The news that building and civils contractor Probuild Construction Group was granted a Business Rescue order on 31st May 2019 comes as yet another blow for the beleaguered construction sector, says Mohau Mphomela, Executive Director, Master Builders Association North.
Probuild Construction Group is being placed in business rescue, with the Board of Directors resolving at a meeting that the company is financially distressed and it is unlikely that the company will be able to pay all of its debts. Facing various pending summonses and three pending liquidation applications, Probuild owes various subcontractors, suppliers and SARS over R65 million. The company has cited cash flow difficulties due to a combination of factors – including non-payment for work completed and developers calling up guarantees before the dispute resolution process as per the Joint Building Contract Committee (JBCC) has played out.
Philip Buck, Director at Probuild says, “The JBCC Contract in its present format facilitates the easy calling up of demand guarantees prior to resolution of pending disputes and is destroying many iconic businesses in the construction industry, that being main contractors and sub-contractors at all levels.”
The latest blow follows the likes of Basil Read, Liviero Group, Esor Construction being placed in business rescue and Group 5 and LBC Lenco Construction applying for debt-freezing agreements over the past year. Lenco Construction has since been liquidated.
Mphomela said, “While many see recent events as a sign that the industry may be correcting itself, the sector is currently in a perilous position, with major firms in trouble having a devastating ripple effect on employees and the supply chain. Hundreds of suppliers and sub-contractors can be severely impacted by a major construction company going into business rescue, because smaller contractors do not have the cash reserves to wait for a resolution.”
Professionals dictate a price for project delivery whether viable or not to main contractors. The main contractors are then compelled to take the project out of fear of being excluded from future work and to stay in business. Sub-contractors are typically drawn in and managed by main contractors in high value projects, with the government or private sector client paying the main contractor, who then pays smaller contractors. “However, with professionals dictating prices and therefore, main contractors having a tight budget, all other trades and suppliers along the value chain will operate with very tight margins. We continue to see an increasing trend for government and contractors not to adhere to payment terms,” he said.
In the case of business rescue, business rescue agents will prioritise invoices and schedule payments where possible, but sub-contractors who still have unpaid invoices with the contractors in business rescue unfortunately may never see them paid, he said.
The sector has declined for over five consecutive quarters and as a major employer in South Africa, the ailing construction sector also recorded the country’s largest net loss of jobs in the first quarter of this year (142,000), according to StatsSA. “This worrying trend is set to continue as infrastructure projects are delayed and no moves are made to address key challenges in the sector,” Mphomela said.
He explained that MBA North had facilitated a meeting between sub-contractors and main contractors in order to find a solution to the challenges facing the industry. “As a result of the meetings we have found the challenges to include the holding of project retentions that are at times never paid and the amending of standard contracts such as the JBCC and Master Builders Contracts so that conditions such as ‘pay-when-paid’ are included (this is irregular and illegal). Changes to standard industry documents end up putting businesses at risk and have contributed to numerous companies closing down,” he said.
“There are some proposed resolutions that have emerged from these meetings that the Association is currently actioning. We urge construction companies not to operate on the periphery and join the Association in order to grow the Association’s representation of contractors in the region. Main contractors are our members and are similarly not lacking challenges of non-payment themselves. Our aim is to ensure that all contractors are able to operate and that the industry is rescued. For this to happen all stakeholders need to work together, this includes Professional Bodies, Associations and the Government.”
He urged public and private sector to work together to fast-track national infrastructure development programmes and address challenges such as shrinking margins, increased penalties, non-payment or delayed payment by clients, and the emergence of the so-called ‘construction mafia’ – companies or individuals that, under the cover of local business forums, extort money from principal contractors involved in local infrastructure projects in the name of empowerment.