The Construction Industry in Uganda takes a “lion’s share” of our National Budget. According to the proposed 2018/2019 National Budget of Shs21.9 trillion, about Shs9.0 trillion will go to Construction Works comprising roadworks, power dams, water projects, schools, hospitals, etc. This figure goes higher if we add on airports, irrigation schemes and landing sites.
This is about 40% of the National Budget. Of this Shs9 trillion, Ugandan local companies will be very lucky to pick 30%. The rest will go to foreign firms. According to project managers and the Ugandan law as administered by PPDA, failure by local contractors to win jobs is due to their lack of local technical capacity to execute the works effectively. This should raise eyebrows of any well-meaning Ugandan about this flight of capital from our economy.
During the evaluation process of tenders, technical capacity scoring is based mainly on the following criteria:
Relevant jobs handled by the contractor to date
Human resources, ie the company’s present staffing and the proposed staffing on the job
Plant and equipment owned or that can be leased
Financial capacity, ie audited accounts and ability to handle the job at hand or bigger ones.
The biggest challenge for local companies to win tenders is to demonstrate adequate financial capacity. A company will be able to hire appropriate human resources, acquire appropriate machinery and steadily build a good job record if it has strong financial capacity. The path towards strong financial capacity is through being actively engaged in construction projects on a continuous basis. However, this prospect for growth is frustrated when payments for work done, mainly by government departments, is unduly delayed. This fails many local contractors to grow and it causes them to miss out on the national construction budget. This in turn affects the national economy because the capital which would have gone into local hands and circulated in the economy is lost to foreign hands. When we consider the magnitude of the funds involved, there should be cause for alarm.
How do delayed payments silently kill the local contractor’s capacity?
Delayed payments lead to failure to service a company’s loans with the financiers. In the process, the credibility of the company with banks and financiers gets tarnished.
Default on payments to credit suppliers tarnishes the credibility of the contractor to its suppliers, reducing chances of further credit supplies. Credit supplies are very user-friendly to a contractor because most often they don’t accrue interest. The loss of such facilities certainly silently kills the contractor.
Default on payments delays payments to workers thus lowering the morale and motivation. This in turn leads to individual inefficiencies, reduced productivity, poor work quality and staff resignations, all these leading to stunted company growth.
Diversion of funds from one project to another arises when the contractor in a tight situation encroaches on the funds of another better-performing project in order to keep work going, thus putting a well-paying job in jeopardy. This is another silent killer in the long run.
Payment delays lead many contractors to moneylenders (sharks) who charge very high interest rates. Having broken the bridge to ‘easier’ funding, the desperate contractor resorts to these sharks. The prohibitive interest rates eat into his profits and silently but surely kill him in the long run.
Government taxes are due on issuance of an invoice! Delayed payments, many times from the same government, subject a contractor to penalties on delayed remission of these taxes. This certainly maims many local contractors leading them to a slow silent death.
Delayed payments often lead to delayed completion of projects, subjecting the contractor to liquidated damages. This further erodes the profits and capacity, silently killing the contractor.
Delayed payments often lead to loss of new opportunities as the contractor is stuck on one job for a prolonged period and with a non-performing record. This translates into a poor job record.
Ultimately the well intentioned small-scale contractor is sentenced to stunted growth or slow death. The current bank interest rates and surcharges on delayed payments can never in any way compensate for the damage to the contracting company.
It is worth noting that most local contractors fear to undertake legal redress to mitigate some of these adverse effects for fear of endangering future job prospects meted by the culprits, the job givers.
Just to illustrate how prompt payments would lead to capacity building of the local contractor, let us consider an example of a contractor who has a working capital of Shs100m. He or she can on a consecutive basis execute three months’ contracts of Shs300m each giving him a turnover of Shs900m in a year. In three years, the contractor could realize a turnover of Shs2 – 3bn. Within five years, the company would change from a small-scale to a medium-sized one, seeking for contracts above Shs10bn.
Before we chart a way forward for the local contractor to attain capacity and become regionally and internationally competitive, we need to know the causes of delayed payments and propose solutions.
The Federation of Consulting Engineers (FIDIC) defines a definite time frame for the process of valuation and issuance of interim payment certificates to the contractor by the client or the project manager as his representative. FIDIC Conditions of Contract for Construction, clause 14.7 on “Payment” states that the Employer shall pay the Contractor the amount certified in each Interim Payment Certificate within 56 days after the Engineer receives the statement and supporting documents from the Contractor.
It should be noted that this clause does not exonerate the client’s representatives in the event that for any reason they delay to produce the certificate, unless this is due to the contractor’s fault. However, ambiguous or illegally formulated contract agreements that support clients (mainly government entities) to delay payments are common.
The following below are bidding/contract documents used by some clients I have known, which either intentionally or by mistake lack such a clarification at the expense of the contractor. The clause on “Payment” is either ambiguous or illegally coined because it exonerates the client’s representatives in the event that for any reason they delay to produce the interim certificate, even when it is not the contractor’s fault.
The contract agreements alluded to are in the public domain, as below:
Type A: It is purported to be based on the PPDA regulations of March 2014, issued to a Contractor in January 2015. Clause 43 on payment procedure reads: “…The Employer shall pay the Contractor the amounts certified by the Project Manager within 60 days of the date of each certificate.”
This sounds good until one realizes that 60 days are counted from the time the Client’s representative provides the interim certificate! So what happens when the project manager or consultant “goes to sleep”? The Contractor has no one to blame except himself for signing the contract agreement. The other parties that may share the blame are the government authorities, such as PPDA who are supposed to supervise all government procurements and the Office of the Auditor General (OAG) who are supposed to audit and advise against such anomalies.
Type B: It is purported to be a standard bid/contract document issued to a Contractor in May 2015. Clause 43 on payment procedure reads: “…The Employer shall pay the Contractor the amounts certified by the Project Manager within 30 days of the date of each certificate.”
Type C: It is purported to be based on the PPDA regulations of June 2005 issued to a contractor in March 2017. Clause 43 on payment procedure reads: “…The Employer shall pay the Contractor the amounts certified by the Project Manager within 30 days of the date of each certificate.”
Type D: The Bid/Contract document does not show the basis for bidding/contract laws and regulations. It was issued to the Contractor in March 2017, Clause 41 on payment procedure reads: “…The Employer shall pay the Contractor the amounts certified by the Project Manager within 28 days of the date of each certificate.”
Type E: The Bid/Contract document is purported to be based on the PPDA regulations of March 2014. It was issued to the Contractor in March 2017. Clause 43 on payment procedure reads: “…The Employer shall pay the Contractor the amounts certified by the Project Manager within 30 days of the date of each certificate.”
Clearly, these types A to D of Bidding/Contract agreements are at variance with each other and they directly or indirectly cause payment delays. Very often, excuses such as “heavy work overload”, “lack of adequate facilitation by in-house project managers or auditors”, etc, are supported by these ambiguous or illegal clauses. In some instances, this acts as a basis for the contractor to “provide chai” if he wants his certificate processed! By the time a contractor puts in a claim in which he has invested resources to bring the project to this level, he needs to recoup them to move to the next level. And how does he plan for it when a clear time line is not built into the contract?
Willful or unintended failure by most government departments to even honour payments of the approved certificates has caused untold delays that affect contractors’ capacity to deliver in the short and long run. Remember that many local contractors do not seek legal redress for interest charges for fear of victimization by the client in view of the scanty jobs and the cut-throat competition.
I wish to propose a few practical steps towards addressing these payment delays as follows:
a) Contractors should collectively appraise themselves on the legal and desirable content of contract agreements before signing them. In this case, correction of clauses that cause delays should be a must during the pre-bid meetings. At this stage, all tenderers can gang together and insist on the correct contractual procedures.
b) PPDA and the OAG should ensure that the tender documents and procuring processes are in accordance with the law, preferably before the tendering stage.
c) Penalty to client for delayed payment should not only be pegged on bank interest rates but also on loss of opportunities, so as to force the client to pay on time.
d) Government taxes should fall due on receipt of payments to the contractor.
Building capacity takes time and the earlier we look into ways of salvaging our local capacity the better for us as a nation. There is need to financially empower our local contractors and the start is with corrective action before we look at affirmative action. The measures to correct these inequalities won’t cost us anything but a determined mindset to seek ways of putting the Ugandan economy into Ugandan hands.
The slogan “where everyone is accountable, everyone wins” applies very well also in the construction industry. This calls for the project managers and clients to eliminate delayed payments so as to save our local contractors and the construction industry.