selection framework for domestic subcontractors by ... · that principles of good practice be...

CIB2007-468

Selection Framework for Domestic Subcontractors by Contractors in the

Construction Industry

Talukhaba AA and Mapatha M School of Construction Economics and Management

Faculty of Engineering and the Built Environment University of the Witwatersrand,

P O Box, Private Bag 3, Wits 2050, South Africa ABSTRACT Subcontractor selection is part of the wider supply chain management in the construction industry. Through procurement of subcontractors, contractors are able to share risks and manage projects more effectively. If subcontractors fail to perform, they become another risk in the process. Inadequate consideration in procurement of subcontractors may lead to adversarial relationships between contractors and subcontractors. More so for domestic subcontractors who like formal nominated subcontractors contribute significantly to the success of construction projects.

Contractors require domestic subcontractors that have adequate skills and resources to execute work effectively at an agreed price and quality. However, the procurement process should be fair to both parties as a basis for successful teamwork to avoid future strained relations. Observing best practices in domestic subcontractor selection contributes to not only satisfaction of clients but also to harmonious and sustainable construction.

The paper discusses factors necessary for domestic subcontractor selection in the South African construction industry. The literature supports the view that domestic subcontractor selection is unmethodical and subjective. Based on the opinions of contractors and subcontractors, measured on the rating scale, the paper highlights the key factors that are important and which should be considered in the selection process. This would contribute to teamwork and better working relationships in the construction industry.

768 CIB World Building Congress 2007

Keywords: Contractors, Domestic subcontractors, Procurement, Selection framework. 1. INTRODUCTION An important component of the project life cycle is the supply chain management function whose aim is the coordination of all parties to deliver goods and services to meet the objectives of the project. Part of this function is procurement process which is to identify goods and services needed in the project and how best to obtain them. Critical considerations are necessary on how the project will be managed, the contracts involved and the risks allocated in the various contracts.

It is a characteristic of the construction industry that contractors sublet portions of the project to subcontractors. Hence, up to 80% of the gross work done in the construction industry involves procuring of materials and services through subcontracting (Miller, et al, 2002; Dubois and Gadde, 2000; Eccles, 1981). In this respect, subcontractors play an important role in construction projects. Puttick (1978) and Brooks (1993) have argued that sub-letting part of work to specialists is not only a useful arrangement for contractors but also, some of the technical and financial risks are shared between parties. On the other hand, subcontractors benefit by obtaining work to sustain their businesses. More importantly, the preferential procurement policies in South Africa allow joint ventures which enable emerging contractors to participate in the construction industry. However, although the performance of subcontractors is significant on the overall performance of the project, there are widespread poor relationships between contractors and subcontractors in the construction industry, brought about by mistrust, risk and conflicts (Dainty, et al, 2001; Pietroforte, 1997; Hinze and Tracey, 1994). This inevitably impacts on issues of management, contracts and risk allocation.

It has been established that a large percentage of projects in the South African construction industry have not performed well (Massyn, 2003). Some of the causes of poor performance emanate from the procurement process. Inadequate consideration of procurement process leads to deployment of incompetent subcontractors who may cause delays, perform poor work and attract adversarial relationships (Miller, et al, 2002). The selection process appears to be a contentious issue whereby price seems to be an overriding feature in the selection process. Haksever et al, (1995) and Kerfoot (1994) emphasize that the selection process that is based on lower price could lead to the selection of incompetent subcontractors. Consequently, the contractual relationships may begin on the wrong footing, with problems such as reliability, performance, poor working conditions, payments and scheduling (Alman, 1989). These however, could be “red herrings” when the real culprit is cash flow difficulties due to low price. The ultimate receiver of the brunt in these

CIB World Building Congress 2007 769

Industry circumstances is the client, who feels dissatisfied and ends up with unsatisfactory facility and gets discouraged and reluctant to invest in future projects (Mbachu et al, 2003, Kerfoot, 1994).

Latham (1994) suggested that if procedures relating to procurement and tendering were to be improved, the causes of conflicts could be reduced and projects could perform better. This is true in South African where better performance is desired at a time when many projects are linked to the soccer World Cup in 2010. The purpose of this paper is to highlight the factors that are important for domestic subcontractor selection and thereby assist contractors select competent domestic subcontractors. 2. CONTRACTUAL RELATIONSHIPS BETWEEN CONTRACTORS AND SUBCONTRACTORS Standard contracts allow contractors to sublet portions of the work to firms of their own choice provided that contractual conditions are met (Smith, 1995). This is the opportunity for contractors and subcontractors to negotiate risks in the project. There are elaborate procedures for selection of nominated subcontractors. However, the selection of domestic subcontractors is shrouded with secrecy and this may lead to mistrust. Under normal circumstances, all subcontractors should be selected using some criteria which should emphasize equality, expertise and commitment to perform. If this were the case, risks would be shared objectively with the consequence of better project performance (Gray and Flanagan, 1989).

Contractually, the contractor has the ultimate responsibility for the project. However, this does not mean that domestic subcontractors be disregarded and mistreated in contractual relationships. Smith (1995) has observed that contract agreements between the contractor and domestic subcontract conditions in many cases, are a matter of total privacy. There are no well developed procedures for selecting domestic subcontracts. For instance, in labour-only subcontracts, the contract may not even be in writing. Important aspects of the contract such as workmanship standards, co-ordination and payment would be undermined if not based on strong contractual foundations and may inevitably breed conflicts (Puttick, 1978).

Cook and Williams (1998) have argued that contractors do use some form of a selection criteria when selecting subcontractors. However, these procedures are not known to the outside world and there is no way of knowing what is good or bad. CIB (1997) suggests that subcontractors should be selected through a formal process such as competition, negotiation or through partnering and/or joint ventures. It further suggests that principles of good practice be observed, to include among others:


• clear procedures that ensure fair and transparent competition among all subcontractors.

• the tendering process that shortlists systematically from a number of qualified candidates.

• the same conditions for the contract be used, to avoid or discourage collusion.

• formal and recognizable contracts bodies should be used where they are available and

• there should be a commitment to team work from all parties.

If these recommendations are followed, relationships between contractors and domestic subcontractors could be improved for the benefit of the construction industry. 3. SUBCONTRACTOR SELECTION FRAMEWORK Massyn (2003) and Haksever et al, (1995) have reinforced the view that the selection process of subcontractors is important because the nature of the contractor-subcontractor relationship is project-based and therefore a proper selection and management of subcontractors should be one of the key issues for contractors who want to maintain good performance and reputation. It is equally important for contractors to support and provide an enabling environment for subcontractors in order to succeed in their work. However, the commitment to support subcontractors and hence improve their performance is quite limited in the construction industry. For instance, Teo (2002) ranked the support of contractors to subcontractors and found that it is quite limited.

On the other hand, a selection process which emphasises price can easily ignore competent subcontractors in the selection process. A lower tender price does not equate to competency nor does it guarantee good performance and therefore other factors should be taken into consideration (Haksever et al, 1995; Kerfoot, 1994; Latham, 1994). Oluwoye et al. (1996) recommend that when the contractor is rating subcontractors, account should be made for the ability of the subcontractor to meet the following criteria:

• produce project schedules; • produce quality work; • employ skilled trades people; • cultivate goodwill between parties and • ability to allocate resources.

However, if the contractor’s part of the work is not well managed, for instance, the contract is not properly coordinated, project interfaces not well interlinked, contractual obligations not well defined and the use inappropriate specifications, project performance would still be undermined.


Industry It has been observed that unmethodical selection of subcontractors is widespread, leading to client dissatisfaction, causing delays and disputes (Mbachu, 2003; Bowen et al, 1997; Kerfoot, 1994; Kometa et al, 1994;). It is therefore imperative that a subcontractor selection framework be developed in the interest of the construction industry. The suggestion by Kerfoot (1994) that a performance based factors be developed for the selection of subcontractors other than price should be explored. This may not only improve the selection process but also relationships between parties.

4. STUDY METHODOLOGY A study was carried out to investigate the factors that would be suitable for inclusion in the framework for selecting subcontractors. These factors were identified at different stages of the construction process, such as pricing, financial, technical and managerial ability. The target population was contractors and subcontractors who are members of the Gauteng Master Builders Association (GMBA). The fieldwork was carried out in July 2006 at which time there were 240 contractors and 300 subcontractors. Twenty five contractors and 30 subcontractors were selected randomly to which questionnaires were sent, to elucidate opinions on what they perceive as influential factors necessary for subcontractor selection. However, 26 responses were received, 15 from contractors and 11 from subcontractors - a 47% response. The questions asked were related to the criteria that contractors use in selecting subcontractors at various stages of the procurement process. Respondents were asked to rate the importance of identified factors on an ordinal scale of 1 to 5, where 1 represented not influential and 5 very influential. The total number of rating per factor (TR) was divided by the total number of responses to obtain the mean rate(MR). The MR was then used to rank the factors. The results are shown in tables 1 to 5. 5. RESULTS AND DISCUSSION The results of the rating are discussed in the various stages of the construction process as follows: 5.1 PRE-QUALIFICATION STAGE This is the starting point of the process to evaluate whether the subcontractor may be short listed. Contractors were asked to rate eleven factors which are influential at the pre-qualification stage. It can be seen


that most of the factors were highly rated as shown in table 1. Technical and managerial competency, workforce skills, mobilization on site, competitive rates, past records, work and financial capacity stand out strongly. It can be seen that at this point the contractor is focusing on the capacity of the subcontractor. A demonstration by subcontractors that they have adequate capacity may land them on the shortlist. The factors should be adequately met by domestic subcontractor to ensure selection and could be used in the framework to eliminate unsuitable domestic subcontractors.

Table 1: Selection criteria at pre-qualification stage

Levels of Influence: Very Influential=VI(5), Influential = I (4), Somewhat Influential= SI(3), Less Influential= LI(2) and Not Influential=NI(1), TR= Total Response, MR= Mean Rate

Level of influence in the selection process VI I SI LI NI 5 4 3 2 1

Contractors needs from Subcontractors at the pre-qualification stage

% % % % %

TR MR Rank

Technical and managerial competence and experience in the job at hand

69.6 21.7 8.7 0.0 0.0 23 4.61 1

Size and resources: skills, experience and strength of own workforce

47.8 39.1 8.7 0.0 4.3 23 4.26 2

Current workload, commitment and ability to mobilize on site when needed

47.8 39.1 4.3 4.3 4.3 23 4.22 3

Competitive rates and lowest tender overall 34.8 31.8 9.1 13.6 4.5 23 4.17 4 Past records of working relationship with current contractor and/ or reference from previous employers and financiers

34.8 43.5 21.7 0.0 0.0 23 4.13 5

Ability to provide own attendance needs; possession of special tools and equipment that could reduce main contractor's P&G costs

43.5 30.4 21.7 0.0 4.3 23 4.09 6

Financial capacity to undertake the job successfully

43.5 34.8 13.0 0.0 8.7 23 4.04 7

Compliance with statutory regulations: Black Economic Empowerment, Gender Equality, Workman’s Compensation Act, tax regulations, etc

40.9 31.8 9.1 13.6 4.5 22 3.91 8

Health and safety record 33.3 29.2 12.5 16.7 8.3 24 3.63 9 Location of the subcontractor and knowledge of the project environment: local labour laws, site conditions, material supplies, etc

22.7 31.8 22.7 18.2 4.5 22 3.5 10

Experience with the present contract form, terms and conditions

14.3 23.8 38.1 19.0 4.8 21 3.24 11


Industry Table 2: Selection criteria at pre-Contract stage



Contractors needs from Subcontractors at the pre contract stage

% % % % %

TR MR Rank

Efficient programming of subcontract work and proper fit with main contractor's master programme for efficient coordination purpose

58.3 25.0 8.3 4.2 4.2 24 4.29 1

Readiness to mobilize on site on schedule

43.5 43.5 8.7 0.0 4.3 23 4.22 2

Ability to submit error and omission free bids that are reasonable and comparable with others

33.3 29.2 29.2 8.3 0.0 24 3.88 3

Well articulated health and safety plan 25.0 25.0 29.2 12.5 8.3 24 3.46 4 Provision of necessary bonds or specific insurance requirements

21.7 13.0 43.5 13.0 8.7 23 3.26 5

Reasonable discounts 4.5 13.6 50.0 22.7 9.1 22 2.82 6

Table 3: Selection criteria at construction stage



Contractors needs from Subcontractors at the construction stage

% % % % %

TR MR Rank

Good quality of work consistent with the general quality level of the main job

88.5 11.5 0.0 0.0 0.0 26 4.88 1

Time performance 57.7 34.6 7.7 0.0 0.0 26 4.5 2 High productivity level 60.0 32.0 4.0 4.0 0.0 25 4.48 3 Good control of own workforce 53.8 42.3 0.0 3.8 0.0 26 4.46 4 Good working relations with main contractor's team; good tolerance, loyalty and minimal adversarial relation

50.0 46.2 0.0 3.8 0.0 26 4.42 5

Efficient management of own workforce

53.8 34.6 7.7 3.8 0.0 26 4.38 6

Scope management: ability to manage changes without unnecessary claims

44.0 48.8 8.0 0.0 0.0 25 4.36 7

Zero or minimal defects and rework 50.0 34.6 15.4 0.0 0.0 26 4.35 8

Compliance with specifications for materials and methods

46.2 42.3 3.8 7.7 0.0 26 4.27 9


Compliance with contract terms and conditions, labour acts, building regulations etc

53.8 26.9 15.4 0.0 3.8 26 4.27 10

Cost control/ wastage minimization 50.0 30.8 11.5 7.7 0.0 26 4.23 11 Good communication network 38.5 38.5 15.4 7.7 0.0 26 4.08 12 Fair and minimal claims 34.6 46.2 7.7 11.5 0.0 26 4.04 13 Ability to manage the financial and contractual risks in the subcontract

28.0 48.0 20.0 4.0 0.0 25 4.00 14

On site health and safety practice 36.0 24.0 32.0 4.0 4.0 25 3.84 15

5.2 PRE-CONTRACT STAGE

Before the contract is signed, the contractor needs to be sure of certain requirements. At pre-contract stage, it can be seen that the efficiency of the domestic subcontractor’s programming and readiness to mobilize on site are influential. However, bond provisions and discounts are relatively not viewed as influential. It can be seen from table 2 that at this stage, the contractor is focusing more on how the subcontractor would be able to be in congruent with the overall objectives as set by contractor and reflected in project master plan. 5.3 THE CONSTRUCTION STAGE The construction stage is the stage at which the contractor and subcontractor interact the most. At this point they have already entered into an agreement and are carrying out work. and if any party is doing the contrary, consequences might lead to conflicts. Thus, for both contractors and subcontractors the stage of the actual carrying out of the project is every influential. It is not a surprise that all the requirements in this stage are viewed as very influential, notably quality, time, and productivity as shown in table 3.

Table 4: Selection criteria at post construction stage


Levelpr

of influence in the selection ocess

VI I SI LI NI 5 4 3 2 1

Contractors needs from Subcontractors at the post construction stage

% % % % %

TR MR Rank

Efficient and quick completion of snag items

57.7 38.5 3.8 0.0 0.0 26 4.54 1

Maintenance of good 'after-sales' 50.0 34.6 15.4 0.0 0.0 26 4.35 2


Industry

service within defects liability period Zero defects within and beyond defects liability period

50.0 26.9 19.2 3.8 0.0 26 4.23 3

Keeping site neat and tidy 38.5 42.3 23.1 7.7 0.0 26 4.15 4 Readiness to partner with main contractor on future jobs

26.9 42.3 23.1 7.7 0.0 26 3.88 5

Ability to be patient to be paid when the main contractor is paid

30.8 34.6 23.1 11.5 0.0 26 3.85 6

Provision of maintenance manual 'as-built' drawings if needed

30.8 34.6 23.1 7.7 3.8 26 3.81 7

Quick disbandment from site on practical completion

30.8 38.5 11.5 15.4 3.8 26 3.77 8

5.4 POST CONSTRUCTION STAGE The domestic subcontractor’s ability to complete snag items quickly, the offer of services within the defects liability period and keeping the site tidy are influential as shown in table 4. This means that what domestic subcontractors would do even after they have carried out the actual construction work in terms of the agreement with the contractor has influence on subsequent selection of the subcontractor for subsequent projects. Table 5: Benefits of a standardized Framework for selection of domestic subcontractors

Levels of Influence: Strongly Agree=SA(5),Agree = A (4), Neither Agree nor Disagree= NA(3), Disagree= D(2) and Strongly Disagree= SD(1), TR= Total Response, MR= Mean Rate

Level of influence in the selection process SA A NA D SD 5 4 3 2 1

Benefits of Subcontractors selection

% % % % %

TR MR Rank

Overall it could help to select suitable subcontractors who can deliver

81.0 19.0 0.0 0.0 0.0 21 4.81 1

It provides a uniform basis for comparing the suitability of the subcontractors and ensures fairness in the selection process

72.7 27.3 0.0 0.0 0.0 22 4.73 2

It helps the contractor to prioritize his requirements from the subcontractors, and provides a rational basis

63.6 27.3 9.1 0.0 0.0 22 4.55 3

It ensures that the key performance variables are considered Gin the selection process

63.6 22.7 13.6 0.0 0.0 22 4.50 4

It ensures a methodical approach and a justifiable basis for selection, and discourages subjective judgments

52.4 42.9 4.8 0.0 0.0 21 4.48 5


Table 6: Best Practice for Domestic Subcontractor Selection

Levels of Influence: Very Important=VI(5), Important = I (4), Somewhat Important= SI(3), Less Important= LI(2) and Not Important=NI(1), TR= Total Response, MR= Mean Rate

Level of influence in the selection process

VI I SI LI NI 5 4 3 2 1

Best Practice in domestic subcontractor selection

% % % % %

TR MR Rank

Tenders should be assessed and accepted not only on the basis of price

80.8 11.5 7.7 0.0 0.0 26 4.73 1

Practices that avoid collusion 69.2 23.1 3.8 3.8 0.0 26 4.58 2 Conditions for all tenders to be the same 69.2 19.2 7.7 3.8 0.0 26 4.54 3 Inviting tenders with relevant skills and experience to the type of work

57.7 38.5 3.8 0.0 0.0 26 4.54 4

Inviting only subcontractors who have the ability to submit bona fide bid

53.8 34.6 7.7 3.8 0.0 26 4.38 5

Proposed subcontracts to be compatible and consistent with the main contract

50.0 38.5 7.7 0.0 3.8 26 4.31 6

Sufficient time and information to be provided for preparation of tenders

42.3 30.8 23.1 3.8 0.0 26 4.12 7

Contracts from recognised bodies to be used where they are available

23.1 38.5 26.9 7.7 3.8 26 3.69 8

Inviting only subcontractors who have the ability to innovate

23.1 30.8 30.8 7.7 7.7 26 3.54 9

5.5 STANDARDIZED FRAMEWORK FOR SUBCONTRACTOR SELECTION As part of the study, it was necessary to find out from contractors and subcontractors whether it is necessary for the establishment of a standard framework for subcontractor selection and the best practices for this process. The following factors were rated by contractors and subcontractors. It can be seen that a standardized framework for selection of domestic subcontractors in the construction industry as shown in table 5. To enhance this process, and to achieve best practices in the selection process, other factors should be considered other than price as shown in table 6. 6. CONCLUSIONS The opinions expressed by both contractors and subcontractors regarding subcontractor selection will improve the supply chain management process in the construction industry. It is clear that both are keen on supporting a


Industry selection framework that would contribute to better practices in procuring the services of subcontractors. Subcontractors should demonstrate that they possess the skills and experience required by contractors at various stages of the project. The following factors would be useful in decision making for domestic subcontractor selection.

• Price should be not a major selection factor. Experienced and financially stable subcontractors should have good chances of winning tenders more than those who attract contractors’ attention by lowering tender prices or giving discounts.

• Past performance of subcontractors through delivery of good quality work, should secure subcontractors a place in the selection process.

• Efficient management practices and meticulous scheduling of work can improve productivity for the benefit of the project and the contractor.

• Subcontractors need to manage and organize their resources and skills at all times, allowing themselves to be flexible. This helps them fit quickly with the requirements of current projects and move quickly to other project sites.

• The construction stage is viewed by contractors and subcontractors to be important. Both the contractor and subcontractor share the same understanding of the key requirements that should be included in a selection framework from the construction stage.

• Subcontractors who cultivate good working relationships between their workers as well as other subcontractors and the contractor could encourage a conflict free relationship.

• Contractors are more willing to work with subcontractors who can carry their work professionally and confidently and by providing good after sales services.

An elaborate and systematic system of selecting domestic subcontractors would contribute to better relationships between contractors and subcontractors for the benefit of the parties and the industry as a whole.

7. REFERENCES Alman, M.G., 1997, Barriers to quality in the South African Building Industry, Unpublished MBA research report, University of Cape Town. Bowen PA. Pearl RG, Nkado RN, and Edwards PJ 1997, The effectiveness of the briefing process in the attainment of client objectives for construction projects in South Africa, proceedings of the RICS COBRA conference , September , UK, pp.1-10.


Brook M.,1993,.Estimating and Tendering for Construction Work, (Oxford: Butterworth Heinemann). Canter, M.R., 1993, Resource Management for Construction: An integrated approach, (London:Macmillan Press). Cook, B. and Williams, P., 1998, Construction Planning, Programming and Control, (New York: Palgrave). Construction Industry Board.(CID), 1997, Code of Practice for the selection Of Subcontractors, (London: Thomas Telford Publishing). Dainty, A., Briscoe, G., Millet, S., 2001, Subcontractor perspective on supply chain alliances, Construction Management and Economics, Vol. 19 No. 8, pp. 841-848. Dubois, A., Gadde, L.E., 2000, Supply strategy and network effects – purchasing behaviour in the construction industry, European Journal of Purchasing and Supply Management, Vol. 6 No.3-4, pp.207-15. Eccles, R., 1981, Bureaucratic versus craft administration: the relationships of market structure to the construction firm, Administrative Science Quarterly, Vol.26 No.3, pp. 449-469. Gray, C. and Flanagan, R., 1989, The changing role of specialist and trade contractors, Chartered Institute of Building, Ascot, UK. Haksever, A.M, Kim H.S and Pickering, G., 1995, Collaborative long-term relationships in UK construction industry: A lost opportunity? in Proceeding of the 11th ARCOM Conference, University of York, and York, UK. Hinze, J., Tracey, A., 1994, The contractor – subcontractor relationship: the subcontractors view, Journal of Construction Engineering and Management, Vol.120 No.2, pp.274-87. Kerfoot, A., 1994, Problems affecting subcontractor performance in the South African Building Industry, Unpublished dissertation ,University of the Witwatersrand. Kometa, S.T., Olomolaiye, .PA. and Harris F.C., 1994, Attributes of UK construction clients influencing project consultants’ performance, Construction Management and Economics, Vol.12, pp 433-443. Latham, M., 1994, Constructing the team, (London: Her Majesty’s Stationery Office), p130. Massyn, M.W., 2003, The role of the subcontracting organization on the business process of contractors - A South African Perspective. In Proceedings of 1st Postgraduate Conference of the CIDB on Construction Industry Development, Port Elizabeth, pp.237-240. Mbachu, J.I.C.,2003, A Critical Study of Client Needs and Satisfaction in the South African Building Industry. Unpublished PhD thesis, University of Port Elizabeth. Miller, C., Packlam, G., Thomas, B., 2002, Harmonization between main contractors and subcontractors: prerequisite for lean construction, Journal of Construction Research, Vol.3, No.1, pp.67-82. Oluwoye, J.O, Macleannan H.M and Caolan C.G., 1996, Modeling building subcontractor performance: a case study of the NSW construction


Industry industry. In Proceedings of CIB Working commission 55 International symposium, Zagreb, Croatia, September. Pietroforte, R., 1997, Communication and governance in the building process, Construction Management and Economics, Vol. 15 No.1, pp.71- 82. Puttick.R.J., 1978, The implications of employing subcontractors, Unpublished dissertation , University of Witwatersrand. Smith, A. J., 1995, Estimating, tendering and bidding for construction: Theory and practice, (Basingstoke: Mcmillan), p.256. Teo, A.L., 2002, Strategic marking positioning in the construction industry: Importance of organization flexibility for diversification. In Proceeding of the CIB W107 Conference: Creating a Sustainable Construction Industry in Developing Countries, South Africa, November.


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