The Master Builders Association (MBA) North says contractors, particularly small and mid-sized contractors, face growing business risk when embarking on new projects.
This is a result of a range of issues, such as contracts that are amended to favour large contractors or clients, unclear delivery dates, and – crucially – delayed payment or non-payment.
Director at medium-sized subcontractor Combined Flooring, Wanda Merrington, says efforts have been made over the years to make the environment fairer for small and medium-sized subcontractors, but that serious challenges remain.
“The small subcontractor, in particular, may not have the cash flow and resources to wait months for payment by the main contractor, or have the cash to take legal action in the event of non-payment or a dispute.
“In many cases, they don’t receive subcontracts documents, or they receive contracts with many amendments.
“They don’t challenge the exclusions and clauses that have been altered, because they may need the work.
“They may also not keep themselves up to date with the contract data and extensions of time on completion dates and lose out on timeous cash flow as a result.”
Merrington believes that a stronger focus on ethics, transparency and the fine print on subcontract documents would go a long way towards reducing the risks faced by smaller contractors in the construction sector.
She says that significant amendments to subcontract documents could virtually eliminate any rights the subcontractor should have had in terms of the Master Builders South Africa subcontract document. These may include new rules, or a pay-when-paid clause.
Merrington notes that the subcontract agreement should contain details of the entire contract and variables, but in many cases, this is not included, so the subcontractor may remain unaware of these.
“Subcontractors – particularly those who are new to the industry – don’t always know what their rights are, so they accept a document that has been altered. They should know the completion dates, as penalties creep in causing unnecessary disputes.”
Accepting the pay-when-paid principle – often used as paid-if-paid – may mean that smaller contractors get paid late or, sometimes, for certain extras, not at all.
As most smaller contractors cannot deal with unpredictable cash flows, they are then forced to shed staff, or even go out of business.
MBA North risk management consultant and adjudicator Bradley Boertje says one of the key reasons contractors find themselves in difficulties is that they do not understand the implications of the contracts that they have signed, or the risks they become exposed to as a result.
“Many have a poor understanding of how contracts work and a tendency just to sign any document simply to get work.”
Main Contractors Respond
“Although there are many unscrupulous contractors out there implementing many unethical practices, I can only talk from our position which I believe to be a balanced view,” says a major contractor who prefers not to be named.
“Unfortunately, we are in an environment where all these restrictions are being imposed onto main contractors from tender stage.
“You are forced to accept heavily amended Joint Building Contracts Committee (JBCC) documents, or your tender will be disqualified.
“The only way to survive as a main contractor is to create an even playing field throughout the entire value chain and impose the same conditions on subcontractors.
“One needs to understand that with the current margin structures, if a main contractor has to pay subcontractors (which make up about 80% of the contract value) within 30 days and his payment terms are 60 days on a large commercial project, it will literally shut the business down, taking with them many more subcontractors as has been the case over the last few years.”
The major contractor believes that the industry needs to tackle the root of the problem, which starts at the developer/client, project management and quantity surveyor level.
“The current market margins for main contractors are yielding values between 0% to 1.5% – effectively a loss when adding overheads.
“You are forced to sign away your lien with no payment guarantee and your payment terms are extended. This is now common on all tenders we price.
“This is an absolute recipe for disaster. It has a devastating effect all the way down the line onto small contractors. The only solution lies with tackling the problem at the origin.
“We need to get complete buy-in from all role players in the built environment to agree consistent payment terms,” adds the contractor.
“This means getting someone like South African Property Owners Association (Sapoa) involved to apply pressure on development and funding entities to restructure their payment thinking.”
MBA North executive director Mohau Mphomela says that the JBCC and Master Builders South Africa contract documents are designed to simplify the administration of construction contracts, implement best practices and industry standards, and spread risk equitably across the construction value chain.
He says that the practice of amending JBCC and other built environment contracts to, for example, insert conditions such as ‘pay-when-paid’, puts all players in the value chain at risk.
“JBCC and Master Builders contracts are designed to create a fair and standardised business environment, and to ensure that all parties are protected.
“Unauthorised amendments to these documents, especially payment clauses, should be immediately flagged and reported to the Master Builder regional associations and Sapoa,” notes Mphomela.