Contract changes within the construction industry and conditions that are slashing margins are becoming a growing threat to contractors, “contributing to the downward spiral of the construction sector”.
This is according to Master Builders Association North (MBA North) members who say urgent change is needed to help the construction sector survive.
MBA North says the battling construction sector saw at least 88 liquidations last year and a decline of more than 7 000 jobs in the past year alone, continuing the trend of the past five years.
Belo & Kies Construction construction manager and MBA North member Wimpie Kies says contractors are facing growing cash flow challenges and untenable contractual conditions, with margins slashed to between 1% and 2% – significantly lower than in the past.
He points to unfair business practices such as contract amendments and the withholding of payment, as well as to slow and costly legal practices that are forcing contractors to accept the situation and to “take it on the chin”.
“For some years, clients have started to push more and more risk on to the contractors,” says Kies.
“They are stringing them along for months for payment 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 on to the contractors at no additional cost to themselves.”
Developers have also seen a shrinking market and rising interest rates, with far fewer viable projects.
To counter this, they attempt to “unbalance the contractual risk”, says Kies.
“And contractors have started accepting these risks to keep their workforce going, in the hope that there will be an upturn on the next tender.
“But this hardly ever happens and so the spiral continues.”
Ultimately, clients who continually “bully and manipulate” contractors will find that contractors will decline tender opportunities or hike prices, says Kies.
Conditions such as these, he adds, “are unsustainable”.
More contractors will go into liquidation, resulting in project delays and increased costs as the competitive landscape shrinks.
Quality issues will also start arising as the gap grows between experienced and new skills.
“The experience and knowledge base in the industry is being eroded,” says Kies.
“When a company closes, its employees may change industries altogether, or move abroad for work.
“We see a lot of people leaving for regions like Australia, New Zealand and the Middle East, where there is strong demand for South Africans due to their work ethic and experience.”
Other MBA North members echo these sentiments, saying contractors are in a difficult space, with several industry-leading companies having been forced to close doors.
“Since the collapse of Group 5 in 2019, the construction industry has seen a steady flow of very good main contractors go into business rescue or liquidation,” says W30 CEO Gavin Morrow.
“The pace has increased significantly in the last couple of years, with the latest casualty being Gothic Construction, a top-notch contractor.
“The Joint Building Construction Committee (JBCC) contract is deemed a fair contract for all from the client to the contractor,” notes Morrow.
“However, the last time we signed an unedited JBCC contract that hadn’t been edited to suit the clients’ interests was five to six years ago.
“What is often forced on us as contractors is to sign a waiver of lien, or to issue a construction guarantee for performance. If one doesn’t agree to the conditions, the project goes to the next contractor who would happily accept these terms,” explains Morrow.
“Altering building contracts that were carefully and thoroughly implemented to protect and accommodate all is the reason the construction sector is being taken apart block by block,” says Archstone Construction MD Christian Micha.
Tried and Tested?
“I am concerned that, if the industry does not take a very hard look at itself and address the issues, this spiral will continue, to the detriment of all stakeholders,” comments Kies.
A number of MBA North members are calling for contractors, subcontractors and suppliers to return the industry back to where it once was – with no altering of the JBCC contract – as they believe this method is tried and tested.
JBCC contracts should ideally not be amended, but, if amendments are made, they need to be agreed to by both parties, with changes not imposed by the developer or principal agent.
The industry must stand together and say enough is enough, says Morrow.
“From the clients, professional teams, industry associations and contractors, we need to ensure the playing field is fair, the margins are fair, and the contractor is treated more fairly.
“If we don’t, this industry will collapse, the suppliers linked to the industry will fold and all the secondary markets will be impacted hugely due to the large numbers involved.”