DESPITE pandemic-related challenges, more construction firms were formed in the last two years than were wound up, according to figures compiled by data platform Handshakes.

Sectoral relief under the Covid-19 (Temporary) Measures Act (Cotma) might have helped firms hang on, said observers. With the last few relevant provisions under Cotma having just expired or expiring soon, cessations may see a spike – though this may not be that great, as the sector’s prospects have improved, they added.

The construction sector saw net formation of 536 firms in 2020 and 864 firms in 2021.

For most sub-sectors, cessation rates were lower in 2020 and 2021 than in pre-Covid years. This included firms involved in building construction; building completion and finishing; and construction of roads and railways – all of which had lower cessation rates in 2020 and 2021 than in 2019 and 2018.

The exceptions were demolition and site preparation, which had a cessation rate of 7.49 per cent; and construction of “other civil engineering projects” – including land reclamation, dam and drainage construction, and marine construction – which had a cessation rate of 8.8 per cent.

“The government’s assistance during the pandemic has helped businesses tide over and cushion the cessation at this stage,” said a spokesperson for the Singapore Contractors Association (Scal), citing a temporary bridging loan programme that provided access to working capital as an example.

Cotma could also have delayed the day of reckoning for some firms. Noting that the overall positive net formation in 2021 was surprising, Withers KhattarWong LLP partner Spring Tan said: “Certainly Cotma must have played a part.”

In particular, Cotma could have helped firms stay alive by “giving reliefs to defaulting construction companies and preventing the calling of performance bonds,” she said.

This could mean that the sector’s net formation figures paint a rosier picture than reality. Said Tan: “The distressed companies may still be ‘alive’ in name, but may no longer be viable, sustained by the reliefs granted by Cotma.”

On Feb 28, relief periods for Parts 2 and 8B of the Act — concerning the inability to perform contractual obligations due to Covid-19, and the co-sharing of additional non-manpower qualifying costs – came to an end.

The relief period for Part 10A is due to end on Mar 31. This provides a framework under which contractors may seek a determination to adjust contract sums, in light of higher foreign manpower costs due to Covid-19.

Said the Scal spokesperson: “With the cessation of Cotma, the existing labour shortage situation, rising material costs and delivery disruptions, builders are at risk of being imposed LD (liquidated damages) penalties by developers and this may result in a chain of litigation disputes. We hope stakeholders can work together to overcome this together than to go down the legal course.”

Back in October, TSMP Law Corporation director Justin Ee wrote: “It will not be surprising to see a spike in legal actions, bond calls and insolvencies when Cotma is finally discontinued.”

His view now is largely unchanged. “Once the Cotma reliefs cease, I would expect more pain for smaller players as they generally tend to have less financial and operational resilience,” he told The Business Times.

“Such firms may voluntarily wind up or be compelled to do so in the coming months if they are faced with the spectre of law suits or insolvency,” he added.

He noted that there should be a backlog of claims, due to an earlier moratorium on legal proceedings.

Tan similarly expects a rise in disputes, including the calling of performance bonds, after reliefs under Cotma end. “These may take some time, around 8 months to a year, to have a material impact on the distressed companies.

“This may lead to more companies, including those in limbo, being wound up. I am expecting a significant number, but I doubt it will be a deluge,” she added.

Ee notes a countervailing factor: As Cotma relief has been extended several times, parties have had “more time and incentive to potentially resolve their disputes or renegotiate their contracts, rather than simply waiting until the ultimate end of the relief period to have their claims adjudicated”.

Ee also pointed out that there is now considerable demand for construction work “thanks largely to public sector works, such as new MRT lines and public housing projects”.

Tan also cited public projects such as MRT lines, the Tuas port, the Deep Tunnel Sewerage System, and public housing, highlighting a need to catch up with demand for public housing in particular.

This might explain some of the variance across the sector. Said the Scal spokesperson: “During the past 2 years, the government has rolled out some key infrastructure projects such as the MRT stations in the Jurong Area, Cross Island MRT as well the RTS Link, which may explain why some subsectors have not been affected.”

In 2021, the formation rate was particularly high for firms involved in building completion and finishing, at 11.23 per cent, according to Handshakes data.

This was higher than in the preceding three years – including the pre-Covid years of 2018 and 2019 – and outstripped the 2021 cessation rate of 6.59 per cent.

Similarly, the formation rate for firms engaged in construction of roads and railways was 12.4 per cent in 2021, better than in 2020 and between the pre-Covid rates in 2018 and 2019.

This outstripped the cessation rate of 7.45 per cent, which was also below that of pre-Covid years.

The Building and Construction Authority expects construction demand in 2022 to be between S$27 billion and S$32 billion, with the public sector expected to contribute about 60 per cent of this.

Said Ee: “While financially troubled firms or those saddled with unprofitable contracts may fold as a result of the pandemic, there is nothing to stop some of these business owners or their employees from starting afresh and incorporating new companies to soak up the sustained demand.”

Source: https://www.businesstimes.com.sg/government-economy/construction-sector-sees-more-firms-formed-than-closed-despite-pandemic