Overview of construction in South Africa

The South African government has identified a need for infrastructure development and has allocated USD70 billion for the development of roads, bridges and dams, USD3 billion for road maintenance and a further USD13.8 billion for railway upgrade.  Eskom Holdings Limited (the state owned utilities company) build programme (about USD8.2 billion over the next 5 years) is described as the “economy’s biggest stimulus”.  In addition, Eskom was granted a USD3.75 billion loan by the World Bank in April 2010 to assist with its increased energy requirements.  The majority of those funds were earmarked for the completion of the Medupi Power Station – which together with the Kusile Power Station will be amongst the worlds largest when completed.  The remainder of the funds were for procuring renewable energy projects.  In line with this, the government has committed to a Renewable Energy Feed-In Tariff (REFIT) programme which has resulted in a number of international companies partnering with South African companies to bid for a variety of REFIT projects.  There is also renewed interest in private sector projects including mining in Southern Africa. 

So although the construction and engineering industry is in a phase of slowed growth and consolidation we are optimistic, given the commitment by government and private sector interest, that this industry will show much needed growth in the next 12 months. 

Some Legislation Impacting the Industry

A majority of the projects in the pipeline will be public sector projects subject to legislation regulating tenders.  The most important, in this context, is the Construction Industry Development Board Act, 38 of 2000 (“the CIDB Act”).  The CIDB Act requires companies (including foreign companies) tendering for public sector construction contracts to be registered with a suitable grading and designation in order to determine the type and complexity of public sector contracts for which the contractor is eligible to apply. The grading designation is dependent on the company’s:

• turnover for the 2 year period immediately preceding the application;
• value of the contracts undertaken during a 5 year period immediately preceding application;
• available capital; and
• number of qualified employees.

Regulations promulgated in terms of the CIDB Act stipulate both the type of tender process and the preferred standard form contracts a project should use.  These standard form contracts are, in any event, the ones most often used in South African projects – whether private or public sector:

• The Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract:

1. Plant and Design-Build, First Edition, 1999 (Yellow Book);
2. Construction, First Edition, 1999 (Red Book);
3. EPC/Turnkey Projects, First Edition, 1999 (Silver Book). 

• The New Engineering Contract (NEC) Engineering and Construction Contract;
• The Joint Building Contracts Committee (JBCC) 2000 suite of contracts, 2007; or
• The General Conditions of Contract for Construction Works 2010, produced by the South African Institute for Civil Engineering.

Professional consultant appointments often use the:

• NEC Professional Services Contract;
• the FIDIC Client/Consultant Model Services Agreement; or
•  Professional Consultants Services Agreement Committee (PROCSA) Client/Consultant Professional Services Agreement as a form of contracting.

The CIDB Act requires public sector professional consultant appointments to use the NEC or the CIDB Professional Services Contracts.

There are draft amendments to the current construction regulations under the Occupational Health and Safety Act, 85 of 1993.  The changes involve closer supervision by the client and more involvement from the Department of Labour when construction activities are undertaken. 

The Consumer Protection Act, 68 of 2008 has far – reaching consequences for product liability claims in South Africa as it introduced, as at 24 April 2010, the concept of ‘strict liability’.  The legislation while a departure from the common law position is similar to international legislation on this issue.

Construction Issues in a South African context

Whether in public or private sector contracts, the main issues, like in any international project, concern:

• Contractor’s risks

In our experience, the parties will usually follow the risk allocation provisions provided for in the FIDIC and NEC contracts.

• Limitations on liability and exclusions

Market related limitations on liability are between 10%-20% of the contract price depending on the nature of the works while a professional consultants’ liability limit would usually be twice their fee.  Exclusions include no liability for indirect/consequential loss and negligence and exclusions to the limitation on liability include third party injury, death or damage to property as well as breaches of confidential information and intellectual property clauses (depending on the nature of the works).  Under South African law, consequential damages are damages which would not normally be expected to flow from the type of breach but which arose due to special circumstances.

• Force Majeure

Force Majeure provisions align with internationally negotiated events.  South African common law provides that such event must be an absolute “supervening impossibility, not be caused by either party nor be under the control of either party.

• Penalties

In our experience, an employer will accept penalties (liquidated damages) for delay and performance ranging between 10%-15% of the contract price.

• Variations

A contractor is obliged to carry out an employer’s instruction regarding a variation subject to his right to claim the cost and time implications of the variation and provided that (in design-build contracts) the variation does not impact on the performance specifications or safety of the works.  Generally, the common law does not permit an employer to omit work which he will contract to a third party – a provision which is normally negotiated between the parties so that an employer can omit work up to a specified percentage (typically 10% of the total works).  If an employer instructs a variation for work which is not related to the original scope of works, the contractor will have to notify the employer to ensure that the varied works are not done on the same terms as the original scope of works.

• Claims

A contractor’s ability to claim for extensions of time and additional cost claims are generally subject to time barring and case law shows that courts are unlikely to favour a ‘time at large’ argument. 

• Dispute Resolution

Parties usually opt for adjudication followed by arbitration.  The parties will decide the specific rules governing the arbitration (traditionally the Association of Arbitrators or the Arbitration Foundation of Southern Africa’s rules).  The arbitration will remain subject to the Arbitration Act, 42 of 1965.  It is our view, however, that mediation will become increasingly popular over the next few years – legislation, circumstances and costs will all play a factor in this choice.  There are approximately 40 statutes in various sectors which include either a voluntary or mandatory mediation process.  In addition, a 2010 judgement, albeit in the family court, which places an obligation on attorneys to recommend mediation to its clients in the appropriate circumstances may find favour in commercial disputes. 

 The future?

Investment in housing is required, but given the huge spend on road, rail and energy, it is unlikely to be given priority in the next 12 months.  Compared to market activity a year ago, we have seen a small increase in potential Public Private Partnership projects.   All in all, the number of transactions we are involved in and the interest shown by international investor’s promises resurgence to the levels last seen in the industry in 2007/2008. 

Nikita Lalla is a director at ENS (Edward Nathan Sonnenbergs) and has 6 years experience. She currently practices as an attorney in the litigation/dispute resolution department and specialises in the construction and engineering sector.

She has acted for employers/developers, contractors, sub-contractors, engineers, project managers, banks, project companies and mining companies.

Nikita’s practice experience includes drafting contracts and dispute resolution expertise in construction and engineering projects, amongst others, in energy, infrastructure and mining. She has experience in drafting standard form and bespoke construction and engineering contracts. These include Engineering Procurement and Construction (EPC) and Engineering, Procurement and Construction Management (EPCM), Design and Build (D&B), Operation and Maintenance (O&M) and Design, Build and Operate (DBO) contracts, as well as professional appointments. Nikita has experience with due diligence investigations on target construction and engineering companies and on behalf of lenders on construction projects.  She also has experience in contract administration, mediation, adjudication and arbitration on construction projects in various sectors. Nikita has in-depth knowledge of Federation Internationale Des Ingenieurs – Conseils (FIDIC), New Engineering Contract (NEC) and Joint Building Contracts Committee (JBCC) contracts.  Nikita can be contacted on +27 11 269 7600 or by email at nlalla@ens.co.za