ASSESSING THE CAUSES AND EFFECTS OF CONTRACTORS’ INSOLVENCY IN CONSTRUCTION INDUSTRY IN NIGERIA

ASSESSING THE CAUSES AND EFFECTS OF CONTRACTORS’ INSOLVENCY IN CONSTRUCTION INDUSTRY IN NIGERIA

(A CASE STUDY OF GITTO COSTRUZIONI GENERALI / BOUYGUFS CONSTRUCTION NIGERIA LTD)

ABSTRACT

Insolvency is a product of so many factors such as mismanagement, lack of adequate planning and fluctuations. The respondents for this study were professionals within the construction industry, namely: Quantity surveyors, Architects, Engineers and Builders. Primary data was collected through the use of structured questionnaires administered to the respondents while secondary data was obtained through related literature from conference papers, journals, textbooks and the internet. Data was analyzed through the use of frequency counts, simple table, simple percentages and pie chart. The study revealed that the major causes of insolvency in the construction  industry is abuse of mobilization fee with 33.33% followed by  delay in payment for work done/ economic recession with 26.67% while the least cause is increase in minimum wage with 6.67%, the study also revealed that that abandonment of project is the major effect of insolvency with a percentage score of 31.11% followed by retrenchment/ unemployment with a score of 26.67% and the least is bankruptcy of the contractor with a percentage score of 4.44%. The study concluded that the delay in the payment of works completed by the contractor creates a major setback on the projects by hastening the advents of insolvency. The study recommends Complex project should be given to competent contractors and consultants. It will help to minimize the cases of project abandonment in construction industry.

CHAPTER ONE: INTRODUCTION

1.0       Background of the Study

The construction industry has a very strong multiplier effect on developed and developing economies. The UK construction industry has an annual turnover of more than £100 billion and accounts for almost 10% of the country’s GDP (Office of National Statistics, 2013). On the other hand, the Nigeria construction sector, which occupies an important position in the nations economy accounts for 1.4% of its GDP (Bathory, A 1984). In other words, the contribution of the construction industry warrants persistent review of its gaps. Risk and uncertainty are rife in every construction project undertaken and the cost implications are severe enough to justify its uncertainty is linked with infrastructure projects that are stalled due to budget overruns and conflict. Unlike the developed countries, genuine risk management practices are still at an infancy stage in Nigeria (Carmicheal, D.F. 1978). Clients and contractors knowledge of its significance is skewed and it is no news that they are risk shy (Winch 2002). Risk exists when a decision is expressed in terms of a range of possible outcomes and when known probabilities can be attached to the outcome. Similarly, uncertainty exists when there is more than one possible outcome of a course of action but probability of each outcome is not known (Copper. P et al 1994).

Thus, the application of risk management allows incompetent indigenous contractors. (Ickay 2014) These contractors lobby for contracts at all cost by bribing their way through, or by using political influence to get contracts without taking into consideration the inadequacy of the amount budgeted for the contracts. There have been frivolous claims during the progress of work after the collection of mobilization fees. In the event whereby the client cannot source additional finance, this leads to insolvency (Bromiley C.1995). This has been the cause of most of the abandoned projects all over the country (Young B.A  and Hall G. 1992).

One of the primary objectives of any client whether public or private is timely and successful completion of his dream project coupled with achievement of certain functional and aesthetic qualities. This is important in order to get early returns on investment. Achievement of these objectives relies solely on proper financial appraisal, cash flow, forecasting, planning etc. which are to aid evaluation of financial requirement, continuity as well as running of the project. Nigerian indigenous contractors have not had a fair share of major construction activities in the country, as these are often awarded to their foreign counter parts who are considered more technically and managerially superior and efficient in funds acquisition and project execution (Langford D 1990).

1.1       The Need for the Study

Construction projects are usually a one-off endeavour with many unique features such as multiple project participants long gestation period (between conception-design-construction), complex procurement methods, large financial requirements and dynamic organization structures. All these have made the risk and uncertainties related to construction project more in peculiar environments like Nigeria when company with other countries. Although it has been recognized that construction risk cannot be eliminated, it can be mitigated and managed effectively, if project risk and uncommon characteristics are identified and assessed at the early stages of the project.

Insolvency is of great importance to project stakeholders, (contractors, clients and consultants) because it will minimize the possibility of conflicts, disputes, cost and time overruns, abandonment and quality-related issues associated with construction project. The implementation of effective risk management practices, up and down of the supply chain will improve bid success rate, profits, project cash flow, safety record, business continuity and reduce contingencies. Insolvency is all about being able to deliver results with a certain degree of certainty and competitive advantage.

This research on insolvency will help project stakeholders (client, consultants and contractors) to achieve project objectives of cost, time, quality and safety. It will help the society and economies achieve cost effective and efficient projects which will create new business opportunities and generate income for the general public, investors and government. It will undoubtedly contribute to the development of the Nigerian construction industry as risk management variables like power and competitive advantage are aspect of the Nigerian construction process that needs understanding.

Lastly, findings from the study will enable policy makers and construction industry stakeholders improve project delivery in Nigeria and by extension help improve economic growth through multiplier effects.

1.2       Statement of the Research Problem

The construction industry is constantly faced with abandonment of projects, Brownlie S.M and Harris, F.C (1987) – a situation which leads to construction workers being laid off. Unfinished projects resulting to under-development of the country which instead of creating wealth for the country, forces people to live below the poverty line.

1.3       Aim and Objectives of the Study

1.3.1    Aim

The aim of this study is to examine the causes and effects of contractor’s insolvency in the construction industry and consequently propose ways to reduce or possibly stop the incidence.

1.3.2    Objectives

 In order to achieve this aim, the following objectives will be considered:

1. To find out the causes of insolvency in the construction industry.
2. To examine the effects of insolvency in the construction industry.

1.4       Methodology

1.4.1    Data collection

Data was collected through a structure questionnaire, personal interview, conference papers, journal and visits to the study area

1.5       Scope and Limitation of the Study

1.5.1    Scope

The scope of insolvency is very wide that it would not be possible to finish it in a work of this size therefore, this research covers the causes and effects of insolvency in construction industry with a particular interest of contractors in Abuja, the Federal Capital Territory.

1.5.2    Limitation

Research of this nature do not come without setting constraint that tries to affect the successful completion of the work, however, the researcher tries all within her reach to ensure that the success of this project. The following the prominent problems encounter in the course of this work.

1. Uncooperative Attitude of Some Respondents: Some of the contractor failed to respond positively to the request of the researcher with respect to research questionnaire distributed. The contractor behaved in an uncooperative and attempted to be uncooperative with the researcher.
2. Combining research of this nature with regular studies posed a great challenge to this research. The researcher have to cope with the stress of taking part in all school activities (lectures) and at the time sparing time for site visitation and carrying out of this research.

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