The Civil Engineering Contractor March 2019 | Page 27

“The cheque
is in the mail”
The construction industry is suffering a cash flow crisis, as work and margins narrow.
By Eamonn Ryan
and Ntsako Khosa
The government needs
to do more to stamp out
late payment practices,
unreasonable terms, and
corporate bullying to
prevent subcontractors
from being burnt. Until
then, bank products and
facilities can improve
contractors’ working
capital availability.
T
his is far from being a local
issue only. The UK government
is being lobbied to introduce
blacklisting of late-paying contractors
in the wake of the collapse of Carillion
Construction a year ago, as the demise
of that notorious late-payer has
threatened to take down many other
suppliers and subcontractors with it.
Locally, it is in everyone’s interests
to promote previously disadvantaged
artisans to become successful
contractors and to contribute to a
vibrant middle class. However, it
is almost as if the main interest of
municipalities was to see them fail.
According to South African Forum
of Civil Engineering Contractors
www.civilsonline.co.za
Late payment can
bite back
There are risks related to slow or
non-payment. In January, footage
appeared on social media showing
a contractor smashing up a new
Travelodge hotel in Liverpool with
a digger. He claimed he hadn’t
been paid, so in revenge smashed
windows, causing carnage the day
before its official opening. In the
footage, the digger crashes into
doors and windows, sending shards
of glass and door posts crashing to
the ground. During the driver’s
initial attempt to break through, the
digger falls back down the steps.
When he tries again, though, he gets
into the reception area as the sound
of destruction echoes around the
car park. A man can be heard saying
on the video: “That’s what happens
when people don’t pay their wages.”
There is considerable public
sympathy for the man. A GoFundMe
page almost immediately raised
his wages, while other people
commented on social media:
“The man’s a legend! Standing
up for the hard-working man, too
many companies not paying their
workers what is owed!”
Another added: “We have all
been this guy at one point in our
working lives.”
FEATURE: FINANCE
(SAFCEC) statistics, barely one of six
start-up contractors succeeds.
The cash flow of the construction
sector is in a woeful condition for
three reasons: a lack of business;
tight margins (sometimes as low as
1%, and on average 2.5%) on what
business still exists; and late payment
terms. Those companies with plentiful
working capital built up over the
years are surviving but fast eating
into their capital, while those less
fortunate are going into insolvency.
There is a genuine fear that by the
time the economy turns around, the
sector will be irretrievably broken,
and such work as finally does come to
market will go to foreign companies
and workers.
How can companies ensure they
survive what is expected to be a
tough year for construction? This is
especially difficult for SMEs and BEE
companies that have not been able to
build up working capital over the years
and are consequently most at risk.
Cash conversion
Construction can be highly profitable,
says Ian Massey, director of MDA
Consulting. If a business can turn
over its working capital optimally six
times a year with a 10% margin, it
can increase its working capital by
60% in a year. In times like those
— which we probably haven’t seen
CEC March 2019 | 25