Construction Management

Article by Wimpie Kies, 2023

Where it all started…

I started my journey in the construction industry in 1992 and since then I have witnessed a slow downward spiral for the industry. I am concerned that if the industry does not take a very critical look at itself and do a proper reset, this spiral will continue to the detriment of contractors.

The first thing to note is that clients have been pushing more risk onto the contractors. They constantly find ways to get more bang for their buck. But in reality what they are doing is pushing risk and burden onto contractors at no additional cost to themselves. What has also happened is that many contractors are accepting these risks to keep their work force active in the hope that there will be an upturn on the next tender, which hardly ever happens. So the spiral continues. Combine this with the client requiring the contractor to sign a waiver of lien and give a on demand guarantee. In most cases he refuses to give the contractor a payment guarantee. The clients also push more and more for unlimited product warranties.

When I started in construction, the main contractors had almost double the profit margins they have now on their own work. Also, in most cases they had almost 5 times the profit from the attendance of selected sub-contractors. This helped them calculate the risk during projects. However, as time passed by these profit margins decreased but construction risks, like weather and other unforeseen changes, will never decline. As stated above, clients have started pushing more risk onto contractors. What this then means is that profit margins are being eroded from both sides.

There have been other elements added to the mix, such as the fact that the current protection offered to contractors via the JBCC contract is not very helpful. The legal system is extremely slow, and in the construction industry the planning of cashflow is extremely crucial. Standard construction contracts were covered in our studies and we have been utilizing professional services to prevent contract fall-outs as much as possible. Unfortunately, once you get into litigation battle it seems the person with the deepest pockets will come out on top. My reasons for this statement is that the legal system is not a quick process or short term solution. It sometimes takes a year or two to make progress and this fact is often misused. The legal battle becomes a game of cat and mouse to outlast the contractor. To top it all, clients often withhold contractor’s money and indirectly use the contractors ‘own money’ to fight with in court. Knowing very well that they have wounded the contractor by delivering a blow to cashflow.

We find that many contractors and sub-contractors have cashflow issues. The issue has largely been highlighted by the COVID National Lockdown in 2020. These contractors had running costs to cover throughout the lockdown, resulting in losses. These losses can only be rekindled by profit on upcoming projects, which take time, also burdening cashflow.

To add insult to injury, most suppliers have cut credit lines. Let’s look at an example to put this into perspective. Say a contractor has a turnover of R10m per month, and previously purchased around R5m worth of materials on credit for all active sites. Suddenly, the suppliers cut the credit in half resulting in R2,5m of cash purchases, leaving the contractor out of pocket. These types of cashflow issues easily boil over and create more problems as it has become common practice for clients and their professional teams to withhold money in hopes of seeing contractors’ ‘perform’ better. To summarize the stance in today’s climate: to generate the same turnover, the contractor will need double the working capital, with no grace from the client.

I see the industry in desperate need of a reset.

Time to move forward…

We all need to think more outside the box and find creative ways around certain problems.

This is the reason why I believe that moving forward, the industry needs to embrace building projects on a construction management basis. This way of building allows the client to have better control over the construction process as every stakeholder is paid directly by the client. The construction manager invoices monthly. The wet trades contractor and every other contractor issues a claim to the PQS, who in return issues a payment certificate. Contractors receive payment directly from the client. In essence, all contractors on the project become principal contractors.

Most importantly, there is no main contractor, which eliminates one of the most significant risks. Each trade is packaged on its own – In the event of one of the contractors failing it is much easier to replace him and still keep the project on schedule.

The client then has a much more experienced construction team to manage his project.

Another advantage is more flexibility. Each trade is tendered as a seperate package and therefore can be tailored to fit the situation on site. Each contractor also supplies his own guarantee.

Building experience and a thorough understanding of construction processes are essential for this position. It is extremely imperative that the client chooses the right construction manager when doing a project on this basis, as he is the project’s heartbeat.

#Protean Project Innovations

Greetings,

Wimpie Kies

BSc. Construction Management at University of Pretoria, 1997