SA’S CONSTRUCTION SECTOR: IDENTIFYING AND MITIGATING KEY RISKS

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Despite high expectations for South Africa’s Economic Reconstruction and Recovery Plan, which was issued out by President Ramaphosa on 15 October 2020, delays in the roll-out of these initiatives have restricted the growth prospects of the local construction industry.

This, coupled with factors such as the tangible impact of the economic slowdown and the loss of skilled labour, represents some of the biggest risks facing the construction sector.

This is the view of Koketso Shabalala, Underwriting Head of Construction and Single Projects at SHA Risk Specialists, a division of Santam, who has found that client forecasts have remained relatively conservative in 2023. Many of SHA’s clients have estimated lower turnovers compared to 2022, or similar projections, despite actual results coming in at above turnover. In his experience, this conservative cautious approach typically reflects a notable decline in project pipelines, most likely as a result of a lack in new infrastructure projects.

These findings correspond with the latest results of the Afrimat Construction Index (ACI), which saw the sector take a dip in the first quarter of 2023 in comparison to the same period in 2022. For 2023, a positive trajectory resulting in year-on-year growth was forecast, given the performance of the industry in the third quarter of 2022. The expectation, however, was eroded by the lull experienced across the sector with the onset of the December holidays.

Economic turbulence takes its toll

Like countless other sectors, construction has been hard-hit by the economic downturn, amidst a range of other contributing factors. As Shabalala explains: “these factors include the prevalent shortage of new infrastructure projects – a reality that has seen an increased number of contractors bidding for a limited number of projects.” This has driven prices down to nearly unsustainable levels.

Added to this is the increasing cost of construction materials, which in turn has a negative effect on the availability of employment opportunities. The result has been a price war on the employment front, with more workers competing for a limited number of jobs at lower rates of compensation.”

The loss of skilled labour and its impact on the sector

The loss of skilled labour has created a skills vacuum, not just with regards to the current operations of construction companies and the execution of projects, but also in terms of the developmental prospects of graduates. The increasing rate at which skilled veterans of the trade are exiting the industry, has undermined the ability of experts to transfer knowledge and expertise to graduates and interns entering the construction space.

“The loss of skills and the resultant knowledge and expertise gap will continue to have a marked impact on the construction industry, which will face losses related to the quality of work and a reduction in the resilience and structural integrity of end products,” says Shabalala.

How insurance can mitigate the unique risks facing the industry

Faced with the turbulence of the current environment, construction companies need to hone their focus on effective risk management and mitigation strategies. A major part of such an approach should involve obtaining insurance cover that can protect companies from litigation and liability exposures, which can be crippling from a cost perspective, should an incident arise.

In particular, and as a direct response to the emerging risks presented within the current climate, products such as public liability insurance could provide a much-needed safeguard against any damage caused to a third-party or their property during the execution of a construction project.

As Shabalala explains: “At a time during which many construction companies are facing excessive financial strain, the legal costs and repercussions related to third-party incidents could simply be too much for a company to absorb. During tough financial times, having a buffer against these kinds of risks can make all the difference.”

Furthermore, professional indemnity cover, which provides protection against an alleged breach of professional duty – ranging from the design phase to the supervision and implementation of designs – is a vital vanguard in sectors where formal qualifications are required. When an error or oversight is identified, incurring the relevant costs and remedying the defects can cut into company profits and threaten business continuity.

Shabalala concludes: “Partnering with the right Insurer and broker can prove invaluable in choosing the most appropriate insurance and risk mitigation strategies to prepare for the unexpected. SHA, however, remains confident that in the medium- to long-term, the rollout of the Economic Reconstruction and Recovery Plan will provide the industry with the buoyancy it needs to regain traction and become more resilient to navigate the current economic climate and emerging risks in the near future.”