CONSTRUCTION PROCUREMENT

BEST PRACTICE GUIDELINE # D1

Subcontracting arrangements
Construction Industry Development Board
Pretoria - Head Office March 2004)
Tel: 012 482 7200
Fraudline: 0800 11 24 32
Edition 1 of CIDB document 1012
Call Centre: 0860 103 353
E-mail: cidb@cidb.org.za

1. Background

Subcontractors often have unequal negotiating power with prime contractors due to the sheer size of the
to parties and the presence of a “next job syndrome”. Some of the problems expressed by subcontractors
include the “hawking” of prices by prime contractors in order to obtain lower prices from others (i.e. the
practice of “Dutch Auctioning”); the risk of non-payment; and the use by prime contractors of
subcontractors’ monies as an interest free overdraft facility and the lack of representation or participation
by subcontractors in trade associations or at forums.

Traditionally, as employers only have a contractual relationship with the prime contractor, they regard
subcontracting 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 sector
procurement activities. As such, the plight of subcontractors cannot be ignored. Accordingly, measures
need to be taken to address the shortcomings in current subcontracting arrangements, particularly in
respect of engineering and construction works contracts.

2. Fair conditions of subcontract

1) Conditions of subcontract should be regulated in public sector procurement in order to ensure that
subcontractors 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 to
independent adjudication in the event of a dispute arising;

· a dispute resolution procedure which does not include inexpensive alternative dispute
resolution (ADR) procedures and makes use only of formal proceedings such as arbitration,
or litigation;

· unreasonable retention percentages and periods of retention after completion; or

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 · 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 written
agreements 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:

· rights for the subcontractor which are more extensive or more favourable than those enjoyed
by the Contractor in the principal contract; or

· provisions which are incompatible with or in conflict with the principal contract.

3. Compatibility between principal contract and subcontract

Some families or series of standard documents such as the New Engineering contract and Joint Building
Contracts Committee (JBCC) contain principal (prime or main) contracts and subcontracts, others only
provide the principal contracts, eg the International Federation of Consulting Engineers (FIDIC) and the
General Conditions of Contract for Construction Works (GCC).

It is acknowledged that there may be differences between principal and subcontract agreements which
may not necessarily make them incompatible. The argument for “compatibility” is, however, based on
factors such as convenience, style, language and common dispute resolution mechanisms. Whilst there is
considerable merit in this approach, it is possible, and may be advantageous to manage risks differently
between a principal contract and related subcontracts.

The South African Federation of Civil Engineering Contractors (SAFCEC) and the Building Industries
Federation of South Africa (BIFSA) have developed forms of contract which may be used with any forms
of contract, based on the following principles:

· The subcontractor should observe, perform and comply with the provisions of the principal contract
in so far as they relate or apply to the subcontract and are not inconsistent with the provisions of the
subcontract.
· In the interpretation of the provisions of the principal contract, in so far as they relate or apply to the
subcontract, the subcontractor has like powers, rights and responsibilities in relation to the sub-
contract as the contractor has in relation to the principal contract
· There is no privity of contract between the subcontractor and the employer and the subcontractor
should undertake to the prime contractor like obligations and liabilities as are undertaken by the
prime contractor to the employer in terms of the main contract; and the subcontractor holds
harmless and indemnifies the prime contractor in respect of the performance of such obligations
and liabilities.
· The terms of the principal contract as they apply to the subcontractor, and the terms of the
subcontract, which influence the subcontractor's price and assessment of risk, are to be clearly and
concisely 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, Preparing
procurement documents, to engage subcontractors and to manage risk differently. The short forms of
contract and labour only forms of subcontract are well suited to this approach in engineering and
construction works contracts.

Forms of subcontract are not commonly encountered in professional service contracts. The reason for this
is that firms usually form consortiums to undertake the work and therefore enter into joint venture
agreements. Alternatively, work which the firm does not have the competence to undertake is outsourced
to specialists, usually in terms of one of the principal forms of contracts.

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4. Recommended forms of subcontract in engineering and construction works contracts

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
Building Agreements other than the JBCC Principal Building Agreement.
- BIFSA Labour-only sub-contract

· Construction Industry Development Board

- Standard subcontract (labour only)

· The Joint Building Contracts Committee (JBCC series 2000)

- Nominated / selected Subcontract Agreement
- Engineering General Conditions

· New Engineering Contract (NEC)

- NEC Engineering and Construction Subcontract
- NEC Engineering and Construction Short Subcontract

· SAFCEC
- General conditions of subcontract (2003 edition)

Table 1: Recommended combinations of forms of contract and forms of subcontract

Series of contract Recommended forms of subcontract

FIDIC BIFSA Standard Subcontract Agreement 1995 edition (Amended 2000), for use with
GCC Principal Building Agreements other than the JBCC Principal Building Agreement
BIFSA Labour-only sub-contract
CIDB Standard subcontract (labour only)
SAFCEC General conditions of subcontract (2003 edition)
JBCC BIFSA Non-Nominated Subcontract for use with the JBCC Series 2000 Principal Building
Agreement
JBCC 2000 Nominated / selected Subcontract Agreement
Engineering General Conditions#
NEC NEC Engineering and Construction Subcontract
NEC Engineering and Construction Short Subcontract
# This document is specifically designed to be used in conjunction with the N/S Subcontract Agreement where the appointed
subcontractor is responsible for the installation and performance of a dynamic system related to the building contract and for which a
specialist engineer is appointed in terms of the Principal Building Agreement

5. Legal considerations in the engagement of labour only subcontractors1

A labour only subcontractor is a person who provides labour to prime contractors for the performance of
certain work in the construction industry. Typically, in engineering and construction works contracts, a
labour only subcontractor comprises a team of people operating in the wet trades (brickwork and
plastering), employs unskilled labour to handle and mix raw materials and effectively performs work on a

1
This section is based on the KwaZulu Natal Master Builders and Allied Industries Association Bulletin no FIN 1/2003 dated 10
January 2003, entitled “The employment of so called labour only subcontractors and taxation: the need for independence.

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piecework basis. Labour only subcontracting is not confined to engineering and construction works
contracts.

Employer aversion to onerous labour legislation, trade union pressure, social demand and the like
combined 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 prime
contractor and a so called labour only subcontractor, however, varies from being independent contractors
to being effective employees of the prime contractor. Many statutes (eg the Income Tax Act, the
Compensation for Occupational Injuries and Diseases Act, the Basic Conditions of Employment Act, the
Labour Relations Act, the Skills Development Levies Act) and many discrete bodies of common law (such
as delict) are based on the notion of mutual exclusivity. It is therefore important to understand the
implications 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 have
believed to be that of his subcontractor e.g. he may be required to deduct the employee’s tax before
payment is made to his labour only subcontractor, failing which he may be exposed not only to payment of
these 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 an
employment contract in terms of common law. These tests have been revised and refined over a number
of years and currently the “dominant impression test” is presently sanctioned by the Supreme Court of
Appeal to answer the question “is the person or worker integral to or accessory to the organisation”?. In
applying the test (see Table 2), the employment relationship is analysed to arrive at a dominant
impression in favour of either:

· the employer has acquired the workers’ productive capacity in the form of his time and effort as an
employee; or
· the employer has acquired the end result of the workers’ productive capacity as an independent
contractor.

In addition, the status of a labour only subcontractor as an independent contractor must be determined
with reference to particular statutes and the definitions embodied therein. In some Acts, the terms
employer and employee are defined, viz:

· Income Tax Act (Act 58 of 1962) defines an employee in the Forth Schedule of Part 1 as any
person (other than a company) who receives any remuneration or to who any remuneration
accrues, any person who receives any remuneration or to whom any remuneration accrues by
reason of any services rendered by such person to or on behalf of a labour broker, any labour
broker2, any person or class of or category of person whom the Minister of Finance by notice in the
Gazette declares to be an employee for the purposes of this definition; any personalised service
3
company or any personal service trust.
· Skills Development Levies Act (Act 9 of 1999) makes reference to the provisions of the Income
Tax Act;
· Labour Relations Act (Act 66 of 1995) presumes in Section 200 A that a persons who works or
renders a service to any other person, and earns less than a certain amount, is presumed to be an
employee, regardless of the form of contract, if the manner in which a person works is subject to the
control of another person, if the person’s hours of work are subject to the control or direction of
another person, if a persons forms part of the organisation, if the person has worked for that person
for an average of at least forty hours per month, if the person is economically dependent on the
other person, if the person is provided with tools of trade or work equipment by the other person, or
if the person only works or renders services to one person. (Once the presumption comes into

2
A labour broker is defined in the Act as “any person who conducts or carries on any business whereby such person for reward
provides a client of such business with other persons to render a service or perform work for such a client, or procures such services
for the client, for which services or work such other persons are remunerated by such persons.”
3
The Act defines a “personal service provider”.

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 operation, the person who is regarded as the employer carries the onus to prove on a balance of
probabilities that the other person is an independent contractor and not an employee.)

Table 2: Common law dominant impression test

INDICATOR SUGGESTS DEPENDENT WORKER SUGGESTS INDEPENDENT CONTRACTOR

STATUS STATUS
(Control manner/ Exclusive acquisition)

Control of manner of Employer instructs (has right to) which Person chooses which tools/equipment, or staff,
working tools/equipment or staff, or raw materials, or raw materials, or routines, patents,
or routines, patents, technology. technology.
Payment regime Payment at regular intervals / by a rate x Payment by a rate x time –period but with
time period but regardless of output or reference to results, or payment by output or
result “results in a time period”
Person who must Person obliged to render service Person as employee, can delegate to, hire and
render the service personally, hires and fires only with fire own employees, or can subcontract.
approval.
Near conclusive

Nature of obligation to Person obliged to be present, even if there
work is no work to be done.
Employer (client) base Person bound to an exclusive relationship
with one employer (particularly for
independent business test)
Risk/ Profit and loss Employer bears risk (pays despite poor
performance / slow markets (particularly
for independent business test)
Instructions / Employer instructs on location, what work,
(Extent of control)
Person only present and performing work if
actually required, and chooses to.
Person free to build a multiple concurrent client
base (esp if tries to build client base – advertises
etc)
Person bears risk (bad workmanship, price
hikes, time overruns)
Person determines own work, sequence of work,

supervision sequence of work, etc. or has the right to etc. Bound by contract terms, not orders as to
do so. what work, where etc.
Reports Control through oral reports / written Person not obliged to report
Persuasive

reports
Training Employer controls by training the person in Worker uses / trains in own methods
the employer’s methods
Productive time (work Controlled or set by employer / person full At person’s discretion
hours, work week) time or substantially
Tools materials, Provided by employer, not contractual Contractual/ necessarily provided by person
stationery, etc requirement that person provides
Office/ workshop, Provided by employer, not contractual Contractual/ necessarily provided by person
(Labels. Clauses, compliance, economic circumstances, etc)

Admin/ secretarial etc requirement that person provides

Integration / Usual Employer’s usual business premises Person’s own / leased premises
premises
Integration / Usual Person’s service critical / integral part of Person’s services are incidental to the
business operations employer’s operations employer’s operations or success.
Integration / Hierarchy Person has a job designation, a position in Person designated by profession or trade, no
and organogram the employer’s hierarchy. position in the hierarchy.
Duration of Open ended / fixed term and renewable – Limited with regard to the results, binds business
relationship ends on death of worker despite worker’s death.
Threat of termination / Employer may dismiss on notice (IRA, Employer in breach if terminates prematurely.
breach of contract equity aside), worker may resign at will Person in breach if fails to deliver product /
(BCEA aside) service.
Significant investment Employer finances premises, tools, raw Person finances premises, tools, raw materials,
materials, training etc. training etc
Employee benefit Especially if designed to reward loyalty Person not eligible for benefits
Bona fide expenses or No business expenses, travel expenses Over heads built into contract prices. Registered
statutory compliance and / or reimbursed by employer under tax / labour statutes and with trade /
Registered with trade / professional professional association
Association
Viability on termination Obliged to approach an Employment Has other clients, continues trading. Was a
agency or labour broker to obtain new labour broker or independent contractor prior to
work (particularly for independent business this contract.
Relevant

test)
Industry norms, Militate against independent viability. Make Will promote independent viability. Make it likely
customs it likely person is an employee. person is an independent contractor or labour
broker.

· Basic Conditions of Employment Act (Act 75 of 1997) in Section 1 defines an employee as any
person, excluding an independent contractor, who works for another person or for the state and
who receives, or is entitled to receive any remuneration and any other person who in any manner

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 assists in carrying on or conducting the business of an employer. Section 83A of the Act makes the
same presumption that a person is an employee as is the case in Section 200 A of the Labour
Relations Act.
· Compensation for Occupational Injuries and Diseases Act (Act 130 of 1993) defines an
employee in section 1 as a person who has entered into or works under a contract of service or an
apprenticeship or learnership, with an employer, whether the contract is express or implied, oral or
in writing, and whether the remuneration is calculated by time or by work done, or is in cash or in
kind. An independent contractor is expressly excluded form this definition.
· Unemployment Insurance Act (Act 63 of 2001) in section 1 defines an employee as a natural
person who receives remuneration or to whom remuneration accrues in respect of services
rendered by that person, but excludes any independent contractor.

An independent contractor is not defined in any of these Acts.

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