Construction companies have been facing the largest challenge in their businesses due to the Covid-19 pandemic. Although the Malaysian government has allowed for delay in vacant possession (VP) schedules amid MCOs and lockdowns, construction companies’ operational teams face challenges in ensuring smooth processes, including logistics, ingredient price hikes, labor issues.
The Construction industry encompasses Building construction, Infrastructure construction and Industrial construction. In this article, we are focusing on building construction, which includes both residential and non-residential. Each type of construction company, from the Developer to Subcontractor (a.k.a. Subcon), has to overcome different kinds and levels of difficulties to ensure VP on time and quality of the development is up to standard.
One Development Project isn’t completed by One Company
If you are a project buyer, you are most likely to have purchased the house from a Real Estate Developer, for instance Gamuda Land, Mah Sing, SP Setia to name a few. The Real Estate Developer is responsible for the vision of the development. Once a development project is laid out and Development Order (D.O.) approval is obtained, the Real Estate Developer hires or appoints Architecture Firm to draw up plans for building.
Besides, a General Contractor, a.k.a. The Main Contractor is also appointed to build according to the architecture drawings. Subsequently, the Main Contractor appoints and oversees Earthwork Contractor and Subcontractors.
Referencing Top 10 of Malaysia website (top10malaysia.com), the Top 10 Construction Companies in Malaysia are UEM Group Berhad, YTL Corporation Berhad, IJM Corporation Berhad, Gamuda Berhad, Malaysian Resources Corporation Berhad (MRCB), WCT Holdings Berhad, WCE Holdings Berhad, Hock Seng Lee Berhad (HSL), Mudajaya Group Berhad and Muhibbah Engineering (M) Berhad.
The Main Contractor may appoint different subcontractors to handle different aspects of the projects, from plumbing, electrical, roofing to flooring. You may also hear about tier 1, tier 2 and so forth in terms of subcontractors. Tier 1 contractors have subcontracted with the Main Contractor, while tier 2 subcontractors have agreement with the tier 1 contractor. It is important to understand this concept, we will discuss Construction Payment Chain in the coming article.
Throughout the construction process, we also observe the engagement of services and products from Construction Material Suppliers, Equipment Lessors and Interior Designer (ID) and Renovation Contractors.
| Types of Construction Businesses |
| Real Estate Developers Architecture Firms General or Main Contractor Earthwork Contractor Piling Contractor Subcontractor Material Supplier Equipment Lessor ID and Renovation Contractors |
Company Financing for Construction Companies
All businesses require a start-up fund. However in this article, we are discussing financing needs for SME with established business models. To understand the need for financing among these construction companies, we need to look into their business models. Let’s go back to the scenario of you as a project buyer. So you have decided to book this unit from VC Residences (for example), you paid your booking fee and signed a booking form. Your real estate agent then introduces a Mortgage Banker or even a few, to you for a housing loan application.
End Financing and Bridging Loan
The one important arrangement that made this possible is End Financing. End Financing is an arrangement where a commercial bank provides bridging loans to a developer, with terms. So that a prospective property buyer can apply financing for said project to buy the property.
Main Contractor Needs Strong Cash Flow
Generally, we don’t observe urgent needs for professional bodies such as architecture firms for financing applications. On the contrary, it is crucial for a Main Contractor to obtain and secure financing. A project Main Contractor is responsible for A-Z of a development project, from planning, leading, executing, supervising to inspecting the construction project. The financing needs arise from the required payment of performance bond upon accepting an awarded project. As the name suggests, a performance bond is insurance money to ensure the risk of contractor non-performance is being protected against.
Apart from performance bonds, the project Main Contractor does not receive payment from the Real Estate Developer until a certain construction stage is completed. In another word, the Main Contractor needs a working capital fund for purchase of construction ingredients and labor fee upon winning a project tender.
In the following article, we will discuss construction payment chain and its financial risk.
Most Trading Businesses Require Financing
With basic understanding of trading business, we can quickly conclude that Material Supplier and Equipment Lessor businesses need financing. On top of daily operation, a Material Supplier company needs working capital financing to stock up on construction material. Besides, we might observe customer credit payment terms. While an Equipment Lessor company needs financing to maintain existing equipment and purchasing new equipment when demands increase.
Finally, an ID and Renovation Contractor needs financing for working capital as well as purchase of construction materials. We will discuss the financing amount a company can acquire from financial institutions in future articles.
