Order books of construction contractors could become useless as a measure of business health in this sector with the apparent rise in the number of contracts gone wrong. It begs a new approach in the way contractors engage the market - and investors rank them.
Contractors spend much time and money bidding for work, but all that becomes a weapon of mass destruction to shareholder value when contracts undertaken become charity activities. What good is a fat order book when a contractor's cash position is strained by delayed and disputed payment?
These disputes are frequently visible in listed construction groups. Roads seems to be the most problematic area because they involve work over an extended area, raising issues of security and logistics. Mining contracts can end up being hostage to geological enigmas and surprises.
Murray & Roberts' results for the six months to December featured six "problem contracts". The total money involved would be enough to launch a takeover of M&R. Varying in nature and size, these contracts are spread across the regions of M&R's interests, from SA to Abu Dhabi.
In its latest results, Aveng mentions a R100m dispute between subsidiary Grinaker-LTA and client Aquarius Platinum, over the Marikana opencast mining contract. Says the Aveng statement: "Aquarius disputes its obligation to pay certain amounts in respect of the escalation of costs, which Grinaker-LTA considers to be due and payable."
Arbitration on the matter is scheduled to start next month. While that process runs, Aveng will be denied cash that could be earning almost R6m/month in interest.
Another construction group, Basil Read, is choking from a list of non performing contracts undertaken in Southern Africa over the past few years. The latest problem, in Namibia, pushed Basil Read into the red, but the group's French-based parent, Bouygues, came to the rescue by taking over the reeling Namibian division.
M&R CEO Brian Bruce says there's been a shift in the construction landscape that has caught mainstream contractors unawares. During the pre-1994 era, there were relatively few contractors and clients. This encouraged trust in business relations and an understanding of work terms and conditions. But the market has since expanded, bringing in new clients and less cosy relationships between client and service provider.
And the increasing trend of outsourcing means the client is now less knowledgeable about procured services and less inclined to accommodate variables. "We are also in a situation where the client holds the upper hand in the contractual relationship," says Bruce.
He says the shift means contractors must change the way they do business, mainly by adjusting risk measures and by being prepared to walk away from certain contracts. Beefing up risk management unfortunately adds to costs.
Contractors now find themselves operating like banks. When they win a contract, they have to gear up to fund the construction, which in essence makes them project financiers. They are then heavily exposed and will pay dearly if anything goes wrong.
Efforts to get money that is owing can result in litigation, itself a drain on resources.
It seems that a better ratio for judging contractors will be how much money they put in the bank.
