ROELOF VAN DEN BERG | Crumbling construction sector needs urgent reform

The construction landscape in South Africa has changed dramatically over the past few years. What was once a robust pillar of the economy is a sector in distress, with prominent, large-scale construction companies either shutting down or teetering on the brink of collapse.

The construction industry is in a terrible state. There’s no sugarcoating the reality. If we don’t make a change soon and take urgent steps to readjust, the industry may soon face some of the worst years seen in modern times.

The sector is in decline, marred by an alarming rate of closures as hundreds of companies are forced out of the market each year. Small contractors, in particular, are struggling to survive and secure a steady inflow of contracts. When jobs dry up, the contractors cannot compensate their workers, and ultimately must close their doors.

I’m frequently asked the same questions by peers and many of the stakeholders with whom we interact: “What’s at the root of this decline, and what can we do about it?”

My answer: South Africa’s procurement policies are fundamentally flawed, failing to foster an environment conducive to sustainable and profitable operations. The most critical element to any company’s success is profitability. Without profits, there’s no future for any business.

Pitfalls of competitive bidding

The construction sector is notorious for its razor-thin profit margins, worsened by an intensely competitive market with little to no protection for smaller contractors finding their footing. Furthermore, in a desperate bid to remain operational, companies often engage in cut-throat bidding wars, driving down prices to unsustainable levels.

It is not uncommon for bids to be submitted with zero mark-up or at a loss in a desperate attempt to secure work. This practice, in my opinion, is the number one killer in the construction sector, and disproportionately affects smaller businesses that cannot afford it.

However, larger players that employ subcontractors also have a vested interest in protecting and seeing the smaller businesses survive and grow. In many ways our businesses depend on their success. To protect them, we urgently need to revise bidding structures to eliminate substandard bidding altogether.

Systemic issues and client practices

There is a systemic issue in how projects are tendered and managed, where clients often set budgets that are unrealistically low, and which do not align with detailed feasibility studies conducted by professional teams.

It’s baffling that a client would spend significant amounts on professional feasibility studies, then accept bids at 60% of the estimated budget. This practice is counterproductive and worsens the financial strain on contractors.

This flawed approach often leads to projects going through multiple contractors, exceeding the original budget by up to 120%. It also indirectly causes some contractors to go bankrupt and liquidate their businesses, and leads to the financial ruin of many subcontractors.

Economic impact and job losses

Ideally, the construction sector should be at the forefront of job creation and economic stimulation. However, the reality is starkly different, as the industry is characterised by job cuts and a lack of economic stimulation, with projects often running at significant losses.

We are seeing major construction firms enduring losses year after year, which perpetuates a cycle of unsustainable business practices.

These practices extend throughout the supply chain, affecting subcontractors and suppliers who are pressured to reduce costs, often at the expense of quality. This leads to the use of substandard materials and, ultimately, projects that do not meet the minimum required standards and end up failing. The impact is profound, contributing to the closure of more businesses within the industry.

Calls for reform

To solve the construction industry’s plight, comprehensive reforms in policy and procurement frameworks are needed.

If most other sectors can operate with profit margins between 20% and 30%, with some sectors exceeding 50%, why should the construction sector be different? It simply does not make sense that a sector pivotal to job creation in this country, and which is a fundamental part of the success of the economy, must operate on such small profit margins.

In my view, the construction industry should be among the most profitable sectors. Only when that happens will we see real change in our job statistics, household incomes and the economy. But the revival of the construction industry requires a departure from the procurement and policy frameworks that have led us to the brink of crisis.

With thoughtful reforms and a shift towards fair and realistic project management practices, there is hope for restoring the sector’s vitality and its critical role in economic development.

• Roelof van den Berg is CEO of the Gap Infrastructure Corporation

TimesLIVE