Construction sector faces cash crunch as lockdown is extended

2020-06-03T18:18:48+00:00April 28th, 2020|News|

The Master Builders Association (MBA) North warns that the current Covid-19 lockdown and its aftermath are set “to raise all sorts of issues” for an industry that is already in trouble.

The construction industry has entirely closed down during the national lockdown. Image credit: IOL

The construction industry has entirely closed down during the national lockdown. Image credit: IOL

“The fact that all construction work has been put on hold for the lockdown period has caused an immediate cash flow crunch, but there are longer-term impacts that must also be considered,” says MBA North executive director Mohau Mphomela. “The sector is already weakened by a sustained lack of spending on infrastructure, and many of its largest players have gone into business rescue or liquidation.

“Those that remain do not have the cash reserves to survive for long, especially given the way that payments are structured on construction projects,” he notes. Mphomela says payments are linked to project progress. Although contractors and subcontractors can declare force majeure and will, therefore, not be penalised for failing to meet deadlines, payments are still only made at certain progress points.

“All our clients have approved the project extensions, but this is not the issue. The issue is that we will only get paid when the work is complete,” explains Nwabejana Mohlaba of Belo Projects. This temporary cessation in payments is passed down the line, from principal contractor to subcontractors and, ultimately, to the workforce.

MBA North president and Gothic Construction director Wayne Albertyn also points out that while some contractors will have invoiced for work completed during March, they will not be in a position to invoice at the end of April. This might mean that for some the cash crunch will only arrive after the current lockdown period has ended. An added complication is that the industry is already plagued with a culture of late payment.

Many contractors and subcontractors are likely to have entered the lockdown with existing cash flow issues, which will now be exacerbated. Temporary workers have little protection under labour laws and are thus particularly vulnerable to non-payment when work is halted, says the MBA North. Most live from hand to mouth, and have few financial reserves to ride out the current storm.

Even workers at larger companies are likely to be paid at a reduced rate. Albertyn says that his company is paying workers during the lockdown, with individuals being able to claim from the Unemployment Insurance Fund (UIF) where applicable. The UIF has made R30-billion available through a National Disaster Benefit Fund.

Albertyn stresses that this arrangement is not sustainable over the long term and would have to be reviewed if the lockdown is extended. Other options include forcing employees to take their annual leave now and using the traditional December–January builders’ holidays to catch up, as well as moving payday to the end of the month to preserve cash flow.

Because the lockdown was implemented with little warning, some building material suppliers say that they were not able to conclude delivery terms on existing contracts and agree on the way forward.

Corobrik director Musa Shangase says his company will have to renegotiate supply term contracts with clients post lockdown.

On a more positive note, Mphomela argues that the industry-wide hardships caused by the lockdown should be seen as an opportunity for all players, including clients, to come together to thrash out a common response designed to maximise the industry’s ability to recover.

Source: Engineering News