The Domestic Construction Industry

Challenges and Prospects

 Presentation Outline

A. Background and Presentation Scope

B. The Role of DCI in the Road Sector

C. Construction Management Practices of DCI

D. Challenges & Prospects

E. Efforts towards DCI

F. The way forward

2
 A. Background & Presentation Scope

 The Construction Industry can be described as the sum of all economic activities
related to civil/infrastructural and building works: their conception, planning,
execution, and maintenance.

 Civil/Infrastructural works normally comprise capital investment in the form of

roads, railways, airports, ports & maritime structures, dams, power generating
stations, irrigation schemes, health centers & hospitals, educational institutions,
warehouses, factories, offices and residential premises.

 The Industry locally functioning in the conception, planning, execution &

maintenance of Civil/Infrastructural Works is the Domestic Construction Industry.

 Responsible Organizations and Key Stakeholders in the construction industry are

(Government, Client, Contractor, Consultant, Associations and others)

 The Domestic Construction Industry in the road sector is the main interest of this
presentation

3
The Domestic Construction Industry
 … continued
Why Focus on DCI?
• Construction is widely acknowledged as the most important
single constituent in a developing country’s investment
program with about 50% of total capital formation realized
through this particular sector.
• Among the construction industry in developing country
importance of the road sector in supporting social and
economical growth and its roll as a catalyst to meet poverty
reduction target is vital.
• DCI in Ethiopia is characterized by Resource limitation
(experienced firms and staffs, equipment, capital base) and
insufficient and ineffective use of local sources (materials and
local labour)
4
The Domestic Construction Industry
 Road Sector Development Program (RSDP)
• The major focus of RSDP has been on:
– improvement and upgrading of the federal network and
– Expansion of the net work
– Capacity Building
• The increasing number of road projects over the RSDP period is
remarkable.
• The local and international Contractors and ERCC (previous ERA own
force) have been participating in the road construction industry.
• Challenges facing RSDP were:
– contract procurement and administration,
– development of DCI,
– handling change orders in construction projects,
– assessing performance of consultants and contractors and
– enhancing national accessibility
Planning & Program Development
5
Process
 B. The Role of DCI in the Road Sector
Participation in Works Contract

• Over the last 14 years, (1997-2011)

• 198 projects were implemented by local contractors .,
– 72 by foreign and
– 26 by ERCC (ERA's Own Force).
• Average growth per annum of the participation of these three
implementers for the past 14 years:
– Local Contractors = 28.6%
– Foreign Contractors = 20%
– ERCC = 24%
• Local contractors have shown great participation in handing large number
of projects since July 1997

The Domestic Construction Industry 6

 … Continued
Participation in Works Contract
• No. of Projects by ERCC, Local and Foreign Contractors

The Domestic Construction Industry 7

 … Continued
Participation in Works Contract

• the projects among which local contractors

participated highly are:

– new road construction,

– routine/term maintenance and
– periodic maintenance.

The Domestic Construction Industry 8

 … Continued
Participation in Works Contract
• Type of projects by contract and Contractor Groups since July
1997
No of Projects by Local contractors No of
Other Projects
Type of project Total Local Total
Local ERCC by Foreign
Contractors
Contractors contractors
Rehabilitation 1 1 2 20 22
Upgrading 31 7 38 31 69
Construction of 53 4 57 21 78
new roads
Bridge 10 5 15 - 15
Construction
Building 4 - 4 - 4
P. Maintenance 41 9 50 - 50
Routine/Term 48 - 48 - 48
Maintenance
Crushing/Drilling 10 - 10 - 10
Total 198 26 224 72 296

The Domestic Construction Industry 9

 … Continued
Participation in Works Contract
• Awarded Projects to Implementers by Financier group
No of Projects by Local Contractors No of
Other Projects by
Name of Financer Total Local Total
Local ERCC Foreign
Contractors
Contractors Contractors
GOE 161 15 176 14 190
IDA 28 11 39 34 73
Road Fund 8 - 8 1 9
EU - - - 3 3
BADEA/SDF/OFID - - - 2 2
BADEA/OFID 1 1 4 5
ADB - - 8 8
KFW - - - 2 2
GOE/China - 1 1
Kuwait _ _ 1 1
BADEA/SDF/GOE - 1 1
Japan - - - 1 1
Total 198 26 224 72 296

The Domestic Construction Industry 10

 … Continued
Participation in Works Contract
• The Qualification criteria of pre-qualification limits the
participation of local contractors in donors financed projects:
– Turnover & specific experience requirement.
• the Emergency Recovery Program (ERP) funded by IDA has
given quite a lot of opportunity for more participation of local
contractors
• Low financial capacity of the local contractors is a factor for
low participation of local contractors in all cost levels.
• Local Contractors actively participated on:
– projects which cost less than 300 million birr
– but they are participating in all ranges

The Domestic Construction Industry 11

 … Continued
Participation in Works Contract
• No of Projects awarded to local, foreign contractors and ERCC at
different cost intervals

The Domestic Construction Industry 12

 ... Continued
Participation in Services Contract
• Over the last 14 years,
– 306 projects were administered by local consultants, and
– 163 by foreign consultants.
• since July 1997 the local consulting firms are gradually
increasing their share of work in the road sector
– with the increasing emphasis by some of the regional authorities on
competitive bidding for local works
• Participation of consultants in administering projects has
increased at an average annual growth rate of
– 40.6% for the local consultants
– 35.6% for the foreign consultants

The Domestic Construction Industry 13

 ... Continued
Participation in Services Contract
• Consultancy Procurement from July 1997 to 2011

The Domestic Construction Industry 14

 ... Continued
Participation in Services Contract
• Local Consultants administered a large number of supervision
projects followed by design and feasibility/EIA/design projects
• Local Consultants participate at a higher magnitude in service
projects that cost less than 20 million birr
• Local Consultants participated in projects financed by GOE
followed by IDA and Road Fund
• Many local consultants consider that they are unreasonably
disadvantaged by donor policies for they cannot obtain ICB
projects:
– unlike contractors, for donor funded projects; local consultants
generally associate with international consulting firms for ICB services
to carry out design and supervision works

The Domestic Construction Industry 15

 ... Continued
Participation in Services Contract
• Local and Foreign consultants by type of Projects
No of Projects
No of Projects by
Type of project by Foreign Total
Local consultants
consultants
Design 46 27 73
Design & Supervision 21 10 31
Feas/EIA/Design 31 33 64
Consultancy Service 19 2 21
Other Studies 2 4 6
Study 21 16 37
Supervision 151 51 202
TA 15 20 35
Total 306 163 469

The Domestic Construction Industry 16

 ... Continued
Participation in Services Contract
• Awarded projects to Consultants since July 1997 by Project
Cost interval

The Domestic Construction Industry 17

 ... Continued
Participation in Services Contract
• Financers vs. No. of Projects since July 1997
No of Projects No of Projects by
Name of
by Local Foreign Total
Financer
Consultants Consultants
GOE 208 38 246
ADB 5 16 21
EU 2 15 17
ROAD FUND 30 - 30
IDA 48 67 115
JAPAN/IRELA 6 2 8
ND
OFID 2 2 4
KFW - 3 3
BADEA/OFID 1 1 2
Kuwait Fund 1 - 1
NDF - 16 16
GOE/China - 1 1
Others 3 2 5
Total 306 163 469

The Domestic Construction Industry 18

 ... Continued
Performance Indicators for DCI Participation
• Value and Share of Cost of Works Awarded [in Million ETB]
Local Contractors
Other Local ERCC (Previous Foreign Contractors Total Value
Year Contractors ERA's own force) of Money
Awarded
Value % Share Value % Share Value % Share
1998 - - - - 311 100 311
1999 180.3 5.1 - - 3,350.7 94.9 3,530.9
2000 93.5 100 - - - - 93.5
2001 161.4 15.4 369.9 35.4 513.5 49.1 1,044.8
2002 141.9 21.9 110.4 17 395.6 61.1 647.8
2003 569.1 68.4 90.1 10.8 172.5 20.7 831.8
2004 501.3 62.6 12.8 1.6 286.4 35.8 800.5
2005 1,019 40.5 34 1.4 1,460.6 58.1 2513.6
2006 3,248.2 45.6 525.7 7.4 3,356.4 47.1 7,130.3
2007 1,584.4 19.8 1,567.7 19.6 4,866.1 60.7 8,018.2
2008 7,462.6 59.8 64.7 0.5 4,952.5 39.7 12,479.8
2009 2,776.1 17.6 312.2 2 12,660.1 80.4 15,748.4
2010 4,060.2 62.8 1,660.1 25.7 745.4 11.5 6,465.7
2011 8,607.2 64.2 - - 4,798.4 35.8 13,405.5
Total 30,405 41.6 4747.6 6.5 37869.1 51.9 73,021.7

The Domestic Construction Industry 19

 ... Continued
Performance Indicators for DCI Participation
• Value and Share of Cost of Services Awarded [in Million ETB]
Local Consultants Foreign Consultants Total Value of
Year Value % Share Value % Share Money Awarded
1998 7.8 18.9 33.5 81.1 41.3
1999 41.9 29.9 97.9 70.1 139.7
2000 11.7 15.6 63.5 84.4 75.2
2001 9 9.5 85.8 90.5 94.8
2002 33.8 42.2 46.3 57.8 80
2003 21.8 40.8 31.7 59.2 53.4
2004 32.6 27.1 87.5 72.9 120
2005 54.2 42.4 73.8 57.6 128
2006 145.5 32.2 306 67.8 451.5
2007 234.1 80.3 57.3 19.7 291.4
2008 213.1 56.1 166.6 43.9 379.8
2009 163.7 42.6 221 57.4 384.7
2010 663.6 76.9 198.8 23.1 862.4
2011 183.3 43.9 234 56.1 417.3
Total 1,816.1 51.6 1,703.6 48.4 3,519.7

The Domestic Construction Industry 20

 C. Construction Management Practices
of DCI
Construction contractors at Tendering Stage
• Inadequate risk assessment (Tender and Contract
provision particularly material identification,
workmanship, price adjustment, regulation)
• Inappropriate tender pricing and risk allocation
(direct cost, indirect cost, risks and contingencies)
• Poor market analysis
• Tendering capacity assessment
• Resource limitation(Experienced staff shortage)
Planning & Program Development
21
Process
 ... Continued
• Construction Contractors -Construction Phase
Appropriate Equipment
– owned equipment and machineries are quite old with high down time
that require huge volumes of spare parts
– lack of proper equipment management system
– insurers don’t accept construction equipment as collateral
– advanced obsolescence of old equipment increase its operating costs,
and older equipment is more likely to breakdown, reducing its
availability increasing the owners' cost
• Project Management
– Local contractors usually lack project management technique and basic
planning data (project management cycle: Plan, DO, Evaluate)
– Inadequate knowledge about the importance of time in project
management
• equipment time to complete a contract,
• the cost involved with plant being idle waiting parts or
• the need of preventive maintenance programs
The Domestic Construction Industry 22
 ... Continued
Construction Contractors
• Project Management
– shortage of professionals and technical personnel
• highway and structural engineers, mechanics, operators for heavy-duty equipment,
supply and equipment managers, and material inspectors
– difficulty in financial planning, financial analysis & profit planning
(determination of profit, gap b/n expenditure &receipt, utilization for purchased of fixed
asset and working capital,productivity, improper payment utilization)
– Most of the companies are not yet in a position to formulate a
corporate strategy providing a general direction; goal and objective
• Strategic Planning
– There is a little evidence of involvement in future planning and
knowledge of the business plan by the contractors
• Liquidity
– Liquidity problems are a feature of the local contractors, although, in
most case they are hidden by antiquated accounting standards
The Domestic Construction Industry 23
 ... Continued
Construction Contractors
• Liquidity
– Private Contractors are now entering into a situation where they take
their money on new work to finance their completion of existing work
– a vicious circle that will ultimately end in financial disaster for the
contractor unless a major support and injection of capital is provided
• Financial Management
– The detailed financial knowledge of the operations of their business
seems completely absent.
• For example one GC1 contractor could not tell one if one of its major projects is
making profit or loss
– The costing techniques used (usually manual) are basic and incorrect
in their application, possibly leading to decision made on incorrect
information

The Domestic Construction Industry 24

 ... Continued
Construction Contractors
Liquidity
Private Contractors are now entering into a situation where they take
their money on new work to finance their completion of existing work
Pre-qualification Criteria for donor-financed projects
Qualification criteria particularly regarding experience of past
performance, equipment and financial status
situation could not pave the way for local contractors to enter into ICB
contracts
Financial Institutions: Lack of specialized banks
Unlike other countries, there are no banks in Ethiopia that specialize in
helping the construction industry and understand the problems.
EXA: - In Ghana certain banks only deal with the construction industry
and therefore understand problems like bonds and collateral etc.
The Domestic Construction Industry 25
 ... Continued
Construction Contractors

• Equipment Supply Shortage: Plant hiring procedure

– Simple plant hiring procedures are not yet established in Ethiopia
– Many countries have an annual tender for hire companies who must
fix a hire rate per day for 12 months. No major contract is then
required.
• Involvement in many projects
– The involvement of local contractors in too many projects finally
makes them over stretched and unable to manage their resources.

The Domestic Construction Industry 26

 ... Continued
Construction Consultants: General
• Some local consultants lack a thorough understanding of the
Request for Proposals (RFP) and the objectives of the services
• Local Consultants propose personnel,
– who didn't express their agreement and availability,
– only for the purposes of competition and being awarded the service,
– and asking for replacement during the commencement and the
course of implementation of the service.
• Lack of retaining qualified permanent staff contributes a great
deal to this problem
• Some Consultants falsify and modify CVs for the purpose of
meeting the requirements of the RFP and forging the
signatures of the personnel.
27
The Domestic Construction Industry
 ... Continued
Construction Consultants
• Some consultants request for payment for personnel who are
not actually deployed for the time-based service.
• Poor participation and definition of their rights and
responsibilities in their "associations" with Foreign
Consultants
– The term "association" is not clearly defined in their tender
submissions, their contribution being limited.
– Most of the domestic consultants end up in data collection, provision
of logistics and individual personnel and liaison
– Lack of knowledge about the project, absence of frequent visit to the
site and hence, poor transfer of technology
• Lack of own Quality Assurance (QA) system and a failure to
follow the highest ethical standard to implement.
28
The Domestic Construction Industry
 ... Continued
Construction Consultants
Consultants do not strive to create a suitable methodology for
the local conditions. They, instead, copy or adopt what has
been previously developed.
Consultants do not have deep knowledge on the type of
service ERA need (contract conditions procedures, legal issues,
etc…) and in some cases they do not feel accountable for the
service they render
Lack adequate and sufficient experience and even without
having professionals with necessary experience and good team
composition
newly formed and desperate to have a job at significantly lower price
and win, consequently ending up producing low quality work, poor
team composition, fail to meet the client's timeframe
29
The Domestic Construction Industry
 ... Continued
Construction Consultants
Some consultants do not abide by the requirements of TOR and
instructions prepared by the client,
Some consultants present false and unjustifiable background just to
win the Tender and whenever they are found to be the winner, they
come up with staff having limited and inadequate experience
 Nevertheless, the increase in capacity and number of
consultants would indicate that the domestic market was able
to play an important role in the growth of the DCI.
 If the consultants are avoiding the highlighted problems and
focus on providing quality services, they can contribute a lot
towards the growth of the industry

30
The Domestic Construction Industry
 ... Continued
Construction Consultants: Design
 Poor quality of design( Inefficient, non productive, costly and less emphasis
for optimisation of local resources)
 Insufficient data collection and analysis by Design Consultants
 Surveying data is usually inaccurate and prepared out of line with the
requirement of the specifications for the project
- Incorrect reference points(loss and/or widely spaced BM and GPS points)
- Inappropriate route selection.
 Geometric, Hydrology/Hydraulics, Structural designs do not correspond
with actual site requirements
- Inappropriate vertical, horizontal curve, super elevation, widening , and town section designs
- In adequate size, omission and wrong location of structures
 Produced documents are inconsistent with incomplete information
between the Contract Drawings and other design documents such as the
Technical Specification and Contract Drawings.
 Consultants do not carry out sufficient investigation for comprehensive
design
 Material investigation (inaccurate sub grade, incorrect earth work classification, insufficient
construction material)
 hydrological studies, cost-effective geometric routes

31
The Domestic Construction Industry
 ... Continued
Construction Consultants: Design
• Technical Specifications are not properly drafted owing to
requirements of specific projects and locally available materials
• Estimated quantities significantly vary from actual quantities in
project designs
• As there is limited consultation with local authorities at project
design stage, final designs are usually subject to change during
implementation when authorities/public impose their master
plan/demand on cross section, alignment, etc
• Incorrect Cost Estimate that do not reflect current prices based on
actual local quotations which in turn affects budget allocation,
evaluation and cost monitoring
 Most Consultants do not properly implement the QCP on the
project, though they submit one to the client during the services. As
such, Consultants prepare design documents that are particularly
characterized with the above problems.

32
The Domestic Construction Industry
 ... Continued
Construction Consultants: Supervision
• Delay of approval and provision of information to Contractor
– Late or Non decision making by the Supervision Consultants
– Belated Instructions
– Belated Approvals: Working Drawing, Inspection, Measurement Issues
• Delayed certification, evaluation and determination of
Contractor’s requests and Employer’s proposals
• Lack of advisory role to the client
– Delayed and poor quality analysis of variations, claims, Contractor’s
proposals
– Poor design revision based on site condition
– Lack of concern to progress of the works
– Delayed and poor quality reports: Progress Reports, QCP, Inception
Report, Contractor’s Mobilization Report, Updated Project Completion
Cost Report, Etc.
33
The Domestic Construction Industry
 ... Continued
Construction Consultants: Supervision
• Poor Site Recording and Documentation of project status
w.r.t. revised quantity, cost and time parameters
• Low concern for progress of the progress
– Not part of the solution – Only part of the problem
– Reactive problem solving approach – Not Proactive one
– Poor monitoring or progress against Contractor’s program
– Poor monitoring of Contractor’s Mobilization at commencement
– Improper and delayed certification of Contractor’s IPC
– Poor monitoring & concern for quality requirements of the Contract
• Poor monitoring of Contractor’s Subsidiary Obligations
– EIA for material sources, detours, camp site, access roads, etc
– Traffic Management: Plan and monitoring
– HIV/AIDS and STD, Social aspects, ROW Management, etc
34
The Domestic Construction Industry
 ... Continued
Construction Consultants: Supervision
• Absence of experienced key personnel such as Resident
Engineer, Quantity Surveyor, Pavement, Material, Highway,
Structural & Geo-Technical Engineers, Hydrologist, Claims Expert,
etc
• Lack of trust among contracting parties and negative attitude
towards each other distort the team spirit which would
otherwise boost progress if maintained properly.
• Adversarial relationship between Consultant’s and Contractor’s
site staff.
• Lack of understanding of the objectives of the project by the
Consultant’s site staff that lead them to be usually “Fault-
Finders” than being ‘Consulting’ or solving issues at the site level.
• Inaction by the Staff of the Supervision Consultant
35
The Domestic Construction Industry
 ... Continued
Major Challenges: Consultants
• Shortage of qualified professionals (deficiencies in technical,
managerial, financial and entrepreneurial skills)
• limited experience and participation of the private sector in
road and bridge works and maintenance, or the provision of
related consulting services; and and allocation of
inexperienced staffs
• Negligence and lack of professional Ethics within the Sector
• Too diversified in activity without a specific specialization area
• Inadequate data

The Domestic Construction Industry 36

 ... Continued
CASES-IN-POINT: Construction and design
• Durbete – Shahura Project
related
(Terminated by the Employer due to poor performance)
• Sanja – Keraker Project (poor planning, cash flow)
• Humbo – Arbaminch (Initially designed for maintenance and the route alignment
follows the existing road previously built on flood plain, poor planning, cash flow (Cement,
Fuel) lack of equipment, high turnover of staff)
• Wezeka – Gidole(route alignment problem due to slide and other technical parameters)
• Irbeti – Afdera (Contractor’s poor & planning design problem particularly
structures,classification problem)
• Shashemen –Wondogenet- Gemeto (Shortage of equipment on construction
materials due to each flow problem fuel , cement)
• Aleta – Wondo – Daya ( financial problems , inadequate equipment)
• Over Stretched Construction Companies
– 13 on-going construction contracts
– Performance over the last year below expected

The Domestic Construction Industry 37

D. Major Challenges and Prospects for
the DCIfor the construction center,
• Policy level(eg Policy framework
capacity building activities of different associations, assess to
finance equipment lease etc.)
• Construction Industry sector ( sect oral, human resource and
finance.)
• Inadequate competitions
• Inadequate/gap of construction services and supply of
materials.
• an inadequate capital base;
• Shortage of construction equipment: old and limited numbers
of equipment, low levels of equipment availability and
utilization;
The Domestic Construction Industry 38
 …Continued
• deficiencies in technical, managerial, financial and
entrepreneurial skills;
– Substandard Project Management: Supply Chain Management,
Equipment management, Quality Management, Financial
Management, Etc
• limited experience and participation of the private sector in
road and bridge works and maintenance, or the provision of
related civil works; and
• Shortage of qualified Professionals
• Insufficient and ineffective use of local resources
• Lack of Ethical Standards within the Sector

Planning & Program Development

39
Process
 ... Continued
Prospects of the DCI
• The government has placed increased in emphasis on
improvement of the quality and excellent road
infrastructure.
• Road access has been given high priority in the
governments strategic Growth and Transformation Plan
(GTP)
• Especial emphasis on the provision of access through
Universal Rural Road Access Program (URRAP)
• Other Infrastructural works (energy, housing irrigation
schema, Industry)
Planning & Program Development
40
Process
 •E. Efforts Towards DCI

 The Government has given serious attention to the local contractors by

giving priority in government financed projects.
 the local contractors have highly participated in GOE financed projects
followed by IDA and Road Fund financed projects respectively
 Variety of Technical assistance services are conducted(contract
administration, capacity for design and design review support)
 Establishment of variety of systems(PMS, Road Inspection, Quality
Assurance System, FMS, PMUR etc)
 Studies in relation to DCI (SMEC and BCEOM)
 Long and short term training
 Establishment of Research center
 Certification

The Domestic Construction Industry 41

 F. The way forward
• Enhance the Technical Capacity and partnership within DCI
(Employer, Contractor, Consultant)
• Encourage Sub-contracting for Contractors & Consultants
• Relaxed qualification criterion for less complex works to encourage
participation in the Sector
• Performance Appraisal for Employer, Contractor, Consultant
• Quality Management standards in roadwork
• Pro-active Identification/Removal of ROW Obstructions
• Specialization of firms
• Knowledge Management within the sector
• Improve design quality within the sector
• Research on locally available resource
The Domestic Construction Industry 42
 ... Continued
Measures to Improve DCI Performance
System Development by ERA
Works Contract Monitoring System
Progress & Cost Monitoring System
Performance Appraisal System,
Quality Management System
Actions by Government to enhance DCI
Policy measures to increase supply of plant and equipment,
Policy measures to ensure adequate finance,
Policy measures to improve customs systems
human resource development and Capacity Building trainings
for the DCI (operators, engineers, owners, etc)
Increase local participation in the roads sector
Material purchase assistance to local contractors
The Domestic Construction Industry 43
Thank You !!

THE END