Good news for the South African construction industry

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Trunelbags, leading suppliers of bulk bags and plastic bags in Johannesburg and Pretoria, spotted some good news recently regarding South Africa’s construction industry. According to a recent report issued by Andries Rossouw, a PwC Partner, the industry is poised for future growth despite recent setbacks in the economy and labour unrest.

As the report reminds us, “South Africa’s construction industry faced a challenging year in 2014; fraught with labour unrest, substantial delays on some of the country’s major construction projects, as well as recent setbacks in the economy.”

Fortunately the report highlights a brighter outlook for the latter half of 2015 and next year.

Rossouw noted:

“The past few years have highlighted the need for better coordination and monitoring within the construction industry – a challenge that the South African Government has welcomed with the roll-out of its National Infrastructure Plan. Implementation of the plan will require significant input from the construction industry.”

Here is a summary of the key points from the report issued by Andries Rossouw, PwC Partner:

Continued commitment to public infrastructure investment

“The Government’s ongoing National Development Plan and its continued commitment to public infrastructure investment of R847bn over the next three years are positive signals for future growth in the industry.”

Industry positively impacted on increased revenue from energy, oil and gas projects

“Total revenue increased by 9% to R172bn on the prior year mainly as a result of an increase of R4.1bn from Group Five, R1.5bn from Murray & Roberts and R1.3bn from Aveng. These increases were largely as a result of increased revenue from energy, oil and gas projects and a weaker rand partially offset by weaker demand from the mining sector.”

Staff costs a significant component of operating costs

“Total operating costs increased by 9.4%, marginally higher than the revenue growth, resulting in a slightly lower profit margin. The report shows that for the heavy construction companies, staff costs continued to represent a significant component of operating costs, constituting 28.3% of total operating costs (2013: 27.8%) and increased by 10% on the prior year.

Retention of key skills critical for future growth

“Retention of key skills to serve prospective contracts is one of the construction companies’ biggest investments in anticipation of the potential upswing. Although tender activity has been very high according to a number of companies, there were limited tenders awarded. Companies therefore have to decide whether they can continue carrying excess staff or whether they need to downsize.”

Key risks identified

“The common key risks identified by construction companies include risks to growth and expansion of the industry; industrial unrest; loss of key skills and expertise; health, safety and environmental sustainability; project execution; transformation; tender risks; credit risk management; and compliance with the laws and regulations.

“In addition to these risks, the construction industry remains under pressure from the public and regulators to significantly improve its safety performance, with challenges prevailing across the industry. There is also the added risk of non-compliance with the Construction Charter, and concerns around the retention of talent and skills shortages.”

Risk management key to effective management

“Risk management is a vital component of effective management in the construction industry. Companies need to integrate risk and performance management and they need to evolve risk management to be more predictive in order to anticipate and plan for negative potential events.”

Tax challenges in 2016

“A new withholding tax on service fees will be introduced on 1 January 2016. A large number of construction companies are engaged in projects throughout Africa as a result of the expansion of business opportunities on the continent. Therefore it is important for these companies to understand in which instances the new withholding tax on service fees will apply to ensure proper cash flow planning and project pricing.”

In conclusion

Rossouw concludes: “The South African construction industry is well placed to cope with new growth requirements. However, companies will need to manage short-term liquidity needs.”

Source: PwC report on South Africa’s construction industry

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