South Africa’s construction industry is on the brink

The South African construction industry is facing a potential collapse due to shrinking margins, unfair practices, and rampant delays or outright refusal to pay subcontractors.

This warning comes from the Master Builders Association (MBA) North, urging for urgent action to prevent further job losses and bankruptcies.

“The industry is bleeding – it’s in dire straits,” said Mohau Mphomela, Executive Director of MBA North.

Bleeding industry: Subcontractors bear the brunt

MBA North members highlight delayed and non-payment as one of the biggest challenges to South Africa’s construction sector.

Smaller businesses, especially subcontractors, are most vulnerable, often waiting months or even years for payment, even after completing their work, according to MBA North.

This financial strain puts them at risk as they struggle to pay workers and suppliers.

“Sub-contractors who are losing income, incurring debt, must pay labourers and suppliers without making any profits, are frequently forced to wait months or even years for payment,” said MBA North.

Past president of MBA North, Nico Maas of Gauteng Piling, said that his company has lost over R9 million in income in recent years, with outstanding debt of R11 million because of non-payment. “We are a small company with 22 permanent employees [and] our very survival is threatened,” said Maas.

The problem is compounded by the increasing reliance on subcontractors due to increased liquidations of other companies over the years.

Unlike the past where contractors employed most of the workforce in-house, today, up to 80% of the work is done by subcontractors who may lack the experience, resources and cash reserves the multinational contractors had, said MBA North member Wanda Merrington.

However, Neil Duncan, chair of the MBA North Sub-contractor sub-committee, said that “this is not just a sub-contractor 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,” said Duncan.

Solutions proposed

The MBA North have proposed several solutions to this, which include:

• Retention funds:

One suggestion is to create a system where retention monies withheld by main contractors are deposited in a secure fund accessible only after project completion and client approval.

The Federated Employers Mutual Assurance Company has got such a fund – and is widely used by members of the Electrical Contractors Association.

Maas suggests that retention monies in all forms can be paid into this fund, even retentions being withheld by client bodies on main contractors as it “will safeguard the main contractors should the client go out of business, which has also been happening more and more lately.”

• Fair contracts:

Former CEO of the Joint Building Contracts Committee, Uwe Putlitz, identifies contracts and a lack of best practice as key factors influencing these challenges.

“Sub-contractors must conduct due diligence on prospective clients, and should insist on industry recognised contracts that are fair to both parties,” said Putlitz.

Standardised and fair contracts that clearly outline terms, timelines, and penalties are crucial, say the MBA. Overly complex or unilaterally amended contracts that transfer risk unfairly to subcontractors need to be addressed.

This contract should be transparent, fair, and fully detail the entire agreement, variables and penalties, said Putlitz.

• Best practices:

Following best practices like proper contract management and dispute resolution mechanisms can minimise issues.

Subcontractors are advised to conduct due diligence on potential clients and avoid signing unfavorable contracts under pressure.

Risk management consultant and legal to MBA North, Brad Boertje, said that 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,” he said.

Read: Construction mafia here to stay in South Africa – be prepared