CONTRACTORS URGE DIALOGUE ON SA CONSTRUCTION CONTRACTS

• Contractors and MBA North members share their experiences, saying contractors are in a difficult space, with several industry leading companies being forced to close doors
• Unfair practices such as contract amendments to suit the client and withholding payments are a few of the key reasons why contractors are struggling
• And this ultimately stems from the lack of work, from the slow roll-out of infrastructure development projects, which has served to break down the culture of trust that once prevailed in the industry

Construction industry contract changes and conditions that slash margins are increasing risk to contractors and contributing to the downward spiral of the construction sector.

This is according to Master Builders Association North (MBA North) members who say urgent changes must be made to help the construction sector survive.

 The battling construction sector saw at least 88 liquidations last year and a decline of over 7,000 jobs in the past year alone, continuing the trend of the preceding five years.

Contractors cite key issues

MBA North member Wimpie Kies, Construction Manager of Belo & Kies Construction, says contractors face growing cash flow challenges and untenable contractual conditions, with margins slashed to around 1-2%, significantly lower than they were in the past.

He points to unfair business practices such as contract amendments and withholding payment, as well as to slow and costly legal practices that force contractors to accept the situation and ‘take it on the chin’.

“For some years, clients have started to push more and more risk onto the contractors. 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 onto the contractors at no additional cost to themselves,” he says.

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”.

“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. Combined with the fact that the clients want the contractors to sign a waiver of lien and give an on-demand guarantee, in most cases they refuse to give the contractor a payment guarantee. The clients also push more and more for unlimited product warranties.” Ultimately, clients who continually ‘bully and manipulate’ contractors will find that contractors start declining tender opportunities and hiking prices, he says.

These conditions, he notes, 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,” he says. “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.”

Kies says: “In the current model, the main contractor has to beg clients for money to help subcontractors who have cash flow issues. Following the impact of Covid, we now see suppliers, contractors, and main contractors all grappling with cash flow issues, which can slow down work,” he says. “Traditionally, the first reaction a professional team would have is to hold back more money, but this only serves to further slow the project and make the problem bigger, and it puts contractors at risk of liquidation.”

Other MBA North members echo these sentiments, saying contractors are in a difficult space, with several industry leading companies being forced to close doors.

Gavin Morrow, CEO of W30, says: “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.  The pace has increased significantly in the last couple of years with the latest casualty being Gothic Construction, a top-notch contractor.”

Morrow says: “The JBCC contract was deemed a fair contract for all from the client to the contractor.  However, the last time we signed an unedited JBCC contract that hadn’t been edited to suit the clients’ interests was 5-6 years ago. What is often forced on us as contractors is to sign a waiver of lien, or 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.”

He notes: “What is not often talked about when we speak about a contractor going under is the knock on to all the smaller subcontractors who ultimately carry the biggest hit, who now join the begging bowl brigade behind the banks, guarantor providers, SARS and the business rescue practitioners for their cents on the rand.”

Christian Micha, Managing Director at Archstone Construction, adds: “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 and the risk for the main contractor has become unpreventable. Standard practice like Open Tenders have become a thing of the past and have been replaced by Closed Tenders. Also, a trend in recent years is that a large percentage of tender results are not being communicated making it difficult for main building contractors to assume their merit in the market and post tender negotiations is also becoming the norm.”

Back to a tried and tested formula

Kies says: “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.”

Other members agree: “Conversations must be held across the industry spectrum, with employers and consultants, because the status quo is unsustainable.” They call for contractors, sub-contractors and suppliers to stand together to get the industry back to where it once was – with no altering of the JBCC contract, as this method is tried and tested, and worked for all in the past.

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.”

Micha says JBCC contracts are altered as a means of passing down the risk – but this is not the answer. Companies need to assume the risk they signed up for. He says, “As the MBA North, we still have a voice to other governing boards in our sector to revert back to the basic recipe that has been proven to work in the past, in an attempt to save the industry. We had it right before with good business practice. I have no doubt that the construction sector still has a bright future in our country if the right solutions are found and implemented.”

Mohau Mphomela, Executive Director at Master Builders Association North says, “Due to the challenging nature of the business environment, contractors and sub-contractors frequently feel compelled to tolerate unethical business practices, only to later face repercussions. They hesitate to take a stand, fearing exclusion from future opportunities. As an industry association we stand together with our members to advocate for the strict observance of ethical standards, which ultimately benefits all involved.” We urge all stakeholders in the construction industry to stand with us.