Construction Industry Council

CIC/SBC/R/006/08Proposal for Taking Over the Operations of VSRS from Hong KongConstruction Association (HKCA) and Phasing Out PCICB RegistrationLimited (PRL)4. Members noted that the CIC Secretariat had an initial proposal on takingover the operations of the VSRS as follows:(a)(b)Initial phase− HKCA to remain as the Scheme Operator for another 6months− The CIC Secretariat to take over from the DevelopmentBureau the secretarial services for the ManagementCommittee of the VSRS− CIC to be the Scheme Owner by 1 January 2009 and PRL tobe closed accordinglyFinal phase− The CIC Secretariat to perform the role of Scheme Operator− Additional staff to be in place to administer the VSRS− A new computer system to be developed to improveoperational efficiency and to cater for Stage 2 of the VSRS− A suitable location to be identified for accommodating theVSRS office− The operational process to be reviewed with a view tostreamlining relevant procedures5. Members also noted that HKCA had proposed not to renew the currentservice agreement after 25 November 2008 considering its constraints on internalresources. However, the Chairman cautioned that there would be insufficient timefor the CIC Secretariat to familiar with the operations by 25 November 2008. Tominimize operational risks, HKCA was advised to consider continuing itsobligation to ensure the smooth running of the VSRS.6. A Member advised the CIC Secretariat to explore whether the existence ofPRL would be helpful to screen off unnecessary liability before proceeding to windup PRL.7. The Committee agreed to adopt the proposal on taking over the operationsof the VSRS as described in paragraph 4 subject to –(a)further discussion with HKCA on the renewal of the currentservice agreement; and2

CIC/SBC/R/006/08(b)endorsement on resources deployment by the Committee onAdministration and Finance.[Post-meeting note: HKCA has agreed to renew the current service agreement foranother six months until 25 May 2009. The Committee on Finance andAdministration has approved the recruitment of a manager and three clerical stafffor the operations of the VSRS.]Security of Payment – Assessing the Nature and Extent of the ProblemSurvey Findings on General Building Contractors’ and Specialist Contractors’Status on Cash Flow and Other Related Issues (Survey on Contractors) by HongKong Construction Association (HKCA)[Mr Thomas Tse of HKCA together with Dr Robert Chung, Ms Karie Pang and MsWinnie Lee of HKU joined the meeting at this juncture.]8. HKCA commissioned the Public Opinion Programme at the University ofHong Kong (HKU) to conduct the Survey on Contractors to reveal cash flowproblems faced by contractors. Target respondents included members of HKCAand The Hong Kong Federation of Electrical and Mechanical Contractors Limited.Members received a presentation from Dr Robert Chung and major findings weresummarized as below –(a)(b)(c)(d)Inflation and high cost of materials was a major problem facingcontractors. Another critical problem was outstanding paymentsfrom the other contracting parties.“Variations under assessment” was the main reason for payment indisagreement with the other contracting parties.The mean percentage of overall payment withheld due todisagreement/dispute with employers or other contract parties overthe past 12 months was 10% of the original contract sum.“Insufficiency of cash flow” was not considered as a seriousproblem by contractors while the severity of “Outstanding paymentto subcontractors” was even lower.[Mr K H Tao left the meeting at 4:00 pm.]9. Dr Chung added that the survey results were worked out from the numberof respondents only without taking account of the respective market shares.3

CIC/SBC/R/006/08[Mr Thomas Tse, Dr Robert Chung, Ms Karie Pang and Ms Winnie Lee left themeeting after the presentation.]10. Members acknowledged that the problems of outstanding payment fromthe other contracting parties and payments withheld due to disputes would deservefurther study.Survey on Cash Flow Problems in the Construction Supply Chain11. The Survey on Contractors reflected that the main contractors sufferedfrom outstanding payments. Members wondered why the situation neithertransmitted into cash flow problems nor impacted on downstream subcontractors.However, the Survey on Contractors did not probe into the issues due to limitedresources allocated by HKCA.12. Members considered obtaining a complete picture of the problemsencountered by other parts of the supply chain through a comprehensive surveywas necessary. As for the survey methodology, it should be based on thequestionnaires for the HKCA survey with modifications to address the differentpositions of developers, consultants, subcontractors and suppliers. The findings ofthe proposed survey should be analyzed jointly with the findings of Survey onContractors to come up with an overall picture relating to cash flow andoutstanding payment issues in the industry. As such, Members agreed tocommission a comprehensive survey with a view to analyzing the problem ofsecurity of payment in the industry and considering the necessity andappropriateness of resolving the problem through legislation13. To obtain funding for the proposed survey, the CIC Secretariat would makea submission to the Committee on Administration and Finance for consideration.[Post-meeting note: The Committee on Administration and Finance at its meetingof 26 September 2008 agreed that the funding request be considered directly byCIC.]Escrow Accounts for Retention Money14. Members noted the discussion at the CIC meeting held on 28 August 2008regarding the legal viability for CIC to manage escrow accounts and agreed theCIC Secretariat to seek legal advice on the issue and report the result to theCommittee at the next meeting.4

CIC/SBC/R/006/08Findings of Survey on the Register of Subcontractors (Stage 2 of the VSRS)15. The proposed structure and key parameters for the Register ofSubcontractors were found to be affirmative according to the survey findings. Anoverwhelming majority of the respondents indicated their support for the 3-graderegister and the adoption of the existing trade classification for the proposedregister. As for setting financial limits on the value of individual subcontractsundertaken by subcontractors of the entry grade and the intermediate grade,majority of the respondents supported the proposal.16. Members agreed that proper consultation with subcontractors would benecessary as to setting the entry requirements and the financial limits for each grade.With Mr TSE Chun-yuen as the leader and the assistance of Mr Lawrence NG, theCIC Secretariat would work with Mr TSE and Mr NG to form a working group torecommend a suitable structure. A Member suggested the working group toconsider setting compliance with safety standards as one of the entry requirementsand formulating a re-grading mechanism within the register.Update on Work Plan17. Members noted the updated work plan. The CIC Secretariat was asked toseparate “Guidelines on Measures for Protection of Workers’ Entitlement to WagePayment” as an individual item while other possible solutions to address theproblem of security of payment could be further investigated in the discussion of“Security of Payment”. It was envisaged that the latter would take longer time.[Post-meeting note: A revised work plan is at Annex B.]Enhanced Ethical Status (EES) for Subcontractors Registered on the VSRS18. It was reported that an informal meeting was held on 4 August 2008 todiscuss the revised Rules and Procedures of the Primary Register for the purpose ofintroducing EES in the VSRS. They had also touched on the feasibility of makinguse of an independent list instead of the VSRS because ICAC only aimed to assistOwners’ Corporations in identify ethical contractors for building maintenanceworks but not all subcontractors.19. In response to Members’ request for clarifying whether the Committee hadconfirmed to support using the VSRS as a platform for introducing the EES, theCIC Secretariat was requested to circulate to Members the relevant meeting recordfor further perusal.5

CIC/SBC/R/006/08[Post-meeting note: Extracts from the meeting records of the following meetings(Annex C) were circulated to Members by an email on 25 September 2008:− the 4 th Progress Report and the 5 th Progress Report of the Committee− the 9 th Meeting of Construction Industry Council− the informal meeting held on 4 Aug 2008 ]20. As to the definition of “collusion”, Members agreed to adopt the definitionstipulated in the tender documents of the Housing Department.21. ICAC confirmed that they would not insist on including the requirement torevoke the registration status of a subcontractor involved in misconduct beforeconviction.22. In view of the ICAC’s latest position and the consensus on the definition of“collusion”, the CIC Secretariat was directed to further study the introduction of theEES in the VSRS to facilitate Members’ discussion at the next meeting.Further Actions23. The following further actions were agreed –(a)(b)(c)(d)(e)the CIC Secretariat would further discuss with HKCA on therenewal of service agreement regarding the operations of theVSRS;the CIC Secretariat would seek endorsement from the Committeeon Administration and Finance on resources deployment for takingover the operations of the VSRS;the CIC Secretariat would seek legal advice on whether theexistence of PRL would be helpful to screen off unnecessaryliability;the CIC Secretariat would solicit funding support from CIC tocommission the comprehensive survey on problems of cash flowand outstanding payments in the construction supply chain;the CIC Secretariat would seek legal advice on the legality ofmanaging escrow accounts for retention money by CIC;6

CIC/SBC/R/006/08(f)(g)a working group would be formed to advise on entry requirementsand financial limits to be applied on each grade of the Register ofSubcontractors under Stage 2 of the VSRS; andthe Secretariat would circulate again the relevant minutes andprogress reports on the discussion of introducing EES forsubcontractors registered on the VSRS and would prepare a paperto facilitate Members’ discussion at the next meeting.CIC SecretariatSeptember 20087

CIC/SBC/R/006/08Annex ACommittee on Subcontracting6 th Meeting held at 2:30 pm on 17 September 2008in Conference Room 1201, Murray BuildingRecord of AttendancePresentMr S S LEEMs Teresa CHENGMr CHEUNG Tat-tongMr James CHIUMr TSE Chun-yuenMr Conrad WONGMr Bernard HUIMr Lawrence NGMr LAW Wai-taiMr C S SOMr WONG Sing-lamMr LAM Siu-tongMs Sonia YUNGMr T F LEUNGMr S H TSOMr W H MOKChairmanThe Hong Kong Institute of ArchitectsHong Kong Marble and Granite MerchantsAssociationHsin Chong Construction Co. Ltd.Henderson Land Development Co. Ltd.Contractor’s Authorized Signatory AssociationBuildings DepartmentHousing DepartmentDevelopment BureauLabour DepartmentIndependent Commission Against CorruptionApologiesMr Thomas CHANMr CHOI Chun-waMr Stanley HUIIr Edgar KWANMr WAN Koon-sunMr YU Wai-waiMr Paul CHONGMr LAI Chi-hungMr CHEUNG Tak-hingMr YAU Hung-yuenMr Joseph NGPermanent Secretary for Transport and Housing(Housing)The Hong Kong Federation of Electrical andMechanical ContractorsHong Kong Construction Industry Employees’ GeneralUnionConstruction Site Workers General UnionAssociation of Electrical ContractorsHong Kong General Building Contractors Association

CIC/SBC/R/006/08Annex AIn AttendanceCIC SecretariatMr Christopher TO Executive DirectorMr Ivan WONG Senior Manager (Council Services) 2Ms Phoebe LEUNG Manager (Council Services) 2Development BureauMr K H TAOMr Rico CHEUNGChief Assistant Secretary for Development(Works) 1Assistant Secretary for Development (Works)Policy and Development 3For discussion on “Survey on Contractors” onlyMr Thomas TSEDr Robert CHUNGMs Karie PANGMs Winnie LEEHong Kong Construction Association)) The University of Hong Kong)A2

CIC/SBC/R/006/08Annex B(IV)Guidelines on Administration Charges for Reporting of SiteAccidentsScheduleNov 2008Mar 2009TaskDistribution of guidelinesReview of the usage of guidelines(V)Guidelines on Measures for Protection of Workers’ Entitlement toWage PaymentScheduleJan 2009Feb 2009TaskEndorsement of guidelines by CommitteeApproval of guidelines by CIC for promulgationCIC SecretariatSeptember 2008B3

CIC/SBC/R/006/08Annex CDate Meeting Extract from Progress Report / Minutes7 April 4 th meeting of 11. ICAC proposed to use the VSRS as one2008 Committee on of the platforms for achieving this objective bySubcontracting introducing the Enhanced Ethical CommitmentScheme (EECS) whereby RegisteredSubcontractors not having been subject to anyregulatory actions under clause 10 of the Rulesand Procedures of the Primary Register couldapply to join the EECS by promulgating anenhanced company code on ethic (in addition toissuing the company policy on ethics underclause 19 of the Rules and Procedures) pledgingnot to collude with other parties in the biddingand implementation of any construction contractsand to declare any actual or potential conflict ofinterest in bidding and executing constructionworks.12. To assure the credibility of the EECS,the Management Committee could revoke EECSstatus of a Registered Subcontractor underspecified circumstances including any regulatoryactions being taken against the RegisteredSubcontractors, its failure to comply with theenhanced company code on ethics, conviction ofits senior staff for criminal offences involvingcorruption or fraud, embezzlement and theft inconnection with construction works, availabilityof substantial evidence of such misconduct orwinding up or bankruptcy of the company.13. Members supported the proposal inprinciple but were concerned about thepossibility that EECS status being revoked forcorruption offences before actual convictions.The Secretariat was directed to give carefulconsideration to this aspect in revising the Rulesand Procedures for implementing the scheme andcirculate the draft to Members for comments.