Construction industry must address non-payment of sub-contractors

The Master Builders Association (MBA) North says that the continuing trend of main contractors delaying payment of their sub-contractors – or defaulting altogether – is a symptom of the deteriorating health of the construction industry.

The MBA is calling on industry players to enter into a dialogue to address the issue or risk more job losses and bankruptcies.

According to Nico Maas of Gauteng Piling, a member of the MBA North, his company has seen a steady increase in non-payment by principal contractors over the past seven years. “Because of non-payment, my company has lost approximately R9 million in profits and has outstanding debts of R11 million at this point. We’re a small company with 22 permanent employees – our very survival is threatened.”

Yellow Dot Coatings’ Christo van der Merwe adds that while non-payment by principal contractors and clients has increased, the company still has to pay its labourers monthly and its suppliers on 30 days.

An anonymous sub-contractor also broadly confirmed these points, saying that sub-contractors find themselves stuck in the middle with no guarantee when to expect payment by principal contractors, but still paying suppliers within the payment terms.

Respondents say that the main reasons for this problem can be traced back to a payment culture in which the odds are stacked against sub-contractors: Incorrect budgeting and costing. The retention of payments until the whole project is completed can mean that sub-contractors do not get paid for years – without even earning interest on outstanding fees.

Principal contractors retain monies due to sub-contractors for spurious reasons, or to make up the shortfall from non-payment of previous contracts. Government entities are particularly guilty of non-payment. Payments are delayed regularly, or post-dated cheques are issued. Contracts stipulate that sub-contractors will only be paid once principal contractors are paid by the client.

Principal contractors go into liquidation which effectively means that debts owing to sub-contractors are cancelled. Sub-contractors have no access to the professional teams that certify work completed and authorise payment.

It is clear that contractors must conduct due diligence on prospective clients. They must also insist on a contract that is fair to them, and that contains clear and inexpensive provisions for dispute resolution. Sub-contractors should invest in specialised insurance and legal advice to help sub-contractors take the right steps to maximise their chances of getting paid and, crucially, protecting their all-important cash flow.

Both Maas and Van der Merwe believe that a solution could be for project funds to be held in a trust or project-specific account so that they can be quickly released once each project phase is certified complete by an independent third party. “I also believe that sub-contractors should be preferential creditors when a company is liquidated”, adds Maas

MBA North’s Enwee Human points out that smaller companies cannot grow their businesses and may even be contracting if they are consistently not paid. Most unfair of all, the most poorly paid workers are affected most as their jobs are the first to go and they do not have the resources to withstand delayed payments.

“We need to sit down as an industry and work out strategies to solve these challenges. It is to nobody’s benefit if companies, big or large, are hamstrung – the country will not get the infrastructure it needs and we will not create jobs. Our industry is in trouble, and we must take action.”

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