, R16.2 million and R32.7 million in

2007, 2008 and 2009, respectively. However, the average cash position decreased to R14.6

million in 2010.

1.11 Fixed Assets

The value of a company’s investments is reflected in its fixed assets. Fixed assets are

acquired through capital expenditure and may be of a more or less permanent kind. They

are retained by the company solely as instruments of production, or to earn revenue and

are not held for sale, or for conversion into cash. Such assets include land, buildings,

machinery, furniture, etc. Table 19 presents the value of the surveyed companies’

investments from 2006 to 2010.

Table 19 suggests that a typical characteristic of a large contractor is that they have

significant investments in construction equipment, land and buildings. This can be seen in

the growth of the average value of fixed assets from R16.7 million in 2006, to R23.1 million,

R26.9 million, R40.8 and R42.1 million in 2007, 2008, 2009 and 2010, respectively.

25

Table 19 Growth in Value of Fixed Assets of Construction Companies

Company/Year Value of Fixed Assets (In Million Rands) 2006 2007 2008 2009 2010

0131 0.42 0.82 1.33 18.71 39.37

0211 1.93 2.84 2.22

0111 6.99 8.56 3.95

0112 14.55 35.71 47.74 58.26

0221 9.37 10.6

0311 0.54 1.51 3.77 9.15 13.68

0121 0.11 0.08 14.32 13.41 22.80

0421 3.19 5.03 10.21 12.06 13.23

0212 2.33 3.96 5.82 5.32 5.24

0231 0.73 0.68 0.76 0.74 0.85

0222 55.57 88.70 108.15 130.22 117.55

0223 70.77 92.79 107.14 121.62 122.68

0224 151.03 137.35

Average 16.7 23.1 26.9 40.8 42.1

Table 19 suggests that some companies have grown concomitantly with an increase in fixed

asset value (see for example companies 0131, 0112, 0311, 0121 and 0421). This not only

improves the profile of the company, but also aids it when applying for loans and when

tendering for jobs, as alluded to by the respondents.

1.12 Technical Capacity/Number of Employees

Calvert et al. (1995) noted that construction seems to remain a high labour-content

industry, despite the great advances made in the utilization of mechanical plant. The

numbers of, largely non-clerical/managerial, permanent employees within the companies

studied, for which data are available, are presented in Table 20

Table 20 Technical Capacities

Company/Year Absolute Number of Employees 2006 2007 2008 2009 2010

0112 126 86 94

0221 65 130

0311 +300

0113 30 83

0421 50

0212 17 60

0231 60 70 80 120 160

0222 530 537 520 425 496

0223 333 430 511 512 525

0224 1400 1600

0225 1170 934

Table 20, when read in conjunction with Tables 16, 17, 18 and 19, indicates that companies

with relatively stable numbers of technical employees tend to have grown turnover,

26

improved profit, increased cash position and fixed asset value. Companies that had strong

growth in numbers of technical employees did not demonstrate the same pattern.

1.13 The Geographical Spread of Company Operations

As a company grows and become successful, certain business arrangements start to evolve.

Amongst these business arrangements comes as a result of the ability of the company to

transform from a small local company to a large successful company with branches/sub-

divisions in different locations within a country or across its borders. Table 21 presents the

geographical spread of the companies investigated, in South Africa and outside its borders.

Table 21. Distribution of Companies by Geographical Spread

Company Geographical Spread

Ga

ute

ng

We

ste

rn C

ap

e

Kw

a

Zu

lu

Na

tal

No

rth

We

st

Mp

um

ala

ng

a

Lim

po

po

Ea

ste

rn C

ap

e

No

rth

ern

Ca

pe

Fre

e S

tate

Inte

rna

tio

na

l

To

tal

0131 √ √ √ 3

0211 √ 1

0111 √ √ √ √ 4

0112 √ √ 2

0221 √ √ √ √ 4

0311 √ √ √ √ √ √ 6

0121 √ 1

0421 √ √ √ 3

0212 √ 1

0231 √ √ 2

0222 √ √ 2

0223 √ √ 2

0224 √ √ √ 3

0225 √ √ √ 3

Total 7 6 4 4 2 - 4 3 5 2 37

Table 21 shows that the typical geographical structures emerging amongst the successful

large contractors is that a significant number (11) of these firms are spread across at least

two different locations and that seven and six of the companies have established their

presence in Guateng and the Western Cape, respectively. The results suggest that success

and growth of the companies into large business concerns is linked to diversification and

expansion into new and more profitable markets such as Guateng and the Western Cape in

South Africa.

1.14 Diversification of Companies by Products and Services

The ability of a company to grow, improve turnover and gain greater market share is linked

to its ability to diversify its services and products. The study investigated the level of

diversification by services and products of the companies surveyed. The results of this

investigation are presented in Table 22.

27

Table 22 Company distributions by product diversification

Company Services and Products

Ge

ne

ral

Bu

ild

ing

Civ

il

En

gin

ee

rin

g

Pla

nt

Hir

e

Co

mp

an

ies

Pro

pe

rty

De

ve

lop

ers

Fir

e P

rote

ctio

n

Eq

uip

me

nt

Ma

nu

fact

ure

Ho

usi

ng

De

ve

lop

me

nt

Su

bco

ntr

act

ing

Pa

vin

g

&

Pip

eli

ne

In

fra

Bu

ild

ing

Ma

teri

als

To

tal

0131 √ √ √ 3

0211 √ 1

0111 √ √ 2

0112 √ √ √ 3

0221 √ √ √ 3

0311 √ √ √ √ 4

0121 √ 1

0421 √ √ √ 3

0212 √ 1

0231 √ √ 2

0222 √ √ 2

0223 √ √ √ √ 4

0224 √ √ √ √ √ 5

0225 √ √ √ √ 4

Total 10 11 2 4 1 1 4 1 3 1 38

Table 22 shows that eight of the companies are active in at least three types of

product/service markets – most commonly in civil engineering contracting, general

building contracting, property development and housing development in order of

commonality. Table 22 indicates that successful companies are likely to be diversified into

more than one service and or product area as it grows.

It can be inferred from these results that diversification has facilitated market penetration

by the companies, purposely increasing their market share and turnover and making it

possible for them to grow.

1.15 Company Organization

As a business enterprise grows and becomes successful, the function of co-ordinating the

various activities and personnel gradually expands beyond the capacity of one individual.

The organizational structure of a company reflects its maturity – the result of its growth and

development. The study investigated the span of responsibility and divisions within the

companies surveyed. These results are presented in Table 23.

28

Table 23 Company distributions by divided function

Co

mp

an

y

Ch

ain

o

f

Co

mm

an

d

Sp

an

/S

tep

s o

f

resp

on

sib

ilit

y

Divided Functions within Company

Fin

an

ce

Hu

ma

n R

es

/A

dm

in

Qty

Su

rve

yin

g

Pro

ject

/

Co

ntr

act

Mg

mt

Co

mm

erc

ial

/

Ma

rke

tg/

Pro

c

Wo

rksh

op

/

Pla

nt

Off

ice

He

alt

h &

Sa

fety

Co

ntr

act

s

Fin

an

cia

l

To

tal

0131 3 √ √ √ √ 4

0211 3 √ √ √ 3

0112 3 √ √ √ 3

0221 2 √ √ √ 3

0311 3 √ √ √ √ √ 5

0121 2 √ √x2 √ √ 5

0421 3 √ √ √ 3

0212 3 √ √ √ x2 √ 5

0223 3 √ √ x2 3

0114 3 √ √ √ 3

Total 10 6 5 4 8 5 3 1 1 1

Table 23 shows, to the extent that information was available, that the

leadership/management function in the companies surveyed spanned across two steps in

the chain of command/hierarchy. A significant number of companies had three steps of

management responsibility. This finding suggests that the growth of the companies is

consistent with Steinmetz’s (1969) critical phases and four stages of growth model.

The organizational structures developed by a significant number of these successful

companies indicate that they have attained the “indirect control” and “divisional

organizational” stages in which the founders/leaders are “managing the managers”. (Rush

et al., 2007).

Further, Table 23 illustrates that the companies studied have at least three main

division/sections, the four most common being “Project/Contract Management”, “Finance”,

“Human Resources / Admin” and “Commercial / Marketing / Procurement”, in order of

commonality. This suggests that the companies investigated have management employees

that fulfil other requirements such as project/contract management, finance, human

resources, administration, etc.

7. Conclusions

From the results of the interviews of successful upgraded and large contractors registered

on the cidb Register of Contractors, information provided by the cidb and the literature, the

following conclusions can be made: -

• The vast majority of public sector General Building and Civil Engineering contracts

(84% and 88%, respectively) are awarded to large contractors (Grades 7, 8 & 9) that

constitute 6.6% and 8.2%, respectively, of the contracting organizations registered in

these divisions on the cidb Register of Contractors. This can be explained by the fact

that high value contracts in the construction industry are typically large scale projects

which cannot be awarded piece-meal and which require a high level of management,

financial solvency and technical capability - skills more typically found amongst large

scale contractors.

29

• The racial and gender profile of firm ownership in the construction industry reflects

the result of on-going transformation from predominantly white-owned to more black

and women-owned contracting firms. This is due partly to the various laws and

government strategies instituted to assist both historically disadvantaged individuals

and women to participate in construction. Prominent amongst these is the Broad-

Based Black Economic Empowerment Act of 2003. As at October 2010, 83% of cidb

General Building contracting companies registered in Grades 2 to 8 were owned by

black individuals, and 45% by women. Similarly, 80% of the cidb Civil Engineering

companies registered in Grades 2 to 8 were black-owned, and 37% were women-

owned.

• Construction companies require time to grow. The successful contractors interviewed

were found to be in third stage of growth - the Stability/Maturity stage. Their growth

patterns were found to be organic, steady, consistent and gradual. General Building

contractors took an average of 10 months to move up one grade and 27 months to

move up three grades, while Civil Engineering contractors took an average of 12

months and 35 months, respectively to achieve the same results. This suggests that

General Building contractors upgrade more quickly than do Civil Engineering

contractors.

• The following factors were found to be responsible for, or related to, the growth and

success of construction contractors:

o Environmental factors, such as the opportunities available at the company

inception, the level of demand and favourable government policies;

o Organizational factors including: the size of the founding team at inception;

members’ experience prior to inception; founding owners’ past experience; past

experience working together; and variety of members’ experience in the

construction industry. Strong teams with the requisite experience and education

were found to have developed relatively faster.

o Managerial factors, such as the ability of founders to: use their management

capabilities; harness the company’s strengths embodied in knowledgeable and

qualified employees; overcome the problem of access to finance and the difficulty

of securing payment from government agencies/private developers; increase

turnover; re-invest profits back into the business; and making strategic decisions,

including developing a strong financial base for the business, maintaining an

excellent track record, adopting a sound procurement strategy; and developing and

maintaining a strong workforce.

o Personal and leadership qualities of founders, such as leading effectively;

possessing a strategic, balanced and authentic leadership style; training other

managers/successors.

• Typical characteristics of successful large contracting firms include: -

o achieving and maintaining large turnovers;

o generating large profits

o being able to accommodate cash flow problems due to lack of timeous payment;

o keeping and maintaining a cash position of double monthly turnover;

30

o investing in construction equipment and other fixed assets (that enhance the

profile of the company and also stand as surety for loans and facilitate competitive

tendering);

o maintaining the required technical capacity;

o identifying and diversifying into new and more profitable markets (such as

Guateng and the Western Cape in South Africa);

o penetrating the construction market using diverse products and services;

o having a management structure capable of co-ordinating the various activities and

numerous personnel.

8. Recommendations

1.16 Realistic Expectations of Lower Ranked Contractors

Founders/owners of lower ranked contracting firms hoping to develop should: -

• maintain a regular turnover, which should include entering Joint Venture alliances

with large contractors. Such alliances can also be used to access specialized

technology, knowledge and experience. The lower ranked contractors should ensure

that they go into the alliance as equal partners and not as tokens. They should insist

on an appropriate share of the turnover, depending on what role they play;

• allow enough time for the company to develop organically, steadily and gradually.

They should not stretch themselves out too thinly, taking on more jobs than their

capacities and capabilities can cope with so as to avoid burnouts and failure;

• develop the necessary management experience;

• engage in continuous professional development by attending and also sending their

employees to regular and relevant training workshops and seminars on, e.g. cost

estimating and reading of design and construction documents.

• reorganize in order to develop strong management teams; and to provide a suitable

environment and structure for growth by introducing new blood into the company

based on the capacity lacking in the company;

• play effective leadership roles, including re-investing profits back into the business

and endeavouring to strike a balanced leadership style between employee orientation

and production orientation;

• cultivate good manners that would enable them play good leadership roles and that

would help in retaining clients, suppliers, part owners and employees;

• be able to train other managers/successors and create opportunities and avenues

through which these successors would also grow and develop;

• continually motivate workers so as to keep them in the company by providing

rewards and benefits and also by developing a conducive environment that

encourages team work, respect, integrity and commitment, avoiding conflicts and

rivalry;

31

• invest in fixed assets which include plant and equipment and maintain an adequate

cash reserve;

• ensure company affairs are structured and staffed around company activities and

growth stage;

• should diversify strategically into new areas, products and services in order to

improve their turnover and also spread their risk;

• in the case of lower ranked contractors: build a strong relationship with the financial

industry as part of their operational strategy; develop open door and exchange of

ideas policy; explore the use of adequate and competitive marketing tools;

demonstrate an ability to undergo mentoring in their growth and development

phases; and explore all opportunities to have a good and clear understanding on the

modus-operandi of the government bureaucracy and establishment.

1.17 Measures that would encourage the growth and development of lower ranked

contractors into large successful contractors

• An escalation factor that corresponds to the yearly construction inflation rate should

be introduced by the cidb into its Contractor Grading System, and an alternative to

company annual turnover should be used as an evaluation criterion e.g. greatest value

of contract done and time taken – civil engineering jobs are high value contracts

which are spread over a number of years;

• The tender evaluation procedures should be made transparent. The cidb should

monitor the activities of government departments that do not follow the

scorecard/procurement policies, which have negative implications and make sure

there is a level playing field. The erring government departments and contracting

firms should be sanctioned;

• The cidb should network with professional organizations – SACPMP, SACQSP, ECSA,

etc. in order to develop and organize construction based practical training

programmes and provide a forum where lower ranked contractors can take their

problems for solution.

• The Preferential Procurement Policy Framework Act (5 of 2000) should have

requirements that state how the issues regarding HDIs, especially women-owned

contracting organizations, will be catered for;

• Government should ensure that certificates/invoices are honoured within the time

period specified in the contract – payment to contractors should not be delayed;

1.18 Theoretical Implications of the Study

• Initial registration on the cidb Register of Contractors at a high grade means that the

company must have been in existence for more than five years before registration

with the cidb;

• To grow a large successful company, the owner/leader must have aspirations, the

right attitude/behaviour and the ability to make use of opportunities, strategic

decisions and the company strength to its advantage.

32

• Firms registered at the lower grades on the cidb Register of Contractors that have

created profitable niches for themselves can also be profitable and successful.

• Success is not determined solely by Grade of Registration, but by capabilities and

capacities embodied in the Profitability of Operations/Return on Investment (ROI).

• All companies listed on the cidb Register of Contractors that were incorporated

earlier than the last ten years, must have gone through at least three stages of growth

– conception and survival; growth and development; and maturity. They may not

necessarily go through, or want, further expansion and upgrade.

33

9. References

Albert, K. J. (1981) Straight Talk about Small Business, New York: McGraw-Hill

Ansoff, H. I. (1957) Strategies for Diversification, Harvard Business Review, 35, 5, 113 – 124

Brech, E. F. L. (1971) Construction Management in Principles and Practice, Longman Press.

Calvert, R. E., Bailey, G. and Coles, D. (1995) Introduction to Building Management, 6th Ed,

Oxford: Butterworth-Heinemann.

cidb (2008a) Quarterly Monitor (January, 2008) Construction Industry Development Board,

http://www.cidb.org.za/knowledge/publications/industry_reports

cidb (2008b) Quarterly Monitor (October, 2008) Construction Industry Development Board,


cidb (2009a) cidb Construction Industry Indicators Summary Results: 2009, captured by

the Construction Industry Development Board in partnership with the Department of

Quantity Surveying and Construction Management of the University of the Free State,


cidb (2009b)Quarterly Monitor (October, 2009) Construction Industry Development Board,


cidb (2010a) Quarterly Monitor (October, 2010) Construction Industry Development Board,


cidb (2010b) Targeting for Contractor Development Programmes: Background.

Construction Industry Development Board, 9 June 2011,


Covin, J. G., and Slevin, D. P. (1989) Strategic Management of Small Firms in Hostile and

Benign Environments, Strategic Management Journal, 10, 75 -87

Eisenhardt, M. K. and Schoonhoven, C. B. (1990) Organizational Growth: Linking Founding

Team, Strategy, Environment and Growth among U. S. Semi-Conductor Ventures, 1978 -

1988, Administrative Science Quarterly, 35, 504 – 529.

Harris, F. and McCaffer, R. (2006) Modern Construction Management, 6th Ed, Oxford:

Blackwell Science.

Hillebrandt, P. M. (1975) Economic Theory and the Construction Industry, London: McMillan.

Kazanjian, R. K. (1988) Relation of Dominant Problems to Stages of Growth in Technology

Based New Ventures, Academy of Management Journal, 31, 2,257-279.

Kazanjian, R. K. and Drazin, R. (1989) An Empirical Test of a Stage of Growth Progression

Model, Management Science, 35, 12, 1489-1503.

Martin, G., Massy, J., and Clarke, T. (2003) When absorptive capacity meets institutions and

(e) learners: adopting, diffusing and exploiting e-learning in organizations, International

Journal of Training and Development, 7, 4, 228-244.

Pfeffer, J. (1977) The Ambiguity of Leadership. Academy of Management Review, 2, 104-112.

Rush, H., Bessant, J., and Hobday, M. (2007) Assessing the technological capabilities of firms:

developing a policy tool, R&D Management, 37, 3, 221-236.

34

Salancik, G. R. (1977) Commitment and the Control of Organization Behavior and Belief. In

Staw, B. M., and Salancik, G. R. (Eds.), New Directions in Organizational Behavior, Chicago:

St. Clair, 1–54.

Shamir, B., House, R. J., and Arthur, M. B. (1993) The Motivational Effects of Charismatic

Leadership: A Self-Concept Based Theory. Organizational Science, 4, 4, November, 577–591.

Snyman, J. (2009) Keynote address to COBRA RICS construction and building research

conference, Cape Town, 10-11th September 2009.

Stegall, D. P., Steinmetz, L. L., and Kline, J. B. (1976) Managing the Small Business, Richard D.

Irwin, Homewood, Ill.

Steinmetz, L. L. (1969) Critical Stages of Small Business Growth, when they occur and How

to Survive Them, Business Horizons, 12, 1, February, 29–36.

Stinchcombe, A. (1965) Social Structure and Organizations. In James G. March (ed.),

Handbook of Organizations: 142–193. Rand McNally.

35

10. Appendix A

A. Key to Contractor Code Digits - 1234

Where:

• The first two numbers “1,2” represents “Type of Ownership” further broken down

into: -

o 01 – Black owned

o 02 – White owned

o 03 – Black Woman-owned

o 04 – White Woman-owned

• The third number i.e. “3”, represents “Class of Works” further sub-divided into: -

o 1 – General Building contracting

o 2 – Civil Engineering contracting

• The fourth number i.e. “4”, represents the serial numbers given to each company

based on the number of companies having the same first three codes: -

36

B. Interview Protocol

The cidb has appointed the University of Cape Town to undertake a study on the "Path to

Grade 9 Contractor". Based on the track record of your company, the cidb and the

University of Cape Town has identified your organisation to be interviewed so as to draw

out success factors for contractor growth_________________________________________

FACTOR ONE: Background of the respondent

1. Status of the respondent: ___________________________________

2. How long in the company: ___________________________________

3. How long in the present position: ___________________________________

FACTOR TWO: Starting Point

1. Year Company Started: _______________________________

2. Owner (s): _______________________________

3. Owner (s) Title with Company and primary responsibilities: __________________________

4. Owner(s) Background Relevant to Construction:

4.1 Educational qualification:

4.2 Professional qualification/Special Certification:

4.3 Experience and knowledge of the owner(s) before setting up the company

and Number of years worked in same field (relevant to construction):

4.4 Where was the experience obtained?

5. Mission of the founding fathers_______________________________

6. Vision of the founding fathers_______________________________

7. Strengths/capabilities of founders and company at the inception:

7.1 Specialist Expertise

7.2 Project Management Capability – organization and management skills

7.3 Technical ability/technological advantage

7.4 Network/contacts in the right places

7.5 Financial Strength/Access to finance

7.6 Knowledgeable and qualified employees

7.7 Possession of vital tools and equipment

7.8 Others

Which one of the above do you consider to be the key strength of the company?

_______________________________

8. Weakness of the company at inception (e.g. – track records, lack of experience etc)

9. Opportunities available at the company inception

9.1 Government intervention and support

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9.2 Privatization programmes

9.3 Target groups/beneficiary in contract agreements

9.4 Increased spending on infrastructure by government and private sector

organizations

9.5 Chances for technological advancement

9.6 Others

10. Threats to company survival at inception and how it was overcome

10.1 Lack of adequate financial resources by project owners e.g. government agencies

etc

10.2 Inflation and currency fluctuations

10.3 Interest rate increases

10.4 Competitors – new contractors entering the industry and reduced workloads

10.5 Cultural differences (rainbow country)

10.6 Bribery and Corruption

10.7 Others

11. Niche at inception – Major client details and products

FACTOR THREE: Company Growth, Development and Success

1. Supply a brief narrative, no more than 1 or 2 short paragraphs that gives a general

overview of your company’s profile/history and highlight notable significant

milestones/ turning points.

2. What was the growth process like? Was it rapid/sudden, slow and organic?

3. Did the growth pattern match the vision set out by the founders for the company or

was it surpassed?

4. What made a difference in how the company grew?

4.1 Was it the leadership? (Some scholars have voiced scepticism concerning

whether or not leaders can make a difference in organizational performance)

4.2 What type of leadership does the company have?

o Strategic – one who knows how to achieve the company mission and

vision

o Authentic – a leader that is original and not a copy. They do not pretend

to be leaders just because they are in a leadership position

o Visionary – charismatic and transformational (articulation of a vision

and a mission by charismatic leaders presents goals in terms of values

they represent) with motivating effects on followers

o Servant – those who serve with a focus on the followers, whereby the

followers are the primary concern and the organizational concerns are

peripheral

4.3 Was it the ownership structure?

4.4 Was it the business model used? – Private/Public limited liability company, joint

partnership, joint venture etc

4.5 Was it as a result of the culture/ethos/philosophy developed in the company?

o Teamwork,

o commitment,

o integrity,

38

o creating opportunities/innovation

4.6 Could it be as a result of the contents of the leaders values or convictions –

his/her character ~

o Determination

o Dedication

o Discipline - especially financial

o Dint of hard work

o Destiny

4.7 To survive and prosper construction companies need to use specific strategies

and develop specific strengths. Which of the following strategies were

responsible the success of your company?

o Diversification (spreading the risk) – expanding into other

o markets geographically,

o products

o clientele

o areas of specialization

o Track record

o Technological advantage

o Network – to secure valuable information

o Financial strength

o Developing a strong workforce

o Acquisition of construction equipment and other bankable assets

o Joint venture/alliances with other companies to access specialized

technology / know- how

o Small overheads

o Make the least mistakes

o Quality products/work in a short time

o Good clientele – zero bad debt

o Adaptability – no niche market

o Healthy credit rating and easy access to finance

o Research and development – pro-active

o Outsourcing/sub-contracting

o Mergers and acquisition

o Quality Certification – ISO 90001

o Procurement type – design and build, PPP, turnkey etc.

o Other.

4.8 Which one of the above do you consider to be the specific strategy responsible

for the company’s development, success and growth?

_______________________________

FACTOR FOUR: Current Growth Point

1. Please indicate the differences between where you are now today and where you are

at the beginning of the company based on the following pointers ~

39

Indicators Then Now

cidb grade of registration

Profitability

Annual Turnover

Financial Standing/Turnover (Cash flow

is key)

Market share

Order book value and number of years

booked (it is ideal to have 1.5 of your

turnover as your order book value)

Current size of projects

Complexity of work

Niche – Major client details (public or

private sector)

Major products and diversity (civil,

building, material production etc.)

Geographical location and company

spread – local, national or international

and when this status was obtained

Technical capacity

No. of permanent employees.

2. Give an indication of the number of permanent employees available in your

company over a the past five years

o 2006 _______________________________

o 2007______________________________

o 2008_______________________________

o 2009_______________________________

o 2010_______________________________

3. What is your employee turnover like? – high/low?

4. How long has the oldest member of staff been with the company?

______________________

5. Documents that will assist in documenting the characteristics of a typical Grade 9

company: -

o Abridged five-year audited financial statements/annual reports

o Company organizational charts – showing function and leadership

FACTOR FIVE: Where next?

Kindly give an indication of what keeps the company going and where is it going next?

FACTOR SIX: Enterprise Development Companies and Mentorship Programmes

1. How many BEE companies must you develop relative to your turn over?

________________

2. How many companies are being developed by the company and grade of registration

with the cidb and classification

40

Grade CE GB

1

2

3

4

5

6

7

3. What are the problems hindering the development/growth of these companies?

3.1 Lack of financial discipline - they don’t plough back the profits made

3.2 Lack of continuity – procurement problems – how to get the next job

3.3 Maintain procurement and a suitable order book

3.4 No management experience

3.5 No technical/operational experience

3.6 Other

3.7 Which one of the above do you consider to be the specific problem responsible

for the BEE Company’s development, success and growth?

_______________________________

FACTOR SEVEN: SUGGESTIONS FOR THE cidb

e.g. Lack of adequate enforcement etc.

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