Construction Sector Confronts 27% Margin Decline

The construction sector in Mauritius is grappling with significant operational challenges, primarily driven by escalating costs. In 2024, the industry has felt the weight of soaring material prices, escalating wages, and the constraints posed by fixed-price contracts, leaving many companies in a precarious position.

With tightened profit margins, operators are struggling to maintain financial viability.

A recent report titled “State of the Economy” has revised downward its growth forecasts for the construction sector.

In September 2024, projections indicated a growth of 37.4% for 2023 and 38.8% for 2024, while the latest revisions reflect a stark decline to 21.3% and 25%, respectively.

Industry stakeholders attribute this downturn to a combination of factors including the lingering effects of the COVID-19 pandemic, geopolitical conflicts, and increasing raw material costs, driven by freight and exchange rate fluctuations.

Labor costs, which constitute approximately 25% of the total expenses for construction projects, have also surged.

The average increase in labor costs reached 27% between December 2023 and December 2024.

This dramatic escalation pressures companies, with one operator noting that a firm generating a revenue of Rs 500 million would face an annual increase in payroll of Rs 32 million—around Rs 2.5 million monthly—without the ability to recover costs due to fixed-price contracts. This rise is deemed both substantial and unsustainable.

Vidianand Toofanny, president of the Association of Contractors, acknowledged that many of its members are struggling to remain profitable.

“The biggest challenge for 2024 has been the rising prices. Our contracts do not universally accommodate these increases, and we have had to absorb the costs,” he explained.

Most public and private contracts in Mauritius are fixed-price, which means contractors bear the burden of any unanticipated cost increases.

For instance, the Public Procurement Office’s Circular No. 1 of 2020 mandates that public contracts under one year are typically fixed-price, with no room for adjustment.

Another substantial obstacle in 2024 has been the availability of construction materials, especially with ongoing public projects such as those led by the National Housing Development Company.

Toofanny noted that this situation has resulted in material shortages, delaying various construction projects and leading to penalties for overdue deliveries.

“This has created a boomerang effect on operators within the sector,” he added.

The financial plight of some construction companies has reached a critical level, with past instances where firms like Pad & Co and Building & Civil Engineering Co. Ltd had to shut down operations, while Super Construction opted for voluntary administration.

The current environment has further weakened the financial stability of several construction businesses.

According to operators in the sector, excessive payroll burdens compounded by fixed-price contracts threaten to suffocate their cash flow.

“Without immediate support measures, many companies risk shutting their doors, jeopardizing thousands of jobs,” lamented one operator.

A Need for Financial Support

To address the financial strain posed by these developments, an estimated Rs 1.5 billion will be required to fund the 14th month’s salary across the construction sector, based on the base salaries of all employees.

However, this expense was not anticipated in the 2024 financial budget, unlike the year-end statutory bonus.

Ravi Gutty, president of the Building and Civil Engineering Contractors Association, emphasized the significant impact this additional payment will exert on the profitability of construction businesses.

“This will be the first time the sector has to cope with a 35% salary increase within a single year, including the 14th month.

This exceptional bonus represents a substantial additional payroll burden, especially for firms with a large workforce,” he remarked.

Proposals for Mitigation

To alleviate the financial repercussions, several proposals have been put forth, including:

• Direct Subsidies: Offering financial assistance to construction firms.
• Temporary Tax Credits: Reducing taxes or contributions for employers in the construction sector.
• Revision of Fixed-Price Contracts: Introducing adjustment clauses to account for extraordinary price increases.

Key Statistics

• Contribution of the Sector to GDP (2023): 6.6%
• Employment in the Sector: Approximately 45,650 workers (as per the Labour Force, Employment and Unemployment report from September 2024).

The Position of BACECA

The Building and Civil Engineering Contractors Association (BACECA) has highlighted the challenges facing construction firms, particularly concerning the impact of rising wages in 2024 and the burden of the 14th month’s payment.

While the association acknowledges the importance of honoring commitments regarding the 14th month and the significance of this measure, it stresses the need for financial viability for construction companies.

BACECA is prepared to engage in open dialogue and collaborate with stakeholders to develop sustainable solutions that will ensure the long-term health of the construction sector in Mauritius.

Source: Defi Media