HOPE FOR THE RAPIDLY DECLINING CONSTRUCTION INDUSTRY.
The construction industry has been the point of discussion towards the end of 2018 and at the beginning of the current year. The year started off with talks of how the industry was declining, causing a big concern for the future of the industry.
In one of the articles I had been reading, we started the year with a 12% reduction in the infrastructure budget, which was not good news for an industry that was already not too steady at the time. The beginning of this year saw some construction companies going into business rescue and some into bankruptcy.
Towards the end of last year Esor Construction, applied for business rescue after it had declared to its shareholders that it is under financial distress and that it owed 130 million to its creditors.
The main causes that they outlined were as follows;
- The significant losses that were incurred on certain construction contracts in previous financial years.
- The challenging economic environment in the construction sector.The inability to secure short and medium-term funding.
- The inability to secure short and medium-term funding.
One of the major construction companies, Group 5 did not survive the negative impact that the decline had on the industry as well, which led them to apply for bankruptcy protection in March of this year. It is said that at that time, this placed about 8 000 jobs at risk. According to Group Five spokesperson Heidi Geldenhuys, Group Five Construction and its direct and indirect subsidiaries reflected an operating loss of about R1.23billion for the year ended June last year, adding that the company experienced negative cash flow from operating activities of R880 million last year.
At the beginning of this year, the company would be needing 3.6 billion in order to fund its working capital requirements up to December 2019 and it was said that the company would not be able to generate such working capital.
Another blow into the industry came from the building and civils contractor Probuild Construction group, which was granted a Business Rescue order om 31st May 2019. The company owed over 65 million to various subcontractors, suppliers including SARS at the time.
Where to from here??
It is not up until recently that we saw a bit of hope for the industry, with some companies that were under financial distress coming out with a plan to help try and save their companies. Below is just some of the ways some companies are planning to execute their plans and hopefully with proper planning and correct execution, a noticeable difference will be seen in the industry.
As the above headline suggests, Group 5 is looking into a plan that will save the future of the company. Group 5 business rescue plan will be executed in two phases;
- The first phase of the rescue plan, which will involve the payment of creditors is expected to be completed around the end of the first quarter of 2020.
- The second phase will deal with matters which go beyond the payment of creditors and will lead up to the termination of the business rescue proceedings.
With the correct execution of the plan, it is said that it could save up to 3000-3500 jobs which is good news considering the fact that about 8000 jobs were at risk at the time the company went into business rescue. Although some jobs will be preserved by the plan, ongoing retrenchment processes are expected given the company still being in financial distress and the inevitable winding down of its divisions. The rescuers said industry experts had indicated that the liquidation process of the company would have taken five to ten years to complete. However, the current process would be wrapped up more quickly.
The troubled construction industry has been given a glimmer of hope, with state-owned enterprises (SOEs) Transnet, Eskom, the Airports Company of South Africa (ACSA) and the SA National Roads Agency (Sanral) advertising multiple multi-billion-rand construction projects.
Louwtjie Nel, chair of listed construction and engineering group WBHO, confirmed this on Tuesday the 3rd of September 2019, when the company released its financial records for the year to June.
“The re-emergence of large-scale public infrastructure projects could result in an improvement in the local construction environment over the medium term,” he said.
As I was reading through the articles while doing some research, I came across an article that highlighted some of the reasons that construction companies fail and should be carefully monitored by any contractor.
Capital & Cash Flow: Construction companies are capital intensive businesses, large amounts of capital are invested in fixed assets like tools, heavy equipment, and vehicles. Not maintaining an adequate level of capital has led to the failure of many construction companies, as we have seen in the year. Not having enough capital to get your company through lean times or to overcome unexpected surprises is a huge risk.
Project Performance: A single bad project doesn’t typically sound like that big of a deal for a construction company, but it has been known to cause problems for some companies. String together a handful of bad projects that lose money and your business could be in serious trouble. Ensuring that you deliver profitable projects starts long before signing contracts and commencing construction. Picking projects that are the right fit for your business and going through a bid/no-bid decision-making process should be your first step. Doing your due diligence when estimating and job costing can help you avoid taking on work that won’t be profitable.
Failure to innovate: The construction industry is amid a digital transformation that will inevitably lead to the demise of construction companies that refuse to adapt. Technology from drones and robots to Building Information Modeling (BIM) and big data are rapidly changing how the construction designs and builds structures.