CIDB grading: how your financial statements decide the contracts you can tender for
A contractor's Construction Industry Development Board (CIDB) grade caps the value of public-sector work it may tender for. It is decided by two things, your track record and your available capital, and the second comes straight from your financial statements.
In short
- The CIDB grades on two determinants: construction works (your track record over the last five years) and available capital.
- It assesses capital from your financial statements for the last two years, and looks at your best annual turnover of the two.
- A financial sponsorship, a third-party guarantee, can count towards your capital.
- Your grade is limited by the weaker of the two determinants, so strong financials do not help if your track record is short.
- Late, unreconciled or inconsistent financial statements are a common reason for delay.
What the grade is
The CIDB registers contractors and grades them from 1 to 9. The grade, written with a class of works such as 4GB (general building), sets the highest value of public-sector contract the contractor may tender for. A tender that states a required grade and class is a pass-or-fail test: a bid above your grade is not considered.
The two determinants
The CIDB describes grading as based on two things.
- Construction works, or track record. The CIDB looks at projects you have completed in the last five years in the class of works you are applying for. You supply evidence such as the project award and a completion certificate.
- Available capital. The CIDB looks at your financial statements for the immediate past two years. The most critical figure is your annual turnover, and it considers the best annual turnover of the two years. Capital is the funds presumed available to a contractor to start a new project.
Your grade is set by the weaker of the two. A contractor with strong finances but no completed work at the next level cannot skip a grade, and a contractor with a big project behind them but thin capital is held back by the capital.
Where the financial statements come in
Financial statements are a core part of an application for grades 2 to 9. Secondary sources say they should be audited or independently reviewed, so check the current CIDB requirement for your grade. TBL does not perform audits or reviews. We prepare your financial statements so that your auditor or independent reviewer can sign them off without delay.
What the CIDB reads from them, and what to watch:
- Turnover. It must be correct and complete, and allocated to the right class of works. Underreported turnover or work booked in the wrong period can cost you a grade.
- Net asset value and loans. Retained income, equity and loans from shareholders form part of your available capital. Messy loan accounts make this hard to prove.
- Consistency. The figures must agree with your tax returns and bank statements.
- Timeliness. Statements must cover the required period and be current.
Bank statements and proof of completed projects are also asked for. Documentation that is incomplete or out of date is a common cause of delay.
Financial sponsorship
A financial sponsorship is a guarantee or surety from a third party to cover your liabilities if you cannot meet them. Where your own capital falls short, a sponsorship can help. Take advice before you give or receive one, because the sponsor takes on real risk.
Cash flow and grading
Construction is cash-hungry. You buy materials and pay labour before the client pays you, retentions are held back, and tax and payroll dates do not move. A contractor growing to a higher grade needs enough cash to survive the jump in project size. A 13-week forecast, tracking of certificates and retentions, and disciplined collection all protect the capital that the CIDB is measuring. See our guides to improving cash flow and getting paid on time.
What to do now
- Note your current grade and class and the grade you want, then check the CIDB requirements for it.
- List your completed projects in the last five years with award letters and completion certificates.
- Ask for your last two years of financial statements to be reviewed against what the CIDB reads: turnover, net asset value and loans.
- Reconcile turnover to your tax returns and bank statements.
- Tidy shareholder and director loan accounts so the balances are clear.
- Plan your next application for well before the tender you want to bid on.
Frequently asked questions
Can strong financial statements get me a higher grade on their own?
No. The grade depends on both track record and capital, and the lower of the two limits it.
Do I need audited statements?
Secondary sources say audited or independently reviewed statements are required for grades 2 to 9. Check the current CIDB requirement. We prepare the statements for your auditor or reviewer but do not perform the audit or review.
How long does grading take?
It varies. Apply well ahead of any tender you want to bid on, and make sure your documents are complete.
Sources and further reading
- Requirements for grading, Construction Industry Development Board (cidb)
- CIDB grades explained, TargetTenders (secondary source)
- CIDB grading explained with examples, Tenders SA (secondary source)
This article is general information for South African businesses. It is not tax, legal or financial advice, and it reflects the rules and figures at the date shown above. Tax rules change, so confirm the current position before you act. TBL's practitioners are registered tax practitioners.