Business risk improvements for emergent contractors
As large construction players struggle to stay ahead of the curve in the face of a constrained construction sector in South Africa, smaller, emergent contractors find themselves trying to succeed in an industry which is squeezing them on every level. But emergent contractors, with the right support, can plot a clearer path to growth and remain competitive.
In April 2019, Webster Mfebe, Chief Executive of the South African Forum of Civil Engineering Contractors (SAFCEC), reported a significant decline in public infrastructure spend of almost R100bn from 2017/2018 financial year to 2018/19. This decrease, according to Mfebe, has had a severely detrimental impact on the construction industry.
Several years ago we realised that our clients in the construction, infrastructure and oil and gas industries were experiencing difficulties working with small, emergent contractors who did not have the appropriate risk management solutions in place and were therefore struggling to meet the demands of a highly competitive and volatile market.
Key challenges for emergent contractors
The barriers that emergent suppliers often face include cash-flow control, restricted insight, low credibility, and a lack of resources and skills retention:
- Cash-flow control – this can be a major problem for small enterprises, due to their size and reliance on prompt payment. These enterprises are frequently smaller than the businesses they render services to, which creates a real David and Goliath scenario, with the larger enterprises potentially using their position of power to manipulate the situation to their advantage.
Smaller enterprises often live or die on single contracts, so they feel that they are not in the position to question when invoices don't get paid. They tend to get lost in the bureaucracy of large businesses, and are unable to negotiate payment terms.
- Restricted access – while smaller companies have less bureaucracy than their Goliath counterparts, thereby allowing them to make immediate operational decisions, this sometimes leads to short-sighted and knee-jerk decision-making. The lack of insight from different departments, such as marketing, finance, human resources and technical, and the subsequent implications of this, may prove to be catastrophic for a small business.
- Low credibility – a lack of brand awareness and market credibility can also hinder smaller enterprises from growth, as clients are often loyal to historical partnerships and brands they know and trust.
- Skills retention and acquisition - smaller enterprises simply cannot match the salaries, international opportunities or company benefits of larger corporations, and attempting to do so creates further cash-flow complications. In addition, attracting employees can be difficult for smaller enterprises as graduates, especially in their first few years, seek to build a credible portfolio of work, which is often perceived to be found only within the scope of large corporations.
- Lack of resources – due to lower work volumes and fewer projects, Exempt Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs) typically have limited access to people, finance and technology. The construction market has been transformed by cutting edge technologies, but a high capital investment is often required to trial or implement these innovations. In an industry where technology is developing rapidly, offering significant time and efficiency benefits, operating without it can be massively detrimental.
Seizing the opportunities
Although things might look less than spectacular with the fall of some of the big names in the construction industry, the changing playing field presents opportunities for small enterprises that are worth remaining optimistic about.
The change is drawing international players into the local construction market with Italian, Turkish and Chinese enterprises making their way into the country at a rapid pace. Because of their need for local support, they offer more opportunities for the smaller enterprises and will be an excellent avenue to explore.
Joining a consultancy’s supplier development programme can also pay dividends.
Over the last eight years, we’ve worked with close to 100 QSEs and EMEs to implement a structured, risk-based, quality management system to help them recognise and overcome the challenges typically faced.
This is being achieved through a programme geared to help them put the right disciplines in place to run successful, sustainable and competitive businesses. As a result, some of these companies have even gone on to form part of our own supply chain as partners on projects. Our programme allows qualifying companies to implement a quality management process, where they develop an ISO9001:2015 certified system that covers all key business processes, such as marketing, production, financial management, human resources management, among others. This has delivered real results.
A brighter picture
Companies on our programme in South Africa alone, have won 58 contracts of which 31 had ISO certification as a mandatory requirement. The total value of contracts won exceeds R230 million, and permanent employment across these businesses has grown four percent.
There are some clear benefits to being David rather than Goliath.
Offering many advantages to their larger counterparts, emergent contractors need to seize the opportunities and lean on the assistance of global companies and their programmes to grow and remain competitive. With uncertain times set to remain in South Africa, the time is right for contractors to get their houses in order.