The South African Construction Industry – Some things to think about and act on!

The South African Construction Industry – Some things to think about and act on!

The current state of the South African construction industry is testament to the devastating effects of poor management, ineffective, self-serving leadership and the lack of collective vision as to what our future holds or could hold. I am not a politician and so I will stay away from the Governments lack of investment in infrastructure as that topic has been thrashed around for a long time and quite frankly once we have placed or mark on the ballot papers all we can do is hope for an investor friendly, safe living and working environment and demand accountability for service delivery that we expect from central and local government, failing which, we vote them out at the next election.

Let’s rather focus on looking at ourselves as an industry. We have been affected by government spend however we have also been affected by other factors too. Not unlike lemmings we have raced toward the precipice and with a few inches to go, we need to decide if we are going to dig our heels in and sort ourselves out or just jump into the abyss. I believe in capitalism and growth but without social consciousness and integrity it is doomed to destruct what it hopes to create. In days gone by a hand shake and a collective will to complete a project was enough to almost guarantee a successful project – it has become a lot more complicated and sophisticated than that driven by growing competition and the need to win all the time, every time with scant regard to win-win. I am going to focus on a few issues that need to be addressed. I don’t have all the answers but collectively we do and we should give the solutions a lot of attention.

Let’s start with the procurement process. Most of the projects are procured by developers in South Africa (Public and private sector) through a tender process where the lowest bid wins the right to construct the project. The bid documentation is usually a set of drawings and a specification developed to describe the project coupled with a bill of quantities that measures the materials required to build it. There is also a form of contract which sets out the rules of administration that govern the engagement of teams’ party to the contract. This all sounds very reasonable however this is precisely where it all goes wrong in tough times as there is an inherent conflict built into the process.

1)     Developers generally take large risks in procuring work that is attractive to their clients and they rightly expect a decent return for taking that risk and that would generally mean a payback on investment of say 20% and anything less would be deemed to be marginal in a risk and reward balance and it would be better to leave their money in a bank.

2)     Professional teams being architects, engineers and quantity surveyors are generally rewarded through fees based on contract value that would allow them to make a return of say 10% on their staffs’ work in detailing, quantifying the works and managing the process.

3)     Contractors who build the projects are rewarded by building the project and if they do it properly, having a positive cash flow (they are not in the business to fund client’s projects) and making a margin on the work delivered. This margin is subject to doing it efficiently to the quality specified and in the time agreed. This margin can therefore vary in many ways and is affected by the methodology chosen to execute the project, and the quality of the construction team. (the current margins prevailing in the industry are around 4.5% not many industries would consider getting out of bed for this especially so with the level of risk that is accepted)

I mention the points above for the layman but also as a pointer to the behaviours that make this process dangerous and subject to the greed trigger. OUR INDUSTRY HAS BECOME ADVERSARIAL TO THE POINT OF SELF DESTRUCTION.

Developers often amend standard forms of contracts to pass added risk onto the contractor and this is not a problem as the contractor can accept the risk and price it or not accept the risk. It is however prevalent that contracts are amended in such a way that the developers pass on inappropriate risk to the contractor (risk that they are ill equipped to manage) and contractors are put under a lot of pressure to accept these risks. Too often companies accept the risk without proper consideration of the impact this can have to their businesses.

Why do contractors do this? Both large corporate construction companies and smaller contractors, and just about everyone in the value chain have been driven to this behaviour because they are currently caught in a perfect storm. Seeking new work in an unattractive investment climate with the effect of reduced construction opportunity, the pressure to grow revenue and “profit” and to secure work to keep their teams busy. What has transpired is that the risks accepted have come home to haunt them and they have posted large losses and / or have gone out of business.

The simple fact since 2010 the weak business environment has been accelerating, creating an era of unsustainable competition, coupled with the correctly proven assumption by unscrupulous developers, both public and private, that “there will always be a company that will accept the risk and as long as they have a balance sheet, and we will continue pushing the risk down until they fail” and this has now reached breaking point. It makes me both sad and angry that companies like G5, Basil Read, NMC, Liviero, Pro-Build and countless other smaller contractors and sub-contractors have fallen into the abyss.

This process has got to change before we kill our industry and allow the large foreign businesses to take their place at our table. We should perhaps consider a move closer towards the French model where the lowest and highest bidders on any tender are excluded and the evaluation and award of contracts is not concluded on price alone. I have not yet met the South African developer who walks that talk.

Likewise, professional consultants have been challenged to reduce their fees out of proportion and below industry agreed scales and in many cases have accepted incentives or penalties on performance in order to be awarded professional commissions, the upshot of which is that they have had to cut costs which has had the effect that expertise and staff compliment required to design and / or administer the project has not met with the required standard or where a design error has been made, the contractor has been an easy target to recoup a loss. This has been a contributing factor to the adversarial contracting style prevailing in our industry.

On the face of it, the better the documentation is at tender stage, the more robust the tender and the greater the predictability of the outcome will be. Too many projects are only half designed and poorly specified when the are started. Consultants should be appointed at industry agreed fee levels based on their design proposals and expertise of the team that they put forward for the specific project. The second thing that really makes my blood boil is that they should be independent (that’s why the industry fee scales were agreed in the first place) and I personally would view any developer with in-house consultancy services as a material risk if I was to consider contracting with them as there is no independence and if they choose this route why do they not have their own in-house construction team other than to mitigate risk.

There is a prevalence of questionable ethics being demonstrated in the documentation and evaluation of tenders. This is especially apparent in the building industry and specifically adjudicating process of tender submissions by selected sub-contractors. (a form of nominated sub-contract) This work makes up a significant portion of a building project and can be up to 75% of the contract value. The sub-contractor is selected by the developer on price and then effectively employed by the main contractor who in turn takes on the performance risk for a small percentage. (In the current market 4% or lower) These tenders are more than often obtained with minimal input of the main contractor and although the main contractor has the right of refusal this is rarely done due to trying to maintain relationships with developers and the carrot of repeat work offered irrespective of who the contractor is. Repeat business is after all a construction businesses Holy Grail.

There is also lots of hearsay evidence about “shopping prices” where main contractors have tendered on the work and then elements of the submitted price are challenged based on the difference between the competing bidders’ price structures. Post tender negotiation is supposed to be conducted independently on price, methodology and team capability. The tender process is quite simply being abused. Ethics and Integrity are bandied about by everyone but ignored by many.

On to the administration of contracts – and you must ask why the commercial construction lawyers have such plush offices in all our major cities? They write the contracts and amend them in a way that favours the client and it is precisely because we do not administer our contracts correctly and get into all kinds of disputes. These vary same lawyers represent the parties in unravelling the disputes for lots of our hard earned money.

No-matter how onerous the contracts may be, contractors must protect themselves by administrating the process correctly. Do not fall into the trap of reducing your P&G by one or two quantity surveyors because your client thinks your P&G is too high. If I hear one more consultant ask the question “why are you putting notices in?” or state “we do not like engaging with claims conscious contractors we will park this issue and deal with it at the end of the project” I will have a serious sense of humour failure. If they do not want the contractor to put notices in then they need to change the contract to reflect that requirement.

The simple message is that contractors need to take care and administer the contract properly and thereby increase the chances of being properly reimbursed. Notices are not necessarily a pre-curser for a claim, they are put in the contract as a formal way of informing the client that something has changed in the tendered design or contemplated execution methodology that may affect the contractor’s ability to deliver in line with the accepted tender submission and such gives the client the ability to mitigate or accept as may be the case.

Contracts envisage the employer paying the contractor fairly for services delivered and this is usually done through a certification process where the contractor applies for certification of works executed during the month. This application should be checked for accuracy by the independent quantity surveyor, and certified for payment and paid within the agreed time. It is not acceptable that this process is abused and often used as an opportunity to cut the contractors application or pay them late without valid, communicated reason and agreed deduction. Cash is the life blood of our industry if the contractors are short changed it ripples down through the whole value chain from main contractor to sub-contractors to suppliers and at the current prevailing circa 4% margins it only takes a 5% cut in value certified to put companies under sever and often terminal financial pressure. Please think about it – every certificate attracts an interim payment which is not finally agreed until completion and settlement of the final account so why not do your checks or pay what is applied for and adjust if necessary in the next application and be part of the solution. It is not clever to be a contract basher! The process was not envisaged as a tool to use contractors to assist in funding the employers’ development.

Another major issue is employee competence in all the disciplines contributing to the value chain which has been badly compromised for many years. Our curriculum in institutes of higher learning and trade schools are out of touch with the changing requirements of our industry. How are we going to get better without understanding the “competency tools” required to deliver quality consistently and having the curriculum to match those requirements. Gone are the days (in our industry) where newly qualified people were properly managed when first entering the work place and their competency supplemented by proper on the job training and career mapping, for them to collect the tools to grow and progress through the organisations. When last have you heard of a newly qualified architect or design engineer being seconded out to work for a contractor for a year so they get to understand build-ability and clash detection and when last has a young engineer been put onto a sewer pipe laying team to learn what it takes to lay pipes correctly? Where are the city and guilds qualified tradesmen and women? Simply put we have failed the new generations through under equipping and over promoting our employees and in the process made our industry unattractive all because the first thing to give during the tough times has been the training and development budget. The second part of the famous saying “Why should we train them just to watch them leave – what if we don’t train them and they stay” has come home to roost.

Lastly there is the growing issue of “The Construction Mafia” which needs to be faced head on. Contractors and construction consultants are not equipped to deal with this unlawful risk. Contractors and consultants need protection from unlawful and intimidating tactics used by “the Mafia” and must have the contractual right to suspend with immediate effect should this occur. The whole process must be properly managed and not fobbed of onto the contractors by developers unwilling to do the leg work. At a recent engagement at Wits University where this was openly discussed in the presence of the so called “Mafia” it was quite refreshing to hear that they want the same thing as we contractors do and have been driven to use their disruptive tactics out of extreme frustration. This is not to say that the lawless opportunists have not jumped on the bus.

Proper communication and engagement with the communities in which you develop is the developer’s responsibility. If you wish for a percentage of the project to be constructed by the local community or an expectation of local community involvement is discussed and created at planning stage then a transparent well-developed plan for their inclusion needs to be detailed with provisions for training, minimum competency and quality expectation. This needs to be supplemented with expressed and agreed terms of engagement and acceptable behaviour parameters. In other words, a clear set of rules needs to be captured in the tender.

It is irresponsible to create an expectation and not to create a robust framework as an enabler for delivery of that expectation.

Individually we should all be able to go to work knowing that we will be safe and can enjoy ourselves. Collectively we should, by working smart and working as a team, aspire to consistently deliver quality on time in the knowledge that we will be rewarded fairly for our work. Always look for a win – win solution so we can celebrate each other’s successes, and support each other in crisis and through the process build a better country.



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