Navigating commercial risks under current trading conditions

    It goes without saying that trading in the current South African economy and construction environment is a difficult and stressful task for most companies. Things were tough before COVID-19. Now they are even worse. I fear that we will still see a lot of casualties in the industry in the short to medium term.

    In order to keep a business afloat and more importantly to make it sustainable, it is imperative that contractors and subcontractors pay careful attention to the risks they assume when they contract. However, in my experience I find that there is generally a lack of attention to detail with companies taking on far more risk than they ought to, often not even knowing what risks they are assuming!

    Don’t get me wrong, there are a lot of risks you can’t avoid. For those risks, you need to ensure that you understand and manage them appropriately.

    In this article I am going to highlight some of the common areas that members can do better at managing.

    Contract Data

    If you are a main contractor or a subcontractor contracting under the JBCC® suite of contracts, it is imperative that the contract data is accurately and totally populated.

    Generic contracts published by the JBCC® cannot cater for every eventuality or specifics of a project. Hence, the contract data is required. It captures the variables peculiar to a project such as programme, access dates, insurances and the like.

    The contract data is typically issued by the professional quantity surveyor when inviting tenderers to submit a bid for a project or subcontract scope.

    In all instances, the tenderer needs to have sight of the completed contract data BEFORE submitting a tender bid. Only the last section which is for the tenderer to complete should be left blank.

    If you are a domestic subcontractor, the MBSA domestic subcontract agreement has a similar section which is at section 31 of the 2018 edition. Ensure you get it from the Contractor before you submit a tender.

    Don’t let the other party complete variables which are your prerogative, such as the type of security.

    Guarantees v Retention

    Not many members know that the default form of security for performance is a construction guarantee (either variable or fixed) and NOT cash retention.

    It is my opinion that a contractor should never let someone else sit with their cash. These are some of the downsides of opting for cash retention as a form of security:

    • No interest is payable on retention held.
    • Having to wait until the issue of the final completion certificate to get the last of your retention released.
    • Margins are often lower than the retention held, so cash profit is only realised right at the end of a project, if all things go well. This means the contractor is going to have a negative cashflow throughout the entire project.
    • If the business holding your retention goes into business rescue or liquidation, your chances of getting your retention back, or even a small part of it, are remote.

     As a fixed guarantee is coupled with some cash retention, it is my opinion that you should strive to procure a variable construction guarantee whenever possible.

    Remember it is the tenderers prerogative to choose what security they are going to provide.

    Contractor’s special terms and conditions

    Did you know that if a contractor wants to impose its special terms and conditions on a subcontractor, they are required to provide them to you before you submit a tender?

    If you are a Selected subcontractor, any special terms and conditions of the main contractor are required to be issued with the invitation to bid. That is, the principal agent or professional quantity surveyor issues them.

    If you are a Domestic subcontractor, the main contractor is obliged to issue them with its invitation to tender.

    In order to get a thorough understanding of the JBCC® and MBSA contract documents, make sure you sign up for one of our quarterly training sessions. These extremely well priced courses are currently presented virtually.

    In order to bring cost-effective contractual assistance to our members, the MBA-North also offers various commercial packages to assist you along the construction journey, from tender stage to final account. Should you wish to make use of these services, please visit our website for more details: https://www.mbanorth.co.za/legal-commercial-services/

    Margins are low, penalties are high. If you want to protect your margins, you have to be commercially astute. As the old adage goes, prevention is better than cure, so make sure you are informed and set up your contracts and sub-contracts properly in the first place. Don’t leave things to chance!

    Brad Boertje BSc QS FA Arb
    Commercial and Legal desk

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