Amended Construction Sector Code

The long-awaited Amended Construction Sector Code (Construction Sector Code) finally came into effect on 1st December

2017. Many describe the South African construction sector as a sector in tatters. Over the past decade, many issues have

plagued the sector. One such is the reputational damage caused through ‘bid-rigging’ admissions and hefty fines paid in

retribution by those involved. Another factor is government’s lack of investment in infrastructure and the downgrading of the

Rand to junk status. The latter had an impact on contracts already underway when a decision on the Rand’s fate was finally

announced. This is the result of capital for most projects not stemming from cash reserves, but credit, which today is more

expensive. In 2017 the difficulty facing the sector became evident, as most JSE listed organisations representing the sector

showed significant losses.

Over the last decade, the sector has not seen a notable trajectory in Transformation. Now with the more stringent sector specific requirements, the sector is playing catch-up. Over the past few years, as part of their growth strategy, many in the

sector have entered into significant Ownership deals to ensure that they are more appealing in the tender evaluation process.

Compounding the prejudice of the sector are significant tenders with requirements that necessitate a higher Ownership target

than the one laid out in the Construction Sector Code. Therefore, to secure a favourable scorecard, Ownership for many is

currently the focus for driving Transformation. Such deals are often followed by a restructuring process in an attempt to meet

other legislative requirements. What we all have to bear in mind is that the Construction Sector Code addresses the bigger

picture of Transformation, which is inclusivity that invites more people to participate in this sector. In 2018, the Construction

Sector and South Africa alike await a new dawn, where building our infrastructure will drive growth throughout the sector and

filter through to the economy. It has to be said though, that the full benefits of this sector code can only be properly measured

and realised in a thriving economy.

This Sector Code became effective on the date of publication. Therefore, any certificate issued to an organisation falling

within the ambit of this sector code as of 1st December 2017, must be measured on the Construction Sector Code. This is

irrespective of an organisation’s financial year-end. The validity of an existing B-BBEE Certificate measured on the Amended

Codes remains intact until expiry. However, an organisation may, before the expiry of their certificate, opt to re-do their latest

rating using the new Construction Sector Code.

When do the increased year four

targets come into effect?

The increased year four targets become effective for the Measured

Period commencing on or after the fourth anniversary that the

Construction Sector Code came into effect.

Were any transitional arrangements

put in place?

No transitional arrangements have been put in place.

What is the ‘Scope of Application?

> All organisations that fall in the Construction Sector.

> This is determined with reference to where the majority of core

activities are measured in terms of annual revenue.

> A subsidiary falling in another Sector that is consolidated on

a construction sector certificate may not use that consolidated

certificate to tender.

> Construction Material Suppliers fall under the Construction Sector

unless they can prove compulsory legislative compliance and

licensing in another sector.

Being registered with any of the following bodies does not automatically

render an organisation as being part of the Construction Sector:

> Construction Industry Development Board (CIDB);

> National Home Builders Registration Council (NHBRC);

> Construction Sector Education and Training; and

> Authority (CETA).

The key consideration which determines whether an organisation falls

within the Construction Sector, notwithstanding registration with these

bodies, remains whether or not the majority of its annual revenue is

derived from construction-related activities.

What is considered construction

related activities?

These are activities conducted by Built Environment Professionals

(BEPs), Construction Material Suppliers and Contractors.

What constitutes a ‘BEP’?

A BEP is defined as a Built Environment Professional. Organisations that

fall into this category conduct the following activities: Planning, design

and costing of construction projects in the built environment. This is in

addition to project management and design of the construction value

chain, including the environment, energy, industrial, property, transport,

as well as infrastructure. Included in the BEP category are, however

not limited to, consulting engineering practices, architects, quantity

surveyors and town planners

What are ‘Construction Material Suppliers’?

These are organisations which conduct the following activities:

manufacturing, creation or the supply of building material and

equipment used in construction, for example, cement, concrete,

bricks, electrical equipment and steel. This category includes

organisations that provide plant hire for construction-related activities.

How are ‘Contractors’ defined?

These organisations conduct construction project activities that include

civil engineering, electrical engineering, power transmission, general

building and specialist construction work as per the CIBD grading table

below:

“This Sector Codes can only be

properly measured in

a thriving economy”.

CE

EB

EP

GB

SC

SG

SH

SI

SJ

SL

SN

SB

Construction work primarily concerned with materials such

as steel, concrete, earth and rock - (water, sewerage, roads,

railways, bridges, dams, cooling towers, grand-stand).

Electrical engineering work. All electrical work forming an

integral part of a building, including any wiring - (building

installations, reticulations within a plot of land (erf) or

building site).

Electrical power generation, transmission, control and

distribution equipment, as well as system - (power

generation, street and area lighting, substations and

protection system).

Building and ancillary works other than civil engineering,

electrical engineering, mechanical engineering and specialist

works - (air-conditioning and mechanical, boiler installation

and steam distribution, central heating).

Asphalts or any other related business.

Building excavations, shaft sinking and lateral earth support.

Glazing, curtain walls and shop fronts.

Landscaping, irrigation and horticultural works.

Escalators, travellators and hoisting machinery.

Specialised foundations for buildings and structures.

Structural steelwork and scaffolding.

The waterproofing of basements, roofs and walls using

specialist systems

Are the EAP targets applicable?

Yes, but only for the Senior, Middle and Junior Management categories.

SKILLS DEVELOPMENT

What are the core features in terms of this element?

> As a Priority element, there is a 40% sub-minimum required of the total Skills Development

scorecard that excludes Bonus Points;

> Certain measurements are subject to an ARG of 1.3;

> The EAP profile targets are not applicable, except for the target of the African People

percentage;

> The WSP, ATR and Pivotal Report must be submitted to SETA;

> The Bursary spend on Grade 10 to 12 Learners is limited to 50% of the overall target;

> Informal training, as well as Cat F and G, is limited to 35% of the total value of the Skills

Development expenditure;

> Training outside South Africa qualifies, providing that it meets the criteria held within the

Learning Programme Matrix;

> Legitimate Training Expense includes:

° “Funding and support of research at tertiary institutions aimed at improving the performance

of the Construction Sector”; and

° Mandatory Sectoral Training specified as site, project and safety inductions, toolbox talks,

as well as operator re-certification.

> A compulsory Mentorship Programme has been introduced as part of the Skills Development

measurement criteria.

What constitutes a Mentorship Program?

A Mentor Champion must be nominated. In a larger organisation, this may be the chairperson of

an already established committee, whose role would be to manage the Mentorship Programme.

The programme must have a minimum number of mentees, otherwise known as protégés.

> A detailed list of activities and/or projects undertaken by a protégé must be included, as well as

the department they represent.

If an employee is participating in a Mentorship Programme for professional registration, such

documentation will supersede the conditions stated above. However, there must be evidence in the

employee’s file to collaborate that the mentorship took place during the said Measurement Period.

PREFERENTIAL PROCUREMENT & SUPPLIER DEVELOPMENT

This Sector Code excludes the Enterprise Development Element. Therefore, Preferential

Procurement and Supplier Development represent the make-up of this element.

Preferential Procurement

What exclusions are available in terms of imported items?

The following exclusions are permitted on imported goods and services:

Imported capital goods, components or services for value-added production in South Africa on the

provision that:

> There is not sufficient existing local production of such capital goods, components or

services; and

> Importing such capital goods, components or services promotes further value-added production

within South Africa;

Imported goods and services, other than those listed above, if there is the insufficient local

production of goods or services that:

> Carry a brand different to locally produced goods or services; or

> Have different technical specifications for the locally produced goods or services.

> The import exclusion is not subject to the Measured Entity having developed and implemented

an Enterprise and Supplier Development Plan for imported goods and services.

What is the exclusion of non-discretionary procurement

mean?

This relates to procurement spend that may be excluded due to an organisation being obligated

to use a particular supplier, due to the tender requirements or client specifications. The Supplier

Development scorecard has a measurement criterion for Supplier Development Programmes

and Supplier Development Contributions. Both are priority elements that are subject to a 40%

sub-minimum requirement. The Supplier Development Scorecard is illustrated below:

Supplier Development Programmes

What is a Supplier Development

Programme?

This is a programme whereby the Entity provides structured

co-operation and assistance to Qualifying Beneficiary Entities

(Beneficiary) in the form of Qualifying Supplier Development

Contributions.

What is the qualifying criteria for

a Beneficiary?

> The Measured Entity may not hold more than 20% equity,

calculated in terms of the normal flow-through principle, in

a Beneficiary’s Equity Ownership structure;

> The beneficiary entity must employ a minimum of three

permanent employees;

> The beneficiary entity must have a valid Tax Clearance

Certificate; and

> The beneficiary entity must be in possession of an affidavit,

where applicable, or a B-BBEE Certificate that was valid at

the date of entering into an agreement.

How is a Supplier Development

Programme evidenced?

> A written agreement signed by both parties;

> A documented ‘needs analysis’ of the Beneficiary signed

by both parties;

> A documented ‘Supplier Development Plan’ signed

by both parties, making specific reference to the

Measurement Period;

> Clear objectives with respect to at least three development

needs, as identified in the ‘needs analysis’. Furthermore,

it must reflect at least two areas previously identified

for development. To avoid doubt, a developmental

need is a specific requirement that must be implemented

in a development area, with the specific needs

defined as the objectives. Areas that may be targeted for

development, include, however are not limited to:

° Management and labour skills transfer;

° Establishment of an administrative system;

° Planning, tendering and programming skills transfer;

° Transfer of business skills with emphasis on negotiation

skills;

° Technical skills transfer with emphasis on innovation;

° Legal compliance;

° Procurement skills transfer;

° Establishment of credit rating and/or history;

° Access to, or implementation of business systems;

° Establishment of financial loan capacity and/or history;

° Contractual knowledge transfer;

° Marketing and branding; and

> Priority intervention activities to address any of the objectives

identified above.

> Qualifying Supplier Development Contributions and the value

thereof. If none of the allocated contributions are payable within the

Measurement Period, the requirements of the contribution will

not have been met.

Who is responsible for the Supplier

Development Programme?

A Supplier Development Champion must be nominated and held

accountable for the overall ‘Supplier Development Programme’. The

Champion must represent Senior Management level or above. That person

must be suitably qualified and experienced to monitor the progress and

complete a portfolio of evidence for verification purposes.

How are Supplier Development Programme

points determined?

> (number of Developed Organisations / X in the below table)

multiplied by

> ((aggregate Developing Organisation revenue/Measured Entity

revenue)/ Y in below table))

> Multiplied by the available 5 points

Can a third-party service provider be contracted to perform Supplier

Development on behalf of the Measured Entity?

Yes, payments made by the Entity to suitably qualified and experienced third-parties to deliver services on the Entity’s behalf can

be recognised as a Supplier Development Contribution. Such contributions are regarded as initiated and implemented once they

become payable to the third-party.

What is the compliance target for Supplier Development Contributions?

The target is 3% of Net Profit After Tax (NPAT). This is based on the average NPAT of an organisation over the three financial years

that preceded the Measurement Period. This is the basis for determining such targets unless:

> An organisation did not make a profit on average over the identified three-year period; or

> The average Net Profit margin of the organisation over a three-year period was less than a third of the industry norm Net Profit

margin during the same three-year period.

What is the process for determining the target if an organisation did not make

a profit during their Measurement Period?

In this case, an Indicative NPAT of the Measured Entity over the three financial years that preceded the Measurement Period will

become the basis for determining targets. An Indicative NPAT is the Revenue of an organisation for the Measurement Period.

This is multiplied by a third of the average industry norm Net Profit margin for the three financial years which preceded the

Measurement Period.

What evidence must be provided to support a claim for Structured

SED Projects over and above what is normally required for Qualifying

Socio-Economic Contributions?

> An SED plan must be signed by the Measured Entity, the Beneficiary, or a third-party intermediary;

> Signed confirmation is required by the Beneficiary or third-party intermediary, through whom the contribution was made.

This must confirm the value of the contribution that was payable during the Measurement Period; and

> An annual project impact analysis against targets set and milestones achieved that must reflect whether or not they were

realistic. A negative outcome of the analysis does not disqualify the recognition of the spend.

The Socio-Economic Development Scorecard is illustrated as follows