Building a construction company takes more skill than constructing a building

When he joined Raizcorp, Sakhile complained to me that, despite being awarded a number of large tenders and contracts, he kept getting into worse and worse financial problems. His cash flow was non-existent, his overdraft facility was maxed out and he hadn't paid himself a salary for the past seven months.

Looking at the size of his turnover, and with some basic insight into the margins in the construction industry, my back-of-a-napkin calculations reflected that he should have been making a decent profit. His current financial predicament was in no way commensurate with the turnover he was achieving.

Offering the cheapest quote

I asked him how he went about costing his quotes. Sakhile had created an elaborate system of asking three unsuspecting subcontractors for quotes based on the specifications of the projects that he was quoting for. He would then submit a quote that was 5% less than the lowest of the three quotes he had obtained. As an example, if his subcontractors had returned quotes of R110k, R105k, and R100k, he would submit a quote of R95k to the real project client. His logic was that if he was 5% less than the cheapest quote, he would be sure to get the job.

Sakhile was correct; more often than not, he would be awarded the jobs he quoted for, and this explained his very healthy turnover. There is an old adage in business though; "Turnover is vanity, profit is sanity, and cash flow is reality."

My next question to Sakhile was, "How much do your jobs actually cost you?" He shrugged, and replied, "I don't know."
Sakhile Mdluli represents the large number of contractors and subcontractors trying to enter the construction industry who pay no attention to the real costs of doing business. Consequently, they land up in very hot water and are forced to close down their businesses. The frequency with which this happens reinforces the widely held belief that small construction businesses are unsustainable.

Two main reasons contribute to construction industry entrepreneurs like Sakhile not knowing how much the work they undertake costs them. Firstly, they have never learned the considerable technical skills required to cost a construction project correctly, based on the quantities, time, labour, risks, etc. involved in a specific project.

Fear of financial statements

Secondly, like Sakhile, many entrepreneurs have a deep-seated fear of financial statements. Reflecting this fear, they do not place any importance on developing their own understanding of financials and the costs of doing business. These entrepreneurs are far more interested in sales, getting deals, and perhaps managing the projects on the ground than in acquiring the financial discipline needed to cost properly.

In order to transform the construction industry in South Africa, and give it the strong financial base it requires, it is incumbent on us to create an army of construction entrepreneurs who have a deep understanding, appreciation and respect for costs. The dire state of skills development in the construction sector can be seen from the following finding reported in the cidb's Contractor Skills Survey, published in 2011; for contactors on grading levels two to four, "Around 34% of owners/directors have less than five years' experience in the construction industry, and around 65% have no formal qualifications."

The construction industry needs to over- rather than under-emphasise the importance of the business skills required to run a successful and sustainable construction business. Until there is an industry-wide understanding of this, we will continue to hear the popcorn sound of small construction companies exploding.

*Not his real name