BEST PRACTICE GUIDE LINE # D1 - CIDB
CONSTRUCTION PROCUREMENTBEST PRACTICE GUIDELINE # D1Subcontracting arrangementsConstruction Industry Development BoardPretoria - Head OfficeTel: 012 482 7200Fraudline: 0800 11 24 32Call Centre: 0860 103 353E-mail: cidb@cidb.org.za1.March 2004)Edition 1 of CIDB document 1012BackgroundSubcontractors often have unequal negotiating power with prime contractors due to the sheer size of theto parties and the presence of a “next job syndrome”. Some of the problems expressed by subcontractorsinclude the “hawking” of prices by prime contractors in order to obtain lower prices from others (i.e. thepractice of “Dutch Auctioning”); the risk of non-payment; and the use by prime contractors ofsubcontractors’ monies as an interest free overdraft facility and the lack of representation or participationby subcontractors in trade associations or at forums.Traditionally, as employers only have a contractual relationship with the prime contractor, they regardsubcontracting issues to be the prime contractor’s problem and of no concern to them. Subcontracting is,however, an effective means of involving small, medium and micro enterprises in public sectorprocurement activities. As such, the plight of subcontractors cannot be ignored. Accordingly, measuresneed to be taken to address the shortcomings in current subcontracting arrangements, particularly inrespect of engineering and construction works contracts.2.Fair conditions of subcontract1)Conditions of subcontract should be regulated in public sector procurement in order to ensure thatsubcontractors are engaged in terms of fair conditions of contract which are recorded in writing.2)Unacceptable forms of subcontracts are those which contain provisions for:·payment procedures based on a pay-when-paid, or pay-if-paid, system;·a right of set-off in favour of the contractor not provided for in the law;·authoritarian rights given to the prime contractor, or his agent, with no recourse toindependent adjudication in the event of a dispute arising;·a dispute resolution procedure which does not include inexpensive alternative disputeresolution (ADR) procedures and makes use only of formal proceedings such as arbitration,or litigation;·unreasonable retention percentages and periods of retention after completion; orBest Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 1
·conditions which are more onerous than those which exist in the principal contract.Note:It is a requirement of the SANS 1914 targeted construction procurement standards that contractors enter into writtenagreements with targeted enterprises that do not contain any of the above provisions.3)Forms of subcontract which may be unacceptable to the prime contractor are those which contain:3.·rights for the subcontractor which are more extensive or more favourable than those enjoyedby the Contractor in the principal contract; or·provisions which are incompatible with or in conflict with the principal contract.Compatibility between principal contract and subcontractSome families or series of standard documents such as the New Engineering contract and Joint BuildingContracts Committee (JBCC) contain principal (prime or main) contracts and subcontracts, others onlyprovide the principal contracts, eg the International Federation of Consulting Engineers (FIDIC) and theGeneral Conditions of Contract for Construction Works (GCC).It is acknowledged that there may be differences between principal and subcontract agreements whichmay not necessarily make them incompatible. The argument for “compatibility” is, however, based onfactors such as convenience, style, language and common dispute resolution mechanisms. Whilst there isconsiderable merit in this approach, it is possible, and may be advantageous to manage risks differentlybetween a principal contract and related subcontracts.The South African Federation of Civil Engineering Contractors (SAFCEC) and the Building IndustriesFederation of South Africa (BIFSA) have developed forms of contract which may be used with any formsof contract, based on the following principles:····The subcontractor should observe, perform and comply with the provisions of the principal contractin so far as they relate or apply to the subcontract and are not inconsistent with the provisions of thesubcontract.In the interpretation of the provisions of the principal contract, in so far as they relate or apply to thesubcontract, the subcontractor has like powers, rights and responsibilities in relation to the subcontract as the contractor has in relation to the principal contractThere is no privity of contract between the subcontractor and the employer and the subcontractorshould undertake to the prime contractor like obligations and liabilities as are undertaken by theprime contractor to the employer in terms of the main contract; and the subcontractor holdsharmless and indemnifies the prime contractor in respect of the performance of such obligationsand liabilities.The terms of the principal contract as they apply to the subcontractor, and the terms of thesubcontract, which influence the subcontractor's price and assessment of risk, are to be clearly andconcisely stated at tender stage and cannot be unilaterally imposed at a later stage.It is also possible to utilise any of the principal contracts listed in Best Practice Guideline # C1, Preparingprocurement documents, to engage subcontractors and to manage risk differently. The short forms ofcontract and labour only forms of subcontract are well suited to this approach in engineering andconstruction works contracts.Forms of subcontract are not commonly encountered in professional service contracts. The reason for thisis that firms usually form consortiums to undertake the work and therefore enter into joint ventureagreements. Alternatively, work which the firm does not have the competence to undertake is outsourcedto specialists, usually in terms of one of the principal forms of contracts.Best Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 2
4.Recommended forms of subcontract in engineering and construction works contractsThe following standard forms of subcontract are recommended for use in engineering and constructionworks contracts as illustrated in Table 1:·BIFSABIFSA Non-Nominated Subcontract for use with the JBCC Series 2000 Principal BuildingAgreementBIFSA Standard Subcontract Agreement 1995 edition (Amended 2000), for use with PrincipalBuilding Agreements other than the JBCC Principal Building Agreement.BIFSA Labour-only sub-contract·Construction Industry Development BoardStandard subcontract (labour only)·The Joint Building Contracts Committee (JBCC series 2000)Nominated / selected Subcontract AgreementEngineering General Conditions·New Engineering Contract (NEC)NEC Engineering and Construction SubcontractNEC Engineering and Construction Short Subcontract·SAFCECGeneral conditions of subcontract (2003 edition)Table 1:Recommended combinations of forms of contract and forms of subcontractSeries of contractFIDICGCCRecommended forms of subcontractBIFSA Standard Subcontract Agreement 1995 edition (Amended 2000), for use withPrincipal Building Agreements other than the JBCC Principal Building AgreementBIFSA Labour-only sub-contractCIDB Standard subcontract (labour only)SAFCEC General conditions of subcontract (2003 edition)JBCCNECBIFSA Non-Nominated Subcontract for use with the JBCC Series 2000 Principal BuildingAgreementJBCC 2000 Nominated / selected Subcontract AgreementEngineering General Conditions#NEC Engineering and Construction SubcontractNEC Engineering and Construction Short Subcontract# This document is specifically designed to be used in conjunction with the N/S Subcontract Agreement where the appointedsubcontractor is responsible for the installation and performance of a dynamic system related to the building contract and for which aspecialist engineer is appointed in terms of the Principal Building Agreement5.Legal considerations in the engagement of labour only subcontractors1A labour only subcontractor is a person who provides labour to prime contractors for the performance ofcertain work in the construction industry. Typically, in engineering and construction works contracts, alabour only subcontractor comprises a team of people operating in the wet trades (brickwork andplastering), employs unskilled labour to handle and mix raw materials and effectively performs work on a1This section is based on the KwaZulu Natal Master Builders and Allied Industries Association Bulletin no FIN 1/2003 dated 10January 2003, entitled “The employment of so called labour only subcontractors and taxation: the need for independence.Best Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 3
piecework basis. Labour only subcontracting is not confined to engineering and construction workscontracts.Employer aversion to onerous labour legislation, trade union pressure, social demand and the likecombined with worker demands for higher wages and benefits and fluctuations in demand for services,has contributed to the “blossoming” of the labour only subcontractor. The relationship between a primecontractor and a so called labour only subcontractor, however, varies from being independent contractorsto being effective employees of the prime contractor. Many statutes (eg the Income Tax Act, theCompensation for Occupational Injuries and Diseases Act, the Basic Conditions of Employment Act, theLabour Relations Act, the Skills Development Levies Act) and many discrete bodies of common law (suchas delict) are based on the notion of mutual exclusivity. It is therefore important to understand theimplications of being a truly “independent” contractor and an employee in any subcontracting relationship.Failure to do so may result in the prime contractor assuming statutory obligations which he may havebelieved to be that of his subcontractor e.g. he may be required to deduct the employee’s tax beforepayment is made to his labour only subcontractor, failing which he may be exposed not only to payment ofthese amounts but also to penalties and interest on late payments.Over time, the courts have developed a variety of tests intended to assist in determining the object of anemployment contract in terms of common law. These tests have been revised and refined over a numberof years and currently the “dominant impression test” is presently sanctioned by the Supreme Court ofAppeal to answer the question “is the person or worker integral to or accessory to the organisation”?. Inapplying the test (see Table 2), the employment relationship is analysed to arrive at a dominantimpression in favour of either:··the employer has acquired the workers’ productive capacity in the form of his time and effort as anemployee; orthe employer has acquired the end result of the workers’ productive capacity as an independentcontractor.In addition, the status of a labour only subcontractor as an independent contractor must be determinedwith reference to particular statutes and the definitions embodied therein. In some Acts, the termsemployer and employee are defined, viz:···Income Tax Act (Act 58 of 1962) defines an employee in the Forth Schedule of Part 1 as anyperson (other than a company) who receives any remuneration or to who any remunerationaccrues, any person who receives any remuneration or to whom any remuneration accrues byreason of any services rendered by such person to or on behalf of a labour broker, any labourbroker2, any person or class of or category of person whom the Minister of Finance by notice in theGazette declares to be an employee for the purposes of this definition; any personalised service3company or any personal service trust.Skills Development Levies Act (Act 9 of 1999) makes reference to the provisions of the IncomeTax Act;Labour Relations Act (Act 66 of 1995) presumes in Section 200 A that a persons who works orrenders a service to any other person, and earns less than a certain amount, is presumed to be anemployee, regardless of the form of contract, if the manner in which a person works is subject to thecontrol of another person, if the person’s hours of work are subject to the control or direction ofanother person, if a persons forms part of the organisation, if the person has worked for that personfor an average of at least forty hours per month, if the person is economically dependent on theother person, if the person is provided with tools of trade or work equipment by the other person, orif the person only works or renders services to one person. (Once the presumption comes into2A labour broker is defined in the Act as “any person who conducts or carries on any business whereby such person for rewardprovides a client of such business with other persons to render a service or perform work for such a client, or procures such servicesfor the client, for which services or work such other persons are remunerated by such persons.”3The Act defines a “personal service provider”.Best Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 4
operation, the person who is regarded as the employer carries the onus to prove on a balance ofprobabilities that the other person is an independent contractor and not an employee.)Table 2: Common law dominant impression testRelevant(Labels. Clauses, compliance, economic circumstances, etc)Persuasive(Extent of control)Near conclusive(Control manner/ Exclusive acquisition)INDICATOR·Control of manner ofworkingPayment regimePersonwhomustrender the serviceNature of obligation toworkEmployer (client) baseRisk/ Profit and ive time (workhours, work week)Toolsmaterials,stationery, etcOffice/workshop,Admin/ secretarial etcIntegration / UsualpremisesIntegration / Usualbusiness operationsIntegration / Hierarchyand organogramDurationofrelationshipThreat of termination /breach of contractSignificant investmentEmployee benefitBona fide expenses orstatutory complianceViability on terminationIndustrycustomsnorms,SUGGESTS DEPENDENT WORKERSTATUSEmployer instructs (has right to) whichtools/equipment or staff, or raw materials,or routines, patents, technology.Payment at regular intervals / by a rate xtime period but regardless of output orresultPerson obliged to render servicepersonally, hires and fires only withapproval.Person obliged to be present, even if thereis no work to be done.Person bound to an exclusive relationshipwith one employer (particularly forindependent business test)Employer bears risk (pays despite poorperformance / slow markets (particularlyfor independent business test)Employer instructs on location, what work,sequence of work, etc. or has the right todo so.Control through oral reports / writtenreportsEmployer controls by training the person inthe employer’s methodsControlled or set by employer / person fulltime or substantiallyProvided by employer, not contractualrequirement that person providesProvided by employer, not contractualrequirement that person providesEmployer’s usual business premisesSUGGESTS INDEPENDENT CONTRACTORSTATUSPerson chooses which tools/equipment, or staff,or raw materials, or routines, patents,technology.Payment by a rate x time –period but withreference to results, or payment by output or“results in a time period”Person as employee, can delegate to, hire andfire own employees, or can subcontract.Person’s service critical / integral part ofemployer’s operationsPerson has a job designation, a position inthe employer’s hierarchy.Open ended / fixed term and renewable –ends on death of workerEmployer may dismiss on notice (IRA,equity aside), worker may resign at will(BCEA aside)Employer finances premises, tools, rawmaterials, training etc.Especially if designed to reward loyaltyNo business expenses, travel expensesand / or reimbursed by employerRegistered with trade / professionalAssociationObliged to approach an Employmentagency or labour broker to obtain newwork (particularly for independent businesstest)Militate against independent viability. Makeit likely person is an employee.Person’s services are incidental to theemployer’s operations or success.Person designated by profession or trade, noposition in the hierarchy.Limited with regard to the results, binds businessdespite worker’s death.Employer in breach if terminates prematurely.Person in breach if fails to deliver product /service.Person finances premises, tools, raw materials,training etcPerson not eligible for benefitsOver heads built into contract prices. Registeredunder tax / labour statutes and with trade /professional associationPerson only present and performing work ifactually required, and chooses to.Person free to build a multiple concurrent clientbase (esp if tries to build client base – advertisesetc)Person bears risk (bad workmanship, pricehikes, time overruns)Person determines own work, sequence of work,etc. Bound by contract terms, not orders as towhat work, where etc.Person not obliged to reportWorker uses / trains in own methodsAt person’s discretionContractual/ necessarily provided by personContractual/ necessarily provided by personPerson’s own / leased premisesHas other clients, continues trading. Was alabour broker or independent contractor prior tothis contract.Will promote independent viability. Make it likelyperson is an independent contractor or labourbroker.Basic Conditions of Employment Act (Act 75 of 1997) in Section 1 defines an employee as anyperson, excluding an independent contractor, who works for another person or for the state andwho receives, or is entitled to receive any remuneration and any other person who in any mannerBest Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 5
··assists in carrying on or conducting the business of an employer. Section 83A of the Act makes thesame presumption that a person is an employee as is the case in Section 200 A of the LabourRelations Act.Compensation for Occupational Injuries and Diseases Act (Act 130 of 1993) defines anemployee in section 1 as a person who has entered into or works under a contract of service or anapprenticeship or learnership, with an employer, whether the contract is express or implied, oral orin writing, and whether the remuneration is calculated by time or by work done, or is in cash or inkind. An independent contractor is expressly excluded form this definition.Unemployment Insurance Act (Act 63 of 2001) in section 1 defines an employee as a naturalperson who receives remuneration or to whom remuneration accrues in respect of servicesrendered by that person, but excludes any independent contractor.An independent contractor is not defined in any of these Acts.Best Practice Guideline D1: Subcontracting arrangementsMarch, 2004: Edition 1of CIDB document 1012Page 6
The following standard forms of subcontract are recommended for use in engineering and construction works contracts as illustrated in Table 1 : BIFSA - BIFSA Non -Nominated Subcontract for use with the JBCC Series 2000 Principal Building Agreement - BIFSA Standard Subcontract Agreement 1995 edition (Amended 2000) , for use with Principal
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