Contracting a Difficult Business

By 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.

1. Open Tender 

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 well and be ready to face competition. He has to be aware of the market conditions and his competitors.

There is the 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 not encounter difficulties in getting 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 weather is kind to him and will not impact his work. Invariably, many of these assumptions are proven wrong and thus completion delayed, and his contracted price is not sufficient to complete the contract.

2. 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.

3. 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. Every contractor tries to undercut his competitors to secure the contract.

Materials would increase in price due to inflation and other reasons. Contractors require many years of experience to be able to anticipate price changes and to make provisions whilst not overpricing their tenders and losing the bid.

4. No contract is 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 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.

5. 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.

6. How to succeed?

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

Firstly, 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 as a small contractor.

After being one of the founders of Mudajaya, Gumuda and IJM, I can tell you that 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 ensure sustainable profits.


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