The growing prevalence of Engineering, Procurement and Construction (EPC) contracts is reshaping the risk landscape, requiring contractors to build sophisticated legal and commercial capabilities that previously sat with clients or consultants.
Image: AI ron
Payment delays by the government have become a significant threat to the viability of construction companies, one that is even more damaging to the sector than a market downturn, industry sources said.
"Cash flow is oxygen to contractors, but it's been strangled. Payment cycles have extended to 75 days or more in practice. We are financing these projects on paper-thin margins," said Dave Bates, CEO of SMEI Projects in a statement.
Jabu Serithi, Gauteng MD of GVK Siya-Zama, echoing the concern at a recent Construction Forum panel discussion hosted by construction law firm MDA Attorney, described delayed payments as normalised, particularly in the public sector.
"It has become untenable," she said. Despite regulations requiring government departments to pay within 30 days, the panel noted that compliance remains deeply inconsistent, with projects such as the Bus Rapid Transit stalling as a direct consequence.
South Africa's construction sector is currently also burdened by cash flow pressures, an influx of international competitors, and a deepening skills crisis. There remain opportunities in infrastructure, energy, and commercial property.
At the panel discussion senior industry leaders described an industry that has lost its largest players, is financing its own projects on razor-thin margins, and is under siege from community intimidation, but still adapting and innovating.
Sectoral green shoots, however, include growth in commercial property demand, a pipeline of infrastructure and mining work, renewable energy investment and an uptick in private sector investment as capital that has been sitting on the sidelines begins to move.
Databuild CEO Morag Evan said that for a sector that relies on long-term investment, the cost of capital is also a main reason why so many construction projects stall before they reach the site.
She said gross fixed capital formation in South Africa sits at just over 14% of GDP, roughly half the global average of around 28%. This suggests the country is investing far too little in new productive assets, and the construction economy is feeling it first.
Dr Roelof Botha, an economist, said: “A notable shift towards growth-inhibiting monetary policy became excessively restrictive soon after the worst of the Covid-19 pandemic. The negative macro-economic impact of the record high interest rates that accompanied this policy shift is both pervasive and alarming.”
While construction is one of the most powerful levers for growth and jobs in South Africa, it is not being leveraged to its full potential, said Evan.
“Our clients are trying to keep teams employed, price projects appropriately, and plan capacity in an environment where policy, capital, and delivery are often out of sync.
“From an economic perspective, South Africa’s real prime interest rate has climbed to about 7%, roughly double the level during former Reserve Bank Governor Gill Marcus’s tenure. Over the same period, GDP growth slowed, and construction indicators weakened, including across building plans passed and the volume of building materials produced,” she said.
Panelists at the Forum also said clients were increasingly offloading a greater share of contractual risk onto contractors while offering little flexibility in return.
The growing prevalence of Engineering, Procurement and Construction (EPC) contracts is reshaping the risk landscape, requiring contractors to build sophisticated legal and commercial capabilities that previously sat with clients or consultants.
"You need a PhD in law to get through the 2017 FIDIC contract," said one delegate.
Neresh Pather, CEO of Tractionel Holdings, said government and state-owned entities needed to embrace the mechanism of partnership by changing their mindset to become collaborators instead of authorities.
BUSINESS REPORT