WRITING ON THE WALL
Construction Industry Development Board survey shows building sector is in distress
THE BUILDING and construction industry is in distress. Business confidence among general building and civil engineering classes of work remained low at 50 percent in the third quarter of this year, according to the latest Construction Industry Development Board (CIDB) small and medium enterprise business conditions survey.
The survey, undertaken by the Bureau for Economic Research for the CIDB, measures business conditions for contractors registered in CIDB Grades 3 to 8.
The CIDB said the downturn in the building and construction industry had resulted in increasingly more contractors facing financial difficulties and even financial distress.
The board added that the business confidence levels indicated by the survey “represented an industry in distress”.
Building activity
The survey revealed that general builder confidence dropped 9 index points on a 100-point scale to a level of 42 in the third quarter. This implies that almost six out of 10 respondents were dissatisfied with the current business conditions.
The survey report said business confidence was lower across all grades in the third quarter, with the sharpest drop registered by Grades 7 and 8.
It attributed this largely to a slowdown in building activity, adding that business confidence among building contractors in Grades 7 and 8 had cumulatively fallen by 40 index points since the beginning of the year. CONSULTING engineering firms grew in terms of both profitability and employment in the first half of the year. An increasing number of firms, however, are expecting profits to decline.
Firms expecting receding profits increased to 63 percent in the first half of this year from 54 percent in the second half of last year, according to the latest biannual economic capacity survey by Consulting Engineers South Africa (Cesa).
“This is a significant increase and clearly points to an industry under higher levels of financial distress,” the survey’s report said.
It said profitability unexpectedly improved to an average of 14.4 percent in the first half of the year from 12.2 percent and 13.7 percent in the previous two surveys. Employment increased by 4 percent in the
General builder confidence declined in the major provinces, with confidence deteriorating by 31 index points in Gauteng, Western Cape (-6), Kwazulu-Natal (-5) and Eastern Cape (-4).
However, confidence in the Western Cape remained above the key 50-mark. The CIDB said this indicated that the building sector in the Western Cape continued to grow albeit at a more subdued pace.
The survey report said building activity was likely to remain under pressure because the percentage of first six months following three consecutive survey periods of contraction.
It estimated an employment increase by about 2 percent to about 23 838 jobs in the first half of the year, compared with the same period last year.
The number of firms looking for engineers increased to almost 70 percent from 48 percent before.
“There is increased demand for technologists and other technical staff, where 68 percent and 51 percent of respondents reported the desire to increase staff. This is well above the average over the last four surveys of 34 percent and 18 percent,” the report said.
Fee earnings also surprised on the upside, increasing by about 1.2 percent compared with an expected decrease of 3 to 5 percent.
Cesa said it was probable that earnings had reached “an upper turning point with respondents who rated insufficient demand for new building work as a constraint increased to 80 percent in the third quarter from 73 percent in the previous quarter.
Job losses
This marked the third consecutive quarterly increase in the percentage of respondents who suffered from a lack of demand, it said.
The lower building activity led to more job losses in the third quarter. According to the report, the percentage of respondents indicating a softer growth outlook in the medium term” considering the trends in industry indicators reported by firms.
More projects
Wally Mayne, Cesa’s acting chief executive, said the trends were encouraging, especially regarding growth in profitability and staff employment within Cesa’s member firms.
“However, we believe the trends would be better if more projects are brought on stream by the government, which will accelerate infrastructure delivery, reduce unemployment and provide the much-needed training and experience our graduates desperately need,” he said.
Firms largely continued to report keen to fierce competition in tendering despite some level of moderation from a peak of 96 percent in June 2013 to 85 percent by that employment was lower than a year ago increased to 40 percent in the third quarter from 29 percent in the previous quarter.
Business confidence among civil contractors dropped to 45 index points in the third quarter from 53 in the previous quarter.
The CIDB said lower construction activity and tougher tendering price competition weighed on confidence. The percentage of respondents who reported lower activity levels increased to 35 percent in the third quarter from 26 percent December 2014. The survey report said this was above the average of about 80 percent during 2007/08.
On average 55 percent of firms reported that tendering competition was fierce in the first half of the year compared with 53 percent in the previous survey.
Payment remained a serious issue though, with fees outstanding for longer than 90 days as a percentage of total estimated income, including late payments, increasing marginally to 24.5 percent in the first half of this year from 24 percent in the previous survey.
Industry challenges included regulation issues, with procurement based on price and broad-based black economic empowerment resulting in its being largely price driven; unrealistic tendering fees; fraud and corruption; and unlocking greater private sector participation to fast track delivery. in the previous quarter.
Business confidence declined in all the provinces with the exception of KwaZulu-Natal.
The percentage of respondents who indicated that the slowdown in activity had resulted in job losses increased to 24 percent in the third quarter from 4 percent in the previous quarter.
Contractors reported that access to skilled labour was becoming a significant constraint to business growth, with the shortage of skills also driving up the cost of labour.