CHAPTER 4 THE CONSTRAINTS FACED BY SUBCONTRACTORS •••••••• 61
4.4 THE SUBCONTRACTING RELATIONSHIP
The operators complained that certain aspects of the
subcontracting relationship stunted the growth of their firms. In the building sector, as in many other subcontracting
relationships, the two parties to the subcontract agreement meet under conditions of extremely unequal bargaining power. This inequality exists because the subcontractors often have no other source of employment, have invested previously in building- specific human capital, and have no negotiating experience. The extent of inequality in this relationship, however, is primarily a reflection of the size and inherent strength of LSEs, as well as their oligopsony over low-cost housing construction. The latter is a consequence of government policies in the allocation of land.
LSEs have dominated the first phase of low-cost housing privatisation in the 1980's. with the exception of 20% of the Blue Downs project, the smallest contract allocated in the first phase was in excess of 100 units. In the Khayelitsha project the smallest contract alloc;:ated was 100 units.
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These allocations do not offer sufficient opportunities for smaller-scale enterprises, which have less access. to finance, to engage in housing construction, or for homeowners to buy a single plot to develop as they wish. The consequence is that
subcontractors can only work in the growth area of mass housing if they enter into this together with large contractors. If subcontractors had had a choice of contractual relationships to enter into in this field (for example, with small firms or homeowners), their bargaining power would have been enhanced.
In addition to this fundamental issue, the survey identified more specific problems that are contained within the subcontracting relationship, and that reflect the unequal bargaining power of the parties.
4.4.1 Raw Material Shortages
The largest proportion (29.6%) of operators complained of raw material shortages (Appendix B, Table B11). The situation is such that, except for some of the electricians and plumbers, the contractor undertakes responsibility for raw material provision'.
Subcontractors complained of delays and bottle-necks in the supply of raw materials. It was clear from responses that these delays occurred frequently and that the average period of delay was at least one day.
Raw material shortages may be due to bottle-necks in production or management inefficiencies on the side of suppliers or
contractors. However, what is important here is that the nature of the subcontracting relationship and the reality of most of the contracts to date, enables developers to divest all
responsibility for the delay onto the subcontractor. The entire direct cost of the delay is borne by the subcontractor, which limits income generation within the subcontracting firm.
4.4.2 Rates of Pay
A number of subcontractors complained that unreasonably low rates of pay per job prevented them from paying higher wages to their workers and, often, from making any profit themselves (Appendix B, Table B11). As shown in Table 4.4,68 if subcontractors were to have paid their ,workers at minimum wages, 80.8% of firms would have made a loss of up to 40% of the rate they were receiving for a particular piece of work.
68. See Appendix F. question 33 and 39 for the survey questions.
Table 4.4
Return per house at Minimum Wages69 Firms Return
No Percent
Less than -40% 29 27.9
Over -39% to -20% 42 40.4
Over -20% to -1% 13 12 .5
0% 0 0.0
Over 0% to 20% 6 5.8
Over 20% to 39% 12 11.5
Over 39% 2 1.9
Total 104 100.0
Mean -24.3%
There are four possible avenues of explanation for the above results:
i) The vast majority of subcontractors are inefficient.
ii) If subcontractors had been facing minimum wages they would have opted for a different capital:labour ratio in
production.
iii) Subcontractors tendered at prices far too low to make a sufficient profit.
iv) Developers budget for operators to pay well below minimum wages.
Given that both projects were well beyond any "teething" stage, i t is likely that a process of positive selection would have excluded the more inefficient operators who would no longer be on site. The second possibility is also unlikely, given the small range of technical choice in low-cost housing. The third option is incorrect, as rates per job are set by the contractor prior to their acceptance by the subcontractors. Further, given that both projects are well advanced, most subcontractors would have
learned to estimate costs more accurately. Option four would thus seem the most feasible explanation.
conclusive proof that rates per house do not allow for Industrial Council wage rates, would require priced bills of quantities for each firm. As contractors were not willing to provide these, this was as far as the exercise could be taken. At this level of analysis the table is used simply to indicate that contractors do have the bargaining power to set low rates of pay.
69. In the table, income to the fiml is re-calculated using the amount of productiori inputs specified by entrepreneurs, with inputs of each category of labour valued at the statutory cost of labour for the Cape Peninsula. The negative or positive return received by each of the firms is expressed as a percentage of the rate of pay for the work undertaken.
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outside of the issue of payment per job, there were a number of instances mentioned where payment was unduly delayed or where retention "monies were not refunded. In other cases rates for specific jobs were suddenly reduced without any negotiation.
Further, subcontractors were often unreasonably pena~ised. For example, on one site there was a memo from head office
instructing foremen to deduct between R40 and R60 from payments for a site that was not considered clean!
4.4.3 Insecurity of Contract
Finally, a number of subcontractors complained of factors which might be ascribed to the insecurity of the contract. In most cases, the developer maintained the right to hire and fire subcontractors at will. Indeed, the average period of employment for subcontractors was three months. This is based on the records of the developers, and excludes those subcontractors who did not receive a single payment. While the problem may be due partly to the quality of subcontractors and workers, i t does reflect an inadequacy of screening procedures and a lack of incentive to correct them.
In sum, each of the three factors above constrain the growth of subcontracting firms and the amount of employment and income generated. Given these factors, i t was not surprising that a large proportion (42.5%) of operators mentioned some aspect of subcontracting as one of the main factors that constrain the growth of their firm (Appendix B, Table B11). In addition, when asked to what use they would put aRlO 000 gift, most operators replied they would continue to operate in the building industry but outside of the subcontr~cting sector (Table 2.5).
Most subcontractors saw their escape via independent contracting.
They are, however,". at a serious disadvantage in entering this market (Interviews 3 and 13). First, they do not have easy access to financial markets to purchase raw materials. Second, the paucity of management, negotiating and legal skills serve as an even greater constraint, given the wider responsibilities of independent contracting. In"· fact, only six cases of
subcontractors successfully breaking into this market were reported on both of the "sites where interviews were conducted
(Interviews 1, 3-6).