Builders feel the pain of junk status

SA’s downgraded status by international agencies is likely to hike credit costs in the construction industry, particularly in existing contracts, raising the already high risk of non-payment.

The first to feel the pain will be employers, increasing project funding pressure and beggaring returns. Few projects are built from employers’ cash reserves, meaning more expensive credit will cause widespread pain.

State construction projects are likely to be the first affected, interrupting municipal service delivery and all stateowned enterprises’ projects. Already, the controversial nuclear build deal is in doubt due to affordability concerns. Other infrastructure projects are being placed on hold, including those in crucial areas such as water infrastructure.

Employers already engaged in projects must keep funding them, cancel or suspend them, with the associated consequences of doing so.

Cases of employers unable to pay contractors are surfacing; most are unable to finance projects beyond 30 days. Some are taking out loans to keep funding the works in anticipation of payment.

Most at risk are the smaller to medium enterprises – particularly devastating for development.

I’ve come across contractors simply being told by state entities there is no money left to pay them. Anticipate seeing more of this as a result of our junk status. I also anticipate seeing more business rescue and insolvency proceedings.

Ensuring one has contracted with a party that can pay (as a contractor) or finish the job (as an employer) and that the contract has sufficient protections, has never been more critical.

Draft regulations to ensure prompt payment and rapid dispute resolution have not yet been promulgated. But, as long as contractors have complied with their contracts, they should be able to prosecute their claims.

Parties should not be afraid to exercise their rights and pursue the contractual dispute procedures.

Chris Bennett is director at MDA Attorneys

The first to feel the pain will be employers, increasing project funding pressure and beggaring returns.