City Concerned About Liquidations And Cash Flow Problems In Construction Industry

Seven capital projects in excess of R300 million have been hampered due to the liquidation of two well-established contracting companies earlier this year, as well as the liquidation of four other companies last year. This has caused delays of up to four months to current construction projects which have had a knock-on effect in the ensuing months.

Transport for Cape Town (TCT) is concerned about the financial difficulties experienced by some construction companies that have been contracted to deliver on the City’s capital projects for the 2013/14 financial year.

Transport for Cape Town (TCT) is concerned about the financial difficulties experienced by some construction companies that have been contracted to deliver on the City’s capital projects for the 2013/14 financial year.

The six recently liquidated construction contractors are Darson Construction, Jansen Tarmac, Requad Civils, Vusela Construction, Toleni Construction and the subcontractor Winlite; furthermore another four contractors to the City are also experiencing serious cash-flow problems. Among the projects affected by these liquidations are the rehabilitation of Weltevreden Parkway and roads in Kraaifontein; the third phase of the rehabilitation of Main Road between Muizenberg and Clovelly; the reconstruction of the concrete roads in Gugulethu and Manenberg; and a number of non-motorised transport projects in various suburbs of Mitchells Plain and Kuils River.

The contracts held by the liquidated companies cannot be terminated and replaced overnight due to the complexities inherent in legally terminating contracts, the requirements of the Liquidation Act, and the time constraints associated with the procurement processes involved in the appointment of a replacement contractor.

In order to do so, the City is obliged to follow due process in terms of the Supply Chain Management Regulations and the legislative requirements as set out in the Municipal Finance Management Act (MFMA). Thus it takes months to complete the drafting of tender documents, tender advertising, tender adjudications and the subsequent awarding of tenders.

In order to minimise the effect of the liquidations on the finalisation of the capital projects and to prevent the ballooning of costs, TCT has resorted to certain interventions. For example, in most cases TCT has appointed the second ranked tenderer from the initial competitive tender process to complete the project. This is done in terms of the City’s Supply Chain Management Policy and in accordance with the MFMA, via a deviation process approved by the City Manager. The second ranked tenderer normally holds its prices as tendered, unless a year or more has lapsed between the time of tendering and the time of the liquidation, in which case industry escalation or other proven cost increases will apply. It is important to note that a certain start-up period is still required for the newly appointed contractor to get underway, hence a further unavoidable delay.

Additional costs incurred as a result of the need to complete the project with an alternate contractor are usually recovered from the guarantee that every contractor is required to lodge with the City before they are able to commence work – this usually equates to 7% of the contract value and also from the retention that is held back on each payment certificate which can be up to a maximum of 5% of the value of the work completed.

‘We are concerned about these liquidations and the noticeable increase in the number of contractors who do not perform as well as expected due to cash flow and credit problems, restricting their ability to obtain materials for their contracts. However, the City will not relinquish the principle of awarding contracts to registered contractors inclusive of a broader pool of lesser known and deserving businesses that tick all the boxes. We adhere to rigorous due diligence processes when adjudicating and awarding tenders. A financial due diligence check is but one such a requirement. Some will swim and others may sink, but the City cannot be dissuaded from expanding economic opportunities to all its residents, especially emerging businesses,’ said the City’s Mayoral Committee Member: Transport for Cape Town, Councillor Brett Herron.

As of 15 May 2014, Transport for Cape Town’s total actual expenditure plus contractual commitments amounted to R1,278 billion or 79% of the capital budget for 2013/14. In the previous financial year TCT had spent a record of R2,5 billion which equated to 95% of its budget. However, it is likely that in the current financial year and despite the City’s best intentions and interventions, TCT will be hampered in its efforts to make full use of the capital budget at its disposal due to factors beyond its control. In fact, TCT was on track up until January 2014 when numerous contractors began to experience severe financial problems, even with their original financial statements on appointment being in order.

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