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[Revised] Contracting is a difficult business - Koon Yew Yin



 [Revised] Contracting is a difficult business - Koon Yew Yin

 There are more than 30, 000 registered contractors in Malaysia. This ratio is likely to be amongst the highest in the world.

Contracting is a very difficult business yet it is so easy to register as a contractor.

Firstly, to register as a Class F contractor, one has only to show that he has RM5,000 capital. He does not even require a pass in SPM. But it will take at least 10 years to learn how to overcome all the inherent difficulties and become a competitive and efficient contractor.

Secondly, studies have shown that there are more failures and bankruptcies in contracting than in any other business, and also almost all construction projects are NOT completed within the original scheduled time.

The delay will cost the contractor more and that is why you can often see uncompleted buildings and abandoned projects which have been undertaken by inefficient contractors. There are many reasons for this peculiar phenomenon.

    Open tender system

Although this system is the best way to ensure completion of any project/contract at the lowest price, it is the most difficult obstacle any contractor has to face in the real competitive world. He must know his business very well and be efficient to face the open competition all the time. Like a good athlete, he has to keep fit and constantly be aware of the market conditions and his competitors.

There is a classic saying, ‘a cheap thing is not good and a good thing is not cheap’. But contractors always have to produce good work at the cheapest price.

In order to submit the cheapest tender, the contractor must be very optimistic in all his assumptions to get the cheapest rates. He must assume that he will not encounter any cash flow difficulties and that he will always get his progress payments on time to pay his creditors.

He must also assume that he will not encounter any difficulty in getting all the required materials on time to avoid any delay and also that there are ample workers for him to pick and choose from.

Furthermore, he must also assume that the heavens will be kind to him and he will not meet any inclement weather during construction. Invariably, many of these assumptions are proven wrong and thus completion delayed, and his contracted price is not sufficient to complete the contract.

    The importance of teamwork

Teamwork is important in all business endeavours. It is more so in the contracting business. Every contractor must realise that his success is not going to be determined by his own knowledge, talent or abilities. It is going to be determined by his ability to develop a great team. Those who are closest to him will help determine the level of his success.

Every efficient contractor must have a reliable team comprising managers, sub-contractors, material suppliers, foremen and skilled workers. All the team players must cooperate with one another, bearing in mind that the main contractor’s survival depends on their contribution. Their main goal must be saving cost. If they cannot complete the contract within the tender price, all of them will also be affected.

    Construction material pricing

There is no material price escalation clause in the conditions of contract. Invariably most materiel will go up in price, especially now due to the introduction of GST. Contractors are not fortune tellers who can predict the introduction of GST, bearing in mind that they cannot overprice their tender. Every contractor is trying to undercut all his competitors to secure the contract.

Invariably, most materials would increase in price due to inflation and other reasons. Contractors require many years of experience to be able to anticipate such price changes and to make adequate provisions for them whilst at the same time not overpricing their tenders and losing the bid.

    4. No contract is exactly the same

No two high-rise buildings are the same.

Construction of a building, a bridge or a stadium is always akin to making a prototype. The process is much more difficult than manufacturing any product where there is repetition. For example in making cars, the first prototype and the initial few cars may be more difficult to make but once everyone gets used to the routine, the manufacturing process will normally proceed smoothly.

In the construction of buildings or any civil engineering works, there is very little repetitive work. Every construction site is different and most of the people involved have never worked together before.

On top of this, there may also be inexperienced supervisory staff that can create a lot of difficulties for the contractors. Invariably, by the time all parties get used to the routine, the scheduled time is over.

    Financing

Most contractors do not have sufficient capital to finance their undertakings.

Contractors generally do not have fixed assets like most manufacturers. They usually do not have land and buildings but, instead, they have construction equipment. Unfortunately, banks do not accept these moving assets as collateral for a loan. Without bank financing, contractors will obviously find it more difficult to undertake their business.

    Difficulty in getting reimbursement for additional cost for additional works.

Almost all construction projects have variation of works and the contractors usually have difficulty in getting reimbursement for the additional cost. The main reason is that the architects or the consultant engineers dare not approve additional payment even the claims are legally justified because they do not want to appear that they are negligent in causing the variation of works. Moreover, they also do not want to appear that they are favouring the contractors in order to get some bribes.

    Contractors are always at the mercy of the architects and consultant engineers to approve their work.

The contractors need their work to be approved in order to get their monthly progress payment which they require urgently. As you know, the standard of workmanship can vary and it is up to the architects or engineers to approve the works.

    Appointment of an arbitrator

After having listed all the contractors’ difficulties, I think a good way to resolve most of the problems is to appoint a senior lawyer or a retired judge to be an arbitrator before the commencement of the construction works. The contractors can always rely on the arbitrator to give them a fairer deal.

With this reassurance, the contractors do not need to provide additional cost in their tenders to cover the difficulties as mentioned above. As a result, the cost of any project will be reduced.

How to be successful and produce sustainable profit?

I have provided some insight into why contracting is not a business that is as easy or profitable as it is commonly perceived to be.

There are other factors explaining why or how some of the most successful tycoons associated with the building or construction industry have managed to get where they are.

Firstly, it should be noted that the majority of listed companies were started by Chinese merchants, most of whom incidentally did not have tertiary education. For example, Lim Goh Tong of Genting began his working career as a scrap iron dealer and a contractor; and Yeoh Tiong Lay of YTL Corp. started off as a small contractor. They are so successful because they diversified to do many other businesses.

After being one of the founders of Mudajaya, Gumuda and IJM, I can tell you that the companies must not just depend on contracting which is an extremely difficult business. They must diversify into property developments, toll roads, oil palm plantations etc to produce sustainable profit.

[Revised] Contracting is a difficult business - Koon Yew Yin
http://koonyewyin.com/2016/10/29/revised-contracting-is-a-difficult-business/