Construction industry in need of a reset

I started my journey in the construction industry back in 1992 and since then I have witnessed a slow downward spiral in which the industry finds itself. I am concerned that if the industry does not take a very hard look at itself and do a proper reset that this spiral will continue to the detriment of the contractors.

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Firstly, the clients have for many years now started to push more and more risk onto the contractors and are continually finding ways to get what they see as more bang for their buck. But in reality what they are doing is pushing risk and burden onto the contractors at no additional cost to themselves. What has also happened is that the contractors have started accepting these risks to keep their work force going in hope that there will be an upturn on the next tender this hardly ever happens and so the spiral continues. Combined with the fact the clients want the contractors to sign a waiver of lien and give a on demand guarantee, in most cases he refuses to give the contractor a payment guarantee. The clients also push more and more for unlimited product warranties.

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When I started in construction the main contractors had on average almost double the profit margins they currently have on their own work and in most cases they had almost 5 times the profit and attendance they get on the selected sub-contractors which in essence helped them to take certain risks when pricing jobs, but as time went by these margins became less and less but the risks in construction never get less and as stated above clients have started pushing more risk onto the contractors. What this then means is the profit margins are being eroded from both sides.

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A further element that has been added to the mix is that the current protection to the contractors via the contract is not very helpful as the legal system is very slow, and in the construction industry cashflow is extremely important.

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We have all been schooled on the construction contracts and in many cases we have paid expensive school fees in practice .To sum up in short is that once you get into a legal battle it seems the person with the deepest pockets will come out on top as the legal system is not a short term option it some times takes a year or two to get to any type of headway, and in many instances the clients know that. They then play a game of cat and mouse to outlast the contractor, they hold back the contractors money and then they uses the contractors own money to fight him in court. Knowing very well that they have wounded the contractors cashflow.

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I see the industry in desperate need of a reset, we find that there are many contractors and sub-contractors with cashflow issues. Which largely has been highlighted due to the covid lockdown, these contractors had costs run thru lockdown which has eaten into the financials and caused loses these loses can only be rekindled from profit on new projects which takes time. To add insult to injury most of the suppliers have cut the credit lines, to put this in perspective if you as a contractor is used to doing let’s say R10m per month and you are used to buying let’s say R5m of materials on credit for your active sites suddenly covid comes along your projects get frozen halfway but you as contractor need to keep them safe and protected as well as keep you site team on standby to at a minutes notice be back on site to carry on with the project as if nothing happened. Now you return to site to carry on with all your projects as before and suddenly your suppliers say no now you can only buy R2,5m of material on credit the rest is now cash sales. So suddenly the contractor that already took a knock now finds himself in a position that he needs double the working capital to do the same turnover. These type of issues then easily boil over and create more problems as the clients and professional teams then want to withhold more money in hope to see performance which in this industry to see performance one needs cashflow.

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We all need to start thinking more out of the box and find creative ways around certain problems

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Which is why I believe looking forward the industry needs to embrace building projects on a construction management basis. When doing a project on this basis it is very important that the client pick the correct construction manager as he is the heart beat to the project, this needs to be a person with a lot of construction background. This way of building then in essence allows the client to have much better control over the construction process. The client then has a much more experienced construction team to manage his project. The construction manager gets paid his fees, there is a wet works contractor who does the wet works and get’s paid directly by the client and so does all the selected contractors. All the contractors on the project then become principal contractors. The first big risk that gets managed is there is no main contractor, so the risk of the main contractor going into liquidation or business rescue is off the table. Each trade is a package on it’s own so if one of the contractors does fail it is much easier to replace him and still keep the project on program. There is further much more flexibility as and when each trade is tendered that package can be made to fit the situation on site. On the contractors side there is also much better risk management as each contractor is paid directly by the client there is no middle man. Each contractor also supplies his own guarantee.