Junk status to increase nonpayment in construction industry

11 May 2017

The already high risk of non-payment in the local construction industry is set to escalate further, owing to South Africa’s recent downgrades by international ratings agencies impacting on the industry’s credit costs, MDA Attorneys’ Chris Bennett has warned.

He notes that the “first to feel the pain” of more expensive credit will be the employers, as lenders raise interest rates. This places pressure on employers to fund their projects and reduce their returns, with not many projects being built from cash reserves. “This will mean that more expensive credit will be a widespread blow,” says Bennett.

State construction projects are likely to be the first to be affected, ranging from municipal projects and reaching all State-owned enterprises’ projects. “Already, the controversial nuclear build has been placed in doubt on account of the affordability factor. However, other infrastructure projects are also being placed on hold, including those in crucial areas such as water infrastructure.

Besides delaying or blocking new builds, the effect on employers already engaged in projects is significant. They must keep funding them, cancel or suspend them, with the associated results of doing so.

Bennett says pressure is already on employers who are unable to pay their contractors either on time or at all. “This places many contractors in difficult positions, as most contractors will be unable to finance a project beyond 30 days. Those contractors then also take out loans to keep funding the works in anticipation of payment.”

Smaller to medium-sized enterprises are most at risk, he says.

“Non-payment or very late payment of contractors is already a significant problem, particularly in the public sector. We anticipate seeing more of this as a result of our junk status,” says Bennett.

This could possibly lead to increased business rescue and insolvency proceedings in the construction sector.

“Parties should not be afraid to exercise their rights and pursue the contractual dispute procedures, judgment for payment certificates, make demands under guarantees, or even terminating the contracts and proceeding to recover damages,” Bennett advised.

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