The Nigerian construction industry is highly import dependent, as a result, they are already feeling the impact of the Naira devaluation. Checkmating the effects of naira devaluation may not be controlled by contractors but they can control their response to it.
In my last article on Naira devaluation and the Nigerian construction industry, I outlined The Effects of Naira Devaluation on the Construction Industry which includes;
- Reduction in government construction projects
- High costs of doing business
- High costs of housing and properties
- Rise in interest rate and cost of borrowing
- Low employment outlook for construction professionals
- Increase in construction project abandonment
These effects have significantly increased the cost of doing business for construction companies in Nigeria leading to more cash constraints. Managing and surviving as a Nigerian construction company despite these increasing costs and lack of funds is the focus of this article.
Let’s dig in!
6 Ways Nigerian Construction Companies Can Survive Naira Devaluation
1. Reduction in Overhead Cost
Overhead costs can pile up quickly in any business, but especially in construction. Overhead costs are the ongoing costs associated with running a business. But they are different for construction companies than for businesses operating in any other industry.
The nature of construction work; its relationship with independent contractors, frequent location changes, equipment rentals and labour costs, separate it from all other industries. Overhead costs for a construction company can be placed into two broad categories:
- Direct Overhead Costs:
Direct or job overhead costs are unique to a specific construction project and change from job to job. These costs are chargeable to one particular project. The direct overhead costs most likely to accumulate on a construction project are;
- Temporary office structures: such as trailers, architect’s quarters and leased office space.
- Project-specific salaries: for foremen, schedulers, engineers and job superintendents.
- Job-specific equipment rentals: such as jackhammers, cranes, bulldozers and backhoes.
- Temporary utilities: the sanitation facilities and drinking water necessary for any job site.
- Indirect Overhead Costs:
Indirect or general overhead expenses are those that are not specific to any particular job but are fees the contractor pays on a regular basis. These costs are not chargeable to one particular project. The indirect overhead costs most associated with construction companies are;
- Salaries and benefits of employees and personnel: such as bookkeepers, executives and administrative employees who don’t work on an actual job site.
- The company’s physical office: with its expenses for rent, utilities, supplies, phone and Internet lines and insurance.
- Miscellaneous ongoing expenses: such as marketing, advertising, travel costs and legal fees.
These construction overhead costs will severely challenge the cash flow of most Nigerian construction companies during this period. So reducing them will help free up your operational funds. The following are some ways to checkmate your overhead costs;
- Reduction of administrative cost such as salaries and benefits of senior executives, employees and other personnel.
- Selling or leasing underutilized equipment.
- Re-examining the need for your company-owned vehicles.
- Reduction in office expenses such as office rents or lease and other general expenses such as supplies, utilities, phone bills, office equipments and furniture etc.
- Cross-training employees to get the most out of each worker.
- Outsourcing your information technology, accounting and office tasks.
- Reduction of miscellaneous indirect cost such as marketing and advertising cost, legal fees, charitable donations and other contractual professional services e.g. auditors etc.
2. Outsourcing of Jobs
Whether your firm specializes in building materials, construction equipment or commercial interiors solutions, effective talent acquisition is a must as vacant positions often lead to delays and cost overruns.
However, not all talents should be engaged full-time because there are jobs that have more comparative advantage if outsourced than keeping them in-house. Just as was described above, some jobs associated with indirect overhead costs are not executed or do not involve the day to day operations/activities of the company.
Likewise, some jobs are project specific, meaning they are not often needed until a construction project is awarded to you. Such jobs fall under the direct overhead costs, by outsourcing them on a per project basis, can greatly free up your cash flow positively.
So employing the services of such professionals through outsourcing is more cost effective than keeping and maintaining them in-house. These jobs save cost and free up the backlog of capital expenditure involved in maintaining the office and personnel. Examples of jobs that can be outsourced for the construction industry are;
- Legal Services
- Information Technology
- Quantity Surveyor
- Planning Engineer
- Civil/structural Engineer
- Geotechnical Engineer
3. Avoiding Cost Estimation Errors and Budget Overruns
Cost overruns are an unfortunate fact of life in construction. There are many reasons why construction projects go over budget – that is, cost you more than you or your sub-contractors estimated.
One of such reasons is price fluctuations or changes in the prices of building materials needed for the project. Due to the naira devaluation, the foreign exchange rate is in perpetual flux resulting to constant price hikes.
The negative impact of these price hikes on the Nigerian construction industry is traceable to our import dependency as a country. With over 70% of construction materials and equipments being shipped in from overseas, the fluctuating foreign exchanges is bound to affect the eventual costs of executing construction projects.
In the end, if adequate care is not taken, most Nigerian construction companies will repeatedly fall victim of construction costs estimation errors and budget overruns. When this happens, someone must make up the differences in additional costs and in most cases, it’s you the contractor!
To help you avoid such frustrating outcome, here are 3 practical steps you should take as a Nigerian construction company to prevent cost estimation errors and budget overruns.
- Watch Out for Omissions:
These are items accidentally left out of the estimate – either soft costs (permits, fees, etc.) or hard construction costs. Land development costs are often much higher than expected. Also, basic construction items like fasteners and hardware, window jamb extensions, or household exhaust fans are easy to overlook, as well as finishing touches like bathroom accessories or topsoil and landscaping. Each mistake can range from a few hundred to thousands of naira.
Omissions may be due to items missing from the plans and specs that were not included in the estimate and bid. Your best tool to help avoid omissions is a good checklist and detailed plans and specifications. If items are not included in the plans and specs, the bids you receive are likely to also exclude these.
- Avoid Wrong Assumptions:
This is a broad and potentially costly category that takes vigilance to steer clear of. They are items that you assumed were covered under a bid, but aren’t. If you hear yourself saying, “But I thought that was included in the price” then you’ve experienced this first hand. These problems are usually related to unclear communication of expectations via plans, specs, and work descriptions (scope of work) in the contract.
The best solution to these oversights is clear communications in the plans, spec, and contract, so that all parties know what is expected. If you are hiring sub-contractors directly, you should provide each sub with a full written description of his or her scope of work, along with detailed plans and specifications.
- Price Changes:
Material cost, equipment costs or labour costs may rise between the estimate and the project. Always check material prices before committing to an estimate and negotiate with suppliers to lock in prices for the project.
As per equipment costs, schedule your rental equipment in an efficient manner to prevent squandering costs. Do not allow rental tools and equipment to stay on a project if they are not being used. If the equipment is required later in the project, weigh the costs of keeping it or paying pickup and delivery.
4. Prudent Management of Cash
There will be less construction projects to undertake due to the naira devaluation in the country. So you cannot afford to be extravagant with cash during this period. All revenues the company makes must be carefully managed to ensure that the company doesn’t run out of operational funds to keep the company afloat while awaiting new projects.
Cash management is the art of organizing, planning and controlling the collection, investment and disbursement of cash. In the construction industry, it is crucial to keep an eye on a company’s overall cash flow, as well as the cash flow on major projects.
Acquiring a comprehensive knowledge of this process is essential to successfully managing a construction company in trying times. The failure of prudent management of cash can result in the following;
- Increased office expenses.
- Increased investment of owners’ capital.
- Diminished credit ratings.
- Inability to take advantage of new opportunities.
- Failure of the business.
Your ability as a construction company to prudently manage the cash flow will be beneficial to the company and help it sustain in trying times.
5. Accepting Low Profit-Margin Projects
Most construction companies are known to turn down or reject construction jobs that don’t have huge profits. But with less money in circulation in the country as a result of the naira devaluation and low government expenditures, prospective clients will also be affected. The amount of money budget for construction projects will be significantly constrained.
To remain competitive and ensure your survival through this naira devaluation period, accepting construction projects with low profit-margins is better than staying idle. Industry players should understand that accepting big construction jobs that have low profit margins doesn’t lower company’s standards but increases the profile number of companies you have done work for.
6. Downsizing Workforce
The Nigerian construction industry which contributes about 70% of the country’s gross domestic product [GDP] is one of the highest employers of labour. Labour costs are indeed a huge expense for any construction company; this is because of the volume of manpower needed to execute construction projects. So downsizing your workforce is a sure way to stay afloat as a construction company.
The Nigerian government being the biggest source of construction projects is experiencing dwindling revenues. The ripple effect of this is traceable to their inability to pay the debt of N500 billion owed to construction companies. According to the President of the Federation of Construction Industry (FOCI), Mr. Solomon Ogunbusola; construction companies are now downsizing their workforce to enable them survive.
In his words; “the construction companies in Nigeria are working below 30 percent, not because we are interested in doing this, but we have been handicapped due to lack of payment by our clients and the major client we have today is the government (Federal, State and the local governments).
Our members are indebted to the banks. I can say authoritatively that the banks are writing and threatening some of our members, that they would publish their names that they are chronic debtors because, according to them, it is a directive from the Central Bank of Nigeria”.
Conclusion: Desperate Times Call for Desperate Measures
In conclusion, the above listed ways can help the construction industry to manage risk and maintain financial strength and profit during this period of economic downturn till the economy rebounds again.