Risk landscape in the South African construction industry

The construction sector has always operated in a highly complex and diversified risk landscape. The industry is not only sensitive to economic cycles but is also affected by political and technological advances. Construction activities are further exposed to risk from the project acquisition stage through estimating, contractual clarifications, execution, and project closeouts.

The past two years have been particularly testing for the industry due “Black Swan” event of the COVID-9 pandemic. The pandemic caused delays and disruptions on existing projects as well as postponements or cancellations of future projects. The initial impacts of the pandemic affected all sectors of the industry but as economic activity began to increase certain sectors such as healthcare, distribution, and logistics as well as technology have rebounded. Sectors such as leisure, travel, and retail are still lagging.

The sector has also had to face shortages of materials, talent as well mobility between projects. In certain countries, the continued changing of lockdown rules continues to affect the sector’s ability to efficiently managed projects due to the stop-start nature caused by the restrictions.

Key Risks currently being reported

The Aon 2021 Global Risk Management Survey listed the following as the top 10 risks facing the global construction sector:

1. Economic slowdown
2. Commodity price risk, scarcity of materials
3. Cashflow/liquidity
4. Business interruption
5. Accelerated rates of change in market factors
6. Cyber risk/data breach
7. Workforce shortage
8. Capital availability
9. Damage to reputation/brand
10. Pandemic risk/health crises

A review of the JSE listed companies in the heavy construction sector shows a similar risk trend as the one noted above but with the following risks also being highly rated:

1. Industrial action
2. Community unrest
3. Compliance with complex regulatory frameworks

The additional risks noted above are specifically related to the environment in that South African companies need to operate in. The majority of the JSE-listed companies also noted cash flow/ liquidity and loss/shortage of critical skills high on their risk lists.

Future challenges for the sector 

The construction sector will continue to be affected by global and localized economic forces. The sector will also be affected by the political will to release infrastructure projects as well as the potential reduction in office space requirements due to hybrid work-from-home arrangements.

The E-commerce changes arising out of the Covid-19 lockdown situation and the potential reduction in potential demand for retail space could still come to fruition. The need for additional healthcare facilities could however provide an upswing for the sector. Sectors that have seen an upswing in demand for their products such as pharmaceutical, technology, and logistic businesses could also provide an upswing for the sector.

The challenge for companies will be to select, price, and execute the projects efficiently and at improved margins.

The risk of community and labour unrest as well as skills shortages needs to be proactively managed throughout the construction cycle to ensure limited disruption in an already tight margin business. The risk of cyber-attacks and loss of intellectual property also remain a significant risk facing the sector but the use of new technologies such as BIM modeling and the use of drones provides the potential to enhance efficiency across the board.

By Mark Snow

21/04/2022