Contractors, subcontractors on thin ice as construction sector woes worsen
Contractors, subcontractors on thin ice as construction sector woes worsen
By Master Builders Association North
The entire construction industry value chain is at risk of collapsing as shrinking margins, unfair practices, and payment issues continue to undermine the sector.
This is according to members of the Master Builders Association (MBA) North, who warn that urgent dialogue and change is needed to address industry issues and avoid further job losses and bankruptcies.
Mohau Mphomela, an executive director of MBA North, said: “The industry is bleeding… It’s in dire straits. Stakeholders need to use the power of associating and association form a united front and stand together to take action.”
MBA North members say the single biggest challenge facing the sector is ongoing payment delays and non-payment. This situation has worsened in recent years, eating into financial reserves and putting businesses at risk. Smaller businesses, subcontractors and contractors are most vulnerable to payment issues, which have a ripple effect up and down the value chain.
Subcontractors who are losing income and incurring debt, must pay labourers and suppliers without making any profit, and are frequently forced to wait months or even years for payment.
Some subcontractor problems arise from delayed retention payments for their completed work until the whole project is completed; this can mean that subcontractors do not get paid for years.
In many cases, principal contractors retain monies that are due to subcontractors – in some cases this is to make up the shortfall from non-payment of previously completed contracts. And in other cases clients, developers or main contractors are declared insolvent, leaving subcontractors unpaid for work completed.
Wanda Merrington, a MBA North member from Combined Flooring, said liquidations and changes in the sector in the past few years meant that up to 80% of the contract value was now carried out by subcontractors.
“Years ago, the principal or main contractors employed most of the skills required on a contract in-house. It’s not like it was 10 years ago, when we had major multinationals with strong cash flows and large workforces.”
Mphomela said: “Many of the first-tier contractors have gone into liquidation, so the second tier has moved up, using subcontractors to get the work done, and being the holder of the funds.”
However, many of these contractors may lack the experience, resources and cash reserves the multinational contractors had.
Merrington said subcontractors waited for final completion or works completion before being paid in full which could take a long time and in some instances many years.
Neil Duncan, a past president of MBA North and chair of the MBA North subcontractor subcommittee, said: “This is not just a subcontractor problem – it’s an industry problem. If a main contractor gets into financial trouble by virtue of a contract going sour or through poor performance on his part, it impacts the entire industry – suppliers, main contractors, and hugely on subcontractors.”
Another past president of MBA North, Nico Maas of Gauteng Piling, said his company had lost more than R9 million in income in recent years, with outstanding debt of R11m because of non-payment. “We’re a small company with 22 permanent employees. Our very survival is threatened.
“A solution to the retention monies being withheld by main contractors is that the money be paid into a retention fund, which is held by the fund holder until the contract is signed off by the client’s agent,” said Maas.
The Federated Employers Mutual Assurance Company (FEM) has got such a fund and is widely used by members of the Electrical Contractors Association (ECA).
Maas suggested that retention monies in all forms could be paid into this fund, even retentions being withheld by client bodies on main contractors.
“This will safeguard the main contractors should the client go out of business, which has also been happening more and more lately,” he said.
Uwe Putlitz, former CEO of the Joint Building Contracts Committee (JBCC), points to contracts and a lack of best practice as key factors influencing these challenges.
“Subcontractors must conduct due diligence on prospective clients, and should insist on industry recognised contracts that are fair to both parties,” he said.
This contract should be transparent, fair, and fully detail the entire agreement, variables and penalties, said Putlitz.
JBCC® standard-form contracts have been drafted over the past 50 years to ensure all role players are treated fairly, but are often unilaterally amended and adapted in such a way that risk is transferred from clients and developers down to subcontractors.
MBA North members said many contractors and subcontractors sign contracts they do not fully understand or which put their businesses at risk simply to bring in much-needed business.
Duncan advised: “Subcontractors should stay closely in touch with the financial management of prospective clients. There’s never smoke without a fire, so they should do their homework on financials and payment records of both the main contractors and the clients. They should also not accept contracts and amendments without giving them careful consideration. If you are going to debate anything, you need to do it before you sign the contract.”
Putlitz said the standard JBCC® subcontract was periodically modified with amendments, running into many pages of often contradictory detail.
“Some subcontractors recently indicated that they don’t want to use this contract – it is too long. Principal contracts have been drafted to proactively to address most issues that can go wrong and have incorporated such wording in subcontracts.
“We need to simplify legal documents and make them more user-friendly as has been done in the UK,” he said. He pointed to the JBCC® small and simple works contract as an example.
The agreements should also contain clear and inexpensive provisions for dispute resolution, such as “low-value dispute adjudication” promoted by the Construction Adjudication Association of SA, he said.
Maas added: “The abuse of the subcontract document is a major problem. The document should be revised to be more fair to subcontractors.”
Brad Boertje of Borcon, who is also the risk-management consultant and legal and commercial adviser to MBA North, warned that contractors and subcontractors should not neglect best practices. “Many fail to fill out the schedules with all the variables, timelines etc. This schedule also includes important information like the penalty the main contractor will pay if they are late. Populating the variables is crucial if matters deteriorate to dispute resolution.”
Many of the issues plaguing contractors are administrative issues, he said, and many of the disputes he assists with relate to payment. “When payment schedules are ignored by the main contractor and the variables are not completed in the payment schedule, it creates fertile ground for disputes.”
Changes to the JBCC® contracts should be discouraged; JBCC® contracts create reassurance and simplicity in the process but altering them creates lengthy and complex forms, he said.
“Next job syndrome” is a challenge, Mphomela said. “Members are signing unfair contracts and committing to illegal practices to avoid losing out on future opportunities. They fear they will lose opportunities and be prejudiced in future jobs if they don’t agree to contract terms.”
He said MBA North issued a practice note recently, where members pledged to counter unfair business practices. “We call on members to follow through and hold to this agreement. As an association, the time has come to say enough is enough – we must present a united front to demand adherence to ethical practices – to the benefit of all stakeholders.”
“The association commits itself to being the voice for members; and we encourage our members to use the power of the collective. Standing together for the good of the industry has the potential to turn things around,” Mphomela said.
BUSINESS REPORT