28 May 2024

Photo: By David Beer

The construction landscape in South Africa has changed dramatically over the past few years, says Roelof van den Berg, CEO of the South African-based Gap Infrastructure Corporation. This is part two of a two-part series.

Systemic issues and client practices

He further highlights 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 exacerbates 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 current 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, notes van den Berg.

“We are seeing major construction firms enduring losses year after year, which only 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 current 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 South Africa’s construction industry requires a departure from the current 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 the country’s ongoing economic development,” concludes van den Berg.

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