CHAPTER ONE

1.0 INTRODUCTION

1.1 Background to the Study

To start a new business and to remain in business profitably a company must

be able to adopt a number of factors that lead to success. In order to address these
factors, sound intra and inter organization success factors are more important than
ever before.

Small and Medium Construction Firms owners continue to demonstrate their

extraordinary capacity to organize resources and generate profits. National Federation
of Independent Businesses (NFIBs) stated in their last survey in December (2010) that
“Small-business optimism remains high; firms are looking for new employees”. What
assists them in comparison with larger companies is their greater flexibility in being
able to respond to shifting markets and their ability to produce new products and
services to market much faster than larger companies (Scozzi, 2015). To start a new
construction firms and to remain in business profitably a company must be able to
adopt a number of factors that lead to success. In order to address these factors, sound
intra and inter organization success factors are more important than ever before.

The characteristics, definitions and explanations of small and medium

construction companies are vital to provide a broad understanding of their business
management approaches. There is no single definition of a small firm, mainly because
of the wide diversity of businesses (Adekola 2018). In the case of the small and
medium construction industry in Nigeria, it is difficult to obtain definition for these
firms as the industry is controlled by many governmental departments and authorities

(Al-Sharif, 2012).

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 However, in practice, companies which are nominally targeted as small firms
accept a range of working definitions depending on their particular objectives. The
small construction companies differ from the large construction companies in the
attributes of the projects’ size, financial plan, resources and management system
(Turner and Payne, 2012). In the management of small to medium sized projects,
which are the core business of the small construction company, the main emphasis is
on the prioritization of resources across several projects.

Small projects also cannot embrace the bureaucracy of procedures designed for
larger, more complex projects (Turner and Payne, 2013). The high demand for
housing and other forms of infrastructure by both the private and public sectors have
attracted entrepreneurs falling under the small and medium contractor categories to
venture into the construction sector.

Besides construction businesses going insolvent and failing, construction

contractors often fail to deliver projects on time. Accurate predictions of project
completion and meeting completion dates result in clients being satisfied; giving
contractors a comparative advantage over others. Both internal (for example the
competency of contractor) and external forces (for example the competency of the
design team and weather conditions) have an influence on project delivery.

1.2 Statement of the Problem

Small and Medium construction firms finds it difficult to win tenders in the
public sector within thereby making it difficult for them to build a reputation. Failure
to build a reputation makes it difficult for them to get new work in both the public and
private sectors and this affectsprofits or annual turnovers are also affected and impede
their growth capabilities. Besides their growth being impeded, contractors will not be
able to finance the operation and salaries of the staff.

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1.3 Aim and Objectives of the Study

The aim of this research work is to investigate on the techniques for improving the
profitability of small and medium construction firms in Osun State. The following are
the specific objectives;

i. to investigate the techniques and approaches small and medium construction firm
adopts in profit making ii. to determine ways of improving productivity and
managerial issue for small and medium construction firms iii. to examine the
concepts and measures small and medium scale adopts

1.4 Research Questions

i. What are the techniques and approaches small and medium construction firm
adopts in profit making?

ii. What are ways of improving productivity and managerial issue for small and
medium construction firms?

iii. What are the concepts and measures small and medium scale adopts?

1.5 Significance of the Study

There is a need to research the construction sector because of the high failure rate of
Small Medium Construction Firms (SMCF) in the sector. I identified finance,
managerial skills, expansion and growth pressures as well economic and the external
environment as challenges facing Small and Medium Enterprises (SME) contractors.

These challenges will be discussed in detail

It might be thought obvious, especially in the light of all the publicity about
productivity that all SMEs would see productivity as a top priority issue given that, as

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has already been noted, productivity is a key means of maintaining/improving
competitive advantage and generating company growth. In the past, we have observed
companies that have grown, successfully, through acquisition or have grown
organically through increasing sales volumes, developing new products and
penetrating new markets without ever concerning themselves about improved
productivity.

The study will identify a large number of techniques that are potentially
significant in delivering organizational success. The study also identifies intra and
inter organization success factors and asserts that their recognition can lead to
company success. Also, the paper suggests a business success model that is based on
the factors identified.

The next phase of the work involves exploring the relationship between project
cost control and business success in more depth via a small number of project-
centered case studies so as to develop an initial conceptual model of business
maturity. The paper will contribute to the body of knowledge available on SMEs in
construction and identifies factors thought to be some of the keys in driving forward
the management and practice performance agenda in the construction industry

1.6 Scope and Limitation of the Study

The project is solely focused on Small and Medium Sized Construction Firms in
Osun State with a view to identify the techniques for improving the profitability of the
firms. The aim of the of this project s to investigate techniques for improving the
profitability of small and medium sized construction enterprises (SMEs) to be
successful.

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1.7 Definition of Terms

SMALL AND MEDIUM CONSTRUCTION FIRM: This is the types of construction

Firms operating at low cost internally. Their capital base is relatively low compared to large
construction firm.

BUILDING CONSTRUCTION: Building construction is the process of adding

structure to real property or construction of buildings. The majority of building
construction jobs is small renovations, such as addition of a room, or renovation of a
bathroom.

CONSTRUCTION is the process of constructing a building or infrastructure.

Construction differs from manufacturing in that manufacturing typically involves
mass production of similar items without a designated purchaser, while construction
typically takes place on location for a known client. Construction as an industry
comprises six to nine percent of the gross domestic product of developed countries.
Construction starts with planning, design, and financing; and continues until the
project is built and ready for use.

A FIRM is a business organization, such as a corporation, limited liability company

or partnership that sells goods or services to make a profit. While most firms have just
one location, a single firm can consist of one or more establishments, as long as they
fall under the same ownership and, typically utilize the same Employer Identification
Number (EIN).

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 CHAPTHER TWO

2.0 Literature Review

2.1 Small and Medium Sized Firm

Small and medium sized firms (SMFs) irrespective of their sizes have been a source
of economic development through its vast creation of employment, wealth creation
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and innovation by introducing competitive strategies which set them apart from other
firms Akande (2010). These include their ability to re-engineer products and service
delivery to meet clients’ demand by putting in place innovative techniques or
development of new strategies. Yang and Yu (2011) recognized that the employment
opportunities they create improve the livelihood of a large percentage of citizens of
any nation. The importance of SMFs is often being overlooked by commentators
[whereas most economies drive towards industrial development is dependent on the
development of small and medium sized firms considering its large numbers and
structure which under adequate conditions gives them the flexibility and ability to
stand adverse economic situations. SMFs are also considered by many to be an
integral part of any healthy economy considering the role they play in the creation of
jobs and the fostering of innovation.

Nevertheless, their importance as a provider of employment is evident and, for this

reason alone, SMFs are necessarily of interest to those concerned with employment
relations and considered to be critical to organizational Odubajo (2014) and
performance improvement in order for them to gain competitive advantage In Nigeria,
the ten most important factors contributing to growth of construction companies are:
good company management; good cash flow management; sufficient knowledge and
experience; good team members; technical expertise; good site management;
commitment to customer satisfaction; availability of capital; availability of skilled
workers; and good relations with clients

2.2 Characteristics of Small Contracting Companies

The characteristics of SMEs found in the literature can be divided into negative and
positive. The positive characteristics are those that lead the company to success and
the negative characteristics are those that restrict the company in their wish to move
ahead in its business.

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Starting with the positive characteristics, the bill of quantities is often cited as being
the primary tool of management and control of projects (Turner and Payne, 201). The
use of a bill of quantities is a positive characteristic of a small contracting company
because its use can reduce the time for planning and scheduling for the projects, even
though it does not reduce the cost of the initial stage of the project. This is important
in increasing the profitability of small companies, and in helping them to forecast the
overall cost of their projects. Also, the SMEs very often use the technique of project
organization structure (Kuprenas, 2008). The advantage of using this approach is to
increase the levels of communication and flexibility amongst the project workers.

Another positive characteristic is that small projects which are the core business of the
SMEs can be used as a training ground to develop future managers who will proceed
to manage larger projects (OECD, 2012). That provides them with an excellent
opportunity to innovate new techniques to manage their projects and to receive quick
feedback in order to keep the company on the right performance track. In addition, the
small business does not require a large input of capital to get started. At the same
time, its works are manageable and controllable (Wamelink, 2012).

The negative characteristics act as a barrier to the improvement and enhancement of

performance. Generally, it has been recognised that small business failures seem to be
characterized by a lack of management skills and experience (Flahvin, 2012). SMEs
are less likely to obtain management training than larger firms due to financial
constraints, information gaps and other factors (OECD, 2011). Such characteristics
are very evident in the Saudi construction industry which features unstable companies
that are managed by the companies’ owners (Bageis, 2014). Such owners do not have
adequate experience in the construction industry, or they are not sufficiently skilled to
manage the construction works. The reason why such inexperienced owners, choose
to start a construction business; is that the construction works is easy to access, set up,
and operate.

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Most of the legal troubles of small businesses are the result of unclear agreements.
Small businesses usually neglect to set up contracts that are specific and openly clear
in writing, instead preferring informal and legally ambiguous agreements. Good
contracts are clear, complete and appropriate for the situation. A “one-size-fits all”
approach will only get businesses into trouble (Steingold, and Bray, 2013).

Cheetham, (2008) indicate that small to medium sized building contractors do not
forecast the monthly valuations budget and they often have problems in controlling
their financial commitment. Forecasting and controlling the cash flow of projects does
not exist in the project initial phase and construction phases of the management
process of small contractors in (Bageis, 2009). High failure rates of small firms are
largely attributed to weaknesses in financial management and marketing (Mc Carton
Quinn and Carson, 2003). Therefore, they do not give sufficient attention to its
importance and that causes poor financial performance of their projects. Alrabei;
(2009) asserts that one of the main problems associated with small contracting
companies is the absence of quality supervision. Therefore, if the supervision of the
construction works is not adequate, it does not support the quality of the work on the
site and it causes further losses in terms of the financial performance of project
(Siciliano, 2003).

Small contracting companies suffer more than larger sized contracting

companies owing to the weakness of their organizational aspects and their
inefficiency in controlling and monitoring those projects that make up their company
business (Turner and Payan, 2010). Small contractors’ managers are more likely to
move between projects without having to relearn the company’s management
processes (Mc Carton-Quinn and Carson, 2013). In fact, the majority of small
contracting companies do not record their commitment, problems and success in order
to obtain advantages in terms of learning from their past or previous projects.
Moreover, a consistent reporting mechanism is either not in place or often small

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contractors’ managers do not pay sufficient attention to it. This approach results in
having difficulties in determining their work load and their work in progress.

2.3 Factors Leading to Small Construction Company Success

Factors that are considered to be important in producing construction company

success differ in relation to the organization size and the organization’s ability to cope
with these factors (Hutchings and Christ offerson, 2010). These factors seem to be
similar globally in their identification but they do differ in their implementation in
relation to the organizational size, the organization’s main business diversion and to
the organization’s culture (Bageis, 2014). These factors have been collected from the
literature review as they appeared to be the most significant factors influencing the
performance of small construction companies. The factors have been classified into
intra and inter organization success factors, according to its contribution to improve
the SME performance, and the y are as follows:

2.3.1 THE INTRA-ORGANIZATION FACTORS:

(I) Appropriate Organization Structure :

One of the critical tasks of the construction company manager is to design an

organizational structure for the firm as well as a project organizational structure which
is suitable for a particular organization and the project environment (Kuprenas, 2013).
The organizational approach adopted by the firm will influence the management that
will be applied in practice Udo (2011). Small construction firms do not have a
consistent reporting mechanism, or often, their managers do not pay sufficient
attention to it (Bageis, 2011).

However, the structure adopted for a project defines the reporting structures,
systems and procedures for the project (Shirazi et al, 2012).In the construction
industry the organizational patterns have to take account of the needs of

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subcontractors or specialist contractors working together with the SME. This intra
organizational arrangement can shape the nature of these firms’ relations and organise
the way people are involved in the construction projects. The design of an appropriate
project structure should take into account cultural and environmental influences and
may change as the firm evolves through its life cycle and as a result of different types
of project and conditions of contract (Shirazi 2011).

(II) Building Stable Teamwork:

The project team is the basic unit that performs the SMEs project works. Sadly,
project environments in the construction industry are so dynamic that teams working
in this environment do not seem similar to other ordinary teams found in other
industrial and commercial settings (Frame, 2002). On many projects, team members
can be considered to be borrowed resources.

They come to the project, do their work, and then return to their functional
homes. Moreover, most small contractors are frequently characterized by changing
teams as personnel move from one firm to another (Frame, 2012 ).

The challenge for the small construction company manager is how to employ a stable
team in such an environment. The difficulty in this environment is the normal
conditions that promote team work do not exist (Frame, 2008). An additional
complication is that project teams today increasingly involve partnering arrangements
which could promote team work. However, managers must recognise that team
building will not occur by accident, and its development requires conscious and
careful effort. Successful managers of firms who employ a little initiative can develop
ways to build team spirit in an environment that seems rather hostile to it. Kerzner
(2008) indicates that this could be done in such ways as: making the team as tangible
as possible; managers inspiring their hired team to go the extra mile; holding
productive meetings; creating team space; creating team “signs”; publicizing team
efforts; rewarding good behaviour, and soon.
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(III) Appropriate Management Systems:

Well- managed construction jobs often result in excellent project performance which
the construction firm will use as a springboard for success. Management systems that
contribute to these excellent projects differ according to the project size and
characteristics. Management systems contribute to the improving performance of the
constructing company. As a result of these systems, project management approaches
are been more important than ever before. The purpose of project management is to
anticipate or predict dangers and problems as far as possible, by using these systems,
to plan, organise and control activities so that the project can be completed as
successfully as possible in spite of the risks (Haapasalo et al, 2012). The literature
reviewed identify the following as being the management systems used in the
construction industry: organization management systems, supply chain management
systems, human resource management systems, quality and safety management
systems, time management systems, construction software systems and others.

These management systems aim to provide vital information that could be used for
monitoring and controlling the performance of companies (CERL, 2014). These
systems jointly provide a database of basic information on the projects, budget
estimation, control tools, procurement selection tools…etc, which are useful tools to
support decision management.

(IV) The Existence of a Strategic View:

The existence of a strategic view has been perceived to be one of the most significant
factors that lead to a SME becoming successful (Frame, 2012). The primary objective
of survival for the construction firm is to secure a sustainable advantage in the market
against its competition. The firm must be able to work out its survival techniques
through developing a strategy in the context of the overall competitive scene. To
determine ‘what drives the market and where to compete’ it must also be able to

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respond to environmental forces that influence the choice of the appropriate strategy
(Ansoff, 2011).

Small construction firms need to work on a strategic as well as a tactical level for each
project. A good strategy that could be adopted is to develop a strategic plan for every
project based on the common approach, but allow different projects to adopt different
approaches at the detailed or tactical level (Turner and Payan, 2009).

(V) Good Business Management:

There is more to construction than managing resources, materials and time. A

construction company has to deal with everything from complicated union payroll
requirements to last-minute scope changes that potentially stand between it and
quality construction done on time and under budget (CEO, 2004). A construction
company’ business is just like any other business in that it must adopt factors that lead
to business success. Business success factors entail planning the company business,
knowing the key things that can tell when the company has reached its goals(Mc
Carton-Quinn and Carson, 2008). These are indicators or milestones that measure the
company’s business achievements and help determine how well the firm is
progressing towards its goals and objectives.

A business plan provides a small construction firm; with a pathway to profit. In business a
pathway to profit needs to consider business process, marketing strategy and productivity
and benchmarking. These are the key features of good business management which aims to
maintain and support the business situation of a company.

(VI) Good Financial Management:

The implementation of an accounting system and the regular review of financial

statements have been perceived to be two of the most important factors that lead to
construction company success (Adrian, 2010). A complete and accurate accounting

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system and/or the keeping of financial records are crucial to the success of the
business for a number of reasons. For instance, good accounting systems provide
financial data that help the company operate more efficiently, thus increasing
profitability (Siciliano, 2003). Accurate and complete records enable the company,
and their accountant, to identify business assets, liabilities, income and expenses. This
information, when compared with appropriate industry averages, helps the company
identify both the strong and weak phases of its business operations.

Good financial records, such as the income statement (profit and loss) and cash flow
projection, are essential for the preparation of current financial statements (Mason,
2007). These statements, in turn, are critical for maintaining good relations with the
company’s banker. They also present a complete picture of the company’s total
business operation (Siciliano, 2008). Onlya profitable organization can remain in
business, and employ qualified people in rewarding positions. A company can
empower the predictable profit margins only if it employs a project cost control
system that provides employees with a framework to control expenditures effectively
on all of its contracted work (Al De Wachter, 2006).
There are many techniques and systems that integrate with accounting systems to
support the control of the financial commitment of an organization. Among the most
important techniques are the estimating cost models and cash flow forecasting
techniques (Siciliano, 2010). In today’s credit tight economy it is more important than
ever for a contractor to control cash flow. A construction company must plan and
monitor cash requirements (Mason, 2010). Many of the items discussed in this section
today will seem obvious, but are often ignored or given a low priority (Al De
Wachter, 2006). Now is the time for the construction companies to review the basics
of their business, and the best place to start is the all-critical item called cash-
flow(Schaeffer, 2008).

Financial failures still occur and they can often be traced back to the lack of effective
cost control by the project execution team. On the other hand, even under bad estimate

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conditions, if a project has been successfully managed by the execution team, then the
contract's financial outcome is often better than anticipated (Al De Wachter, 2004).
Applying these techniques correctly will provide the small contracting company with
the means to keep its business decision- making on track and their account purchasing
in control. It will also act as an early warning indicator when their expenditures are
running out of line or their sales targets are not being met. To be successful a
construction company must balance its cash flow. It is important to review the
bidding, estimating, billing, and disbursement functions so as to plan properly for
appropriate controls and techniques. This will increase cash flow and allow for the
consideration of alternative sources of finance on a timely basis. Returning to focus on
the basics will greatly enhance a contractor's future success (Schaeffer, 2010).
(VII) Good Time Management:

Time management is a fundamental criterion for the achievement of excellent project

performance (Winch, 2011), and it is perceived to be a primary success factor that
leads to small sized contractors becoming more successful. This factor is concerned
with the control of project time, along with cost and quality. Time management needs
to be carefully controlled and monitored owing to the fact that it is often found to be
stated in contract documents (Lock,

2013). This provides a strong reminder to the engineer and/or constructor that the time
milestones that have been indicated in the project documentation have an economic
significance for the owner and that the control of time is expected. Also, time control
is important for the contractor since time savings can improve a contractor’s profits.

Conversely loss of time can have a direct cost effect on a project.

There are both proactive and reactive aspects to time management (CII, 2011). The
proactive aspects, which have an emphasis on how the project stakeholders should
organise their efforts to best reduce the time required to achieve the engineering and
construction objectives of the project are part of planning. At this stage the importance
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of having good historical schedule performance data for similar work appears to be of
vital importance. Its existence would allow the planner to design an appropriate
schedule with the objective of reducing time without sacrificing other project
objectives. These proactive efforts will yield the greatest return (CII,2013). The
reactive aspects take place during the execution stage when negative time variances
threaten or begin actually to appear, and actions must be taken to overcome those
variances. In both the proactive and reactive modes, the managers are seeking ways to
achieve schedule andplanning objectives.

A small-sized construction company also faces these time pressures. One of the
struggles they face on their projects today is the need to meet customer expectations.
Therefore, salespeople are promising to deliver in six months jobs that normally take
ten months (Frame, 2012). Of course, this can lead to serious problems when the
project team eventually fails to meet its originally promised six-month target date.

(VIII) Careful Project Selection:

The selection of which projects to undertake is a serious business. It should not be

carried out in a careless manner. Very often, insufficient attention is given to whether
a particular project idea has real value to the construction company. Sometimes
projects may be selected to satisfy the powerful players in the industry, or they may be
selected simply to keep staff busy or to spend end-of-the-year money (Frame, 2009).

Most of the medium and small-sized construction companies have difficulties in

determining their work load (Mc Carton-Quinn and Carson, 2010). A big problem that
results from careless project selection is the ineffective use of resources. Support of a
project to satisfy short-term demand may lead to long-term work that is not profitable.
This kind of decision by the company managers causes resource problems because of
the company’s resources being tied up with these projects. It may be said that in such
circumstances companies have not taken into account the opportunity costs of their
decision. If the prospect of a truly good project arises in the future,they may no longer
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have the resources to pursue it because their resources are tied up in less significant
activities.

2.3.2 THE INTER-ORGANIZATION FACTORS:

(I) Achieving Good Project Performance:

A project also needs to be delivered within the terms of its contracted performance.
Variances from agreed times will affect the small contractors’ reputation either
positively or negatively.

Projects usually involve attention to a variety of human, budgetary and technical

variables. Although many definitions exist, most researchers agree that projects
generally possess the following characteristics: defined budget; schedule; quality
standards; and a series of complex and interrelated activities. The following aspects
should be considered when determining project success: project efficiency, impact on
the customer, direct and business success, and preparing for the future (Turner, 2004).
The perception of the various interest groups (e.g. stakeholders, management,
customers, and employees) is also regarded as one of the key factors since different
people will view success in different ways.

Morley (2010) noted that the conventional project management performance

triangle based on schedule, cost and technical performance is the most useful in
determining the success or failure of a project. In addition to these standards, the
project’s risk profile and the capacity to resolve problems encountered by the project
team, also appear to be major elements in the evaluation of the success of a project.

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 (II) The Use of Expert Advisors:
The use of expert advisors is perceived to be important for company success. This
advice could be provided in many ways. The implementation of good supervision for
the construction works is a kind of expert advice, and is perceived to be of great
importance (Alrabei, 2003). Looking for outside help from professional advisors,
including accountants, management consultants and architecture and/or civil
engineering experts can also be a clever business approach to be followed (Belout and
Gauvreau, 2014). Many of circumstances have been solved by specialist advisors such
as has happened in the case of projects that have ended up in a disputes situation.
Obtaining advice from professionals is the first line of a protective wall that could
keep the contractors away from financial risk even though they are often in complex
situations which can happen in the life cycle of project s.

(III) Change Order Procedures and Change Management Skills:

Kerzner (2013) indicates that all proposed design changes need to be reviewed by the
project management team prior to their approval and implementation. All proposed
changes should be fully documented so that their impact on the project can be
assessed before they are implemented. The construction company needs to ensure that
an effective change control system is in place. The need to negotiate change is a
continuing and ongoing component of service contracts. The ability to accommodate
change successfully is fundamental to the success of any commercial arrangement that
is to succeed over time; partnerships are increasingly seen as a way of coping with
uncertainty, as one of their purposes is to better accommodate change in an effective
and efficient manner (Winch, 2009).
OTHER FACTORS

Bednarz (2011) indicates that the existence of other factors such as quality
performance standards for subcontractors, estimating and scheduling procedures,
implementation of strict purchase order systems, control of job-site safety, ongoing

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training and education and the use of checklists for quality control are important to
improve the construction company’s performance.

Jadeola (2010) reported significant results from a study they carried out in the Nigeria
concerning factors leading to construction company success. That work created a
prioritized list of factors leading to the success of small- volume residential
companies. The result shows that personal attributes were perceived to be the most
important by those responding to the survey. Quality of construction, customer service
and warranty work were also considered important. Moreover, the study appreciated
the importance of marketing, product design, pricing strategies, planning, business
profile and technology in improving the SMEs performance.

2.4 SWOT Analysis Small and Medium Construction Enterprises

2.4.1 Strengths

i. Lower cost of human resources. Nigeria is a country of large population and

abundant labor resources. Its labor costs are much lower than in Western
countries. Construction industry has huge potential labor supply, and lower
demand on the level of knowledge. In the area of transferring rural surplus
labor force, it has made outstanding contributions. Workers in small and
medium construction enterprises in Nigeria mainly come from the migrant
workers, whose wage level is generally low. This saves a lot of the cost of
human resources and conducive to the improvement of corporate profits. ii.
Flexibility of operating system, adaptability. Relatively large-scale
construction enterprises, first of all, small and medium construction enterprises
have many advantages ,such as clear property rights, more flexible operational
mechanism, promptly adjusting business scope changes according to market
change and changes following market demands change; Secondly, small and
medium construction enterprises on national policies and regulations has
relatively strong adaptability, can be able to under the new issued national
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 policy changes to adjust their development strategies in time, and fully play
”small boat Uturn" advantage. This makes small and medium construction
enterprises can take rapid response according to the external environment, and
to take positive and effective measures to adapt to changes in the environment
better.

iii. Organization advantage. Compared to large enterprises hierarchical structure, the

small and medium construction enterprises structure is flattened. This
Organizational structure has large scope and few levels of management, which
shorten the lead time for leader’s decision and make the business response to
environment changes so rapidly that the company can grab market
opportunities; addition, flat organizational structure not only conducive to
division and collaborative activities of internal staff, but also reduce cost of the
incentives and constraints within the enterprise.

2.4.2 Weaknesses

i. Low level of technological innovation. Small and medium construction

enterprises themselves technological and economic strength is so weak that
they are very little technological development and lack of capacity for
independent innovation. Most of the technology introduces foreign
technology. Compared with developed countries construction industry,
Nigeria make large differences in technological level. Nigeria's construction
industry’s technology contribution is less than 20%, while the developed
countries are 60% to 80%. The majority of Chinese construction companies
still stay in the labor-intensive and extensive management level. For small
construction businesses, their lack of funds, the relatively low quality of
personnel and other reasons make some advanced equipments and production
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 materials cannot be widely used and promoted, so small and medium
construction enterprises in urban and rural construction scientific and
technological contribution rate reduced rapidly.

ii. Quality of personnel is low. Because many small and medium construction
enterprises cannot continuously contracted projects and in order to reduce
overheads, they always hire project managers and construction workers
temporarily, so staff of the enterprise is too mobile. It is difficult to attract
talented people that a lot of talent flow objectively affects workforce quality.
And in small and medium construction enterprises, not well educated migrant
workers, mixed composition of construction teams and low level of
technology make the overall low level of business. Meanwhile, atmosphere of
family management is strong--important positions are mostly relatives or
membership staff. Despite outside personnel make efforts yearly, they still can
not be put into an important position. As long as the time is ripe, most talented
people will leave.

iii. Financing difficulties. Difficulties in financing have become bottleneck to

restrict the development of small and medium sized construction companies.
Over years, the government and the banks have been willing to provide loans
to large enterprises. Because they believe that as state-owned large
enterprises, they will not cause the loss of state assets. While small and
medium construction enterprises are non-state-owned enterprises, efficiency
unstable, difficultly in recover loans and large risk make the banks lending
conditions harsh. In addition, owing to lack of mortgage assets, when small
and medium construction enterprises apply to financial institutions, it is
difficult to obtain bank guarantee.

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2.4.3 Opportunities

i. The domestic economy developed steadily, and the construction pace speed
up. The rapid development of the domestic economy, steady monetary
policy, pouring a large sum of money by state and growing market demand
have greatly promoted the development of Chinese small and medium
construction enterprises. In recent years, Nigeria's economy has been
showing rapid growth trend. With the significantly increasing of Resident
income, purchasing of house demand continues to "high temperature", the
construction industry has wide prospect. Meanwhile, many people have seen
the real estate opportunities, flocking to invest in real estate market, which
also objectively spurred the construction needs.

ii. The relevant state policies bring development opportunities. Nigeria

government has strong macro-control ability. Facing with severe financial
crisis, the government decisively implemented the two years new 4trillion
Naira of investment plans. Thus, government investment drives key areas
investment significantly accelerated and brings the construction industry
markets a broad space for development. In Nigeria, small and medium
construction enterprises accounted for more than 95% of the total number of
construction companies, employers accounted for more than 85% of the total
industry, the completion of construction value about 70% of the entire
industry, which offer excellent opportunities to them.

iii. Thirdly, the construction market globalization has brought more

opportunities to enter international market. Following Nigeria's WTO entry,
our country has a wider range of engineering construction, deeper
involvement in the process of economic globalization, increased
communication with foreign construction companies opportunities, which
make enterprises learn the advanced project management methods, new

22
 technology and management mode, and improve the management and
service level of small and medium construction enterprises.

2.4.4 Threats

i. Market competition is increasingly fierce. The main behavior of Nigeria’s

construction market is not standard. Illegal tender and colluding in bidding
still exist. Because of the large number of construction enterprises, the
construction market oversupply. In order to get projects, the enterprises are
lowering offer. According to the statistics show that the profits of
construction enterprises in Nigeria is about 2%,so low profits, only to
maintain their own survival. In addition, the accession to WTO, the domestic
protectionist barriers are broken, foreign construction enterprises take
advantage in many aspects suchas capital, technology, management,
personnel, services and so on. They are flooding into the domestic market.
Nigeria's small and medium construction enterprises are facing pincer attack
grim situation from both inside and outside.

ii. Lower barrier to entry into brings more potential competitors. Nigeria's
construction industry is still a labor-intensive industry. Funding a small and
medium enterprise needs relatively low capital requirements, low technical
standards and low barriers to entry. In the current hot construction industry
situation, many people want to enter this industry a share, which is no doubt
that present a threat to small and medium construction enterprises.

iii. The funds are not available, material prices have been volatile. Contractors
investing and inadequate construction funds are so widespread. Default on
construction costs are increasing. Many projects after completion by delivery
acceptance have received project funds for several years. Even worse, owner
has been postponed projects payment, which put a tremendous impact on
construction enterprises. In addition, our small and medium sized engineering
23
 project duration is shorter. They generally sign a fixed price contract.
Accounting for 60% of the total price of construction materials prices have
been volatile, which affects the profitability of construction enterprises and
increases the risk of loss.

2.5 Small and Medium Enterprise Development Strategies Proposed

According to the above SWOT analysis of small and medium construction

enterprises can draw the following two-dimensional matrix of strategic choices.

2.5.1 High-quality products strategy

Small and medium enterprises implement quality strategies to promote to

create high-quality brand building project. Works to create high-quality brands
combined with reasonable fees and the tender contract works, so that small and
medium construction enterprises really taste the sweetness by improving project
quality. At the same time, improving the quality of services and products help
improve business visibility and expand our customer network of relationships.

2.5.2 Centralized strategy

Small and medium construction enterprises must be based on the "small" and
not to blindly seek large, but should proceed from a clear market positioning to
develop for their own development strategies.

This does not mean excluding big, but must take strong and professional for the basis,
adopt professional and a single project management, specializing in a technology, fine
service and professional services. Through doing a number of excellent projects, we
make enterprise fine and stronger.

24
Centralized strategic of small and medium construction enterprises are mainly involve
products target professional, specialized construction technology and specialized
components and parts.
2.5.3 Attached strategy

To the building complex large-scale products construction enterprises, they can

not be “large and all-inclusive" and each process all on its own. Large-scale
enterprises themselves completing many specialized construction process may not get
maximize profit. Therefore, in collaboration with the division of small and medium
sized construction companies, mutual benefit. Collaborating with large enterprises to
establish a stable and close relationship by division of labor and specialization, small
and medium construction enterprises become components of a large-scale, centralized
production system, which is one of the ways for enterprises to survive and develop in
the intense competition.

2.5.4 Market strategy

Market is the source of the survival of enterprises. Competition and consumer

demand make new markets emerging. Small and medium construction enterprises can
take advantage of its small size, operating flexibility and adaptability to find market
which the large corporations cannot form scale that they do not want to gain a
foothold in or other companies have not yet discovered. They may enter into highly
specialized, smaller market capacity to create a unique competitive advantage.

25
 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Research Design

This chapter states the various methods used in research, as well as the population of
the study, and sampling techniques used in determining the sample size for the
research. How data was collected and analyzed is also discussed in this chapter. The
main objectives of this research were achieved through frequency table and analyses
were used to measure the level of accuracy and validate responses from the
respondents in accordance to the objectives of the research.

This research method will be both qualitative and quantitative in nature. The
population of this study will constitute of selected SMEs construction firms in the
building industry in Osun State. The research will be using both primary and
secondary method of data collection which includes structured questionnaires, focus
group, direct observations, interviews, published and unpublished books, journals and

26
articles. The study will use table of published figure to determine the study sample
size. Also, the research will adopt purposive and stratified random sampling
techniques for the choice of individual selected for the interview and questionnaires
distribution respectively. Data obtained from these sources will be analysed using:
Charts, frequency table and interpretation.

3.2 Research Study Area

Osun is an inland state in south-western Nigeria. Its capital is Osogbo. It is bounded in the
north by Kwara State, in the east partly by Ekiti State and partly by Ondo State, in the south
by Ogun State and in the west by Oyo State.
3.3 Population of the Study

The population for this study are SMEs construction sites in Osun State. The
population figure for the were too large due to numerous number of Small and
Medium Scale Enterprises. Hence, the target population for this study was selected.

3.4 Sampling Size and Sampling Techniques

The population of this project work comprises the entire construction

industry/sites in Osun State which there is no doubt on it. Therefore, I resolved into
using some selected (30) sampled population through stratified random sampling
techniques.

3.5 Instrument for collection of data

The basic method used in the collection for this work is survey method. It is used to
gather data without putting pressure on the respondents for immediate response. The

27
questionnaire was also designed and distributed to enable adequate and to be collected
for purpose of the research. Data for this study was collected from the respondents
through the use of questionnaires. Questionnaires were shared to all 50 respondents of
the companies, and field surveys through responses to questions in the questionnaire
served as the main source of primary data for this study. Other information was
collected from text books, journals and other secondary sources of data.
3.6 Procedure for Data Collection

Various analytical tools, tables, and questionnaire distribution table were used in
analyzing data for this study. Data collected were analyzed using frequencies and
percentages. These frequencies and percentages enabled the researcher to clearly
represent true data characteristics and findings with a great deal of accuracy.
Interpretation and analysis of data was also used to describe items in tables and charts
used for this study.

3.7 Statistical Tool for Data Analysis

Since this study is a descriptive research, validation of data characteristics and

variables described maybe limited to some extent as other statistical tools such as
arithmetic mean, variance, standard deviation, and the central limit theorem were not
applied to further prove the accuracy of findings in this study. The researcher only
used descriptive statistical tools such as frequencies and percentages to describe data
characteristics and findings

3.8 Method of Data Analysis

The data collected from the respondents through the questionnaire were analyzed
using percentage method. These include frequency table to and percentage to explain
results of the study. Also, ranking index method was used. The question were listed
and options were ranked 1-4 where 1 is the lowest and 4 is the highest on the
investigation on the techniques for improving the profitability of SMCF .
28
 CHAPTER FOUR

4.0 DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.1 Introduction

Data presentation cover the method used for data collection as well as the sampling
and design adopted. The data collection for this study was evaluated and analyzed
having design the instrumentation. It also discusses the procedures and the methods
used in analyzing the data.

4.2 Data Analysis and Presentation

The data gathered for the research are presented below in the table.

Table 4.1 Questionnaire Administered

Respon dent N u mb er p rcentage

e
Received 4 8 9 6
Notreceived 2 4
Total 5 0 1 0 0

The table above showed that out of 100 questionnaire administered 96% was returned
while 2% were not returned

Table 4.2: LEVEL OF EDUCATION

QUALIFICATIO NO OF QUESTIONNAIRE PERCENTAGE

29
 N ADMINISTERED
OND/HND 15 31 . 2 5
BSc 20 41 . 6 7
MSc 13 27 . 0 8
Total 48 100

Source: Questionnaire

Table 4.2 above shows OND/HND has 31.25%, of the respondents, BSc has 41.67%,
while/MSc has 27.08%

Table 4.3 SEX DISTRIBUTION OF THE RESPONDENTS

S E X Number of respondent Percentage(%)

M A l e 30 62.5
F e M a l e 18 37.5
T O T A L 48 100

Source: Questionnaire

The above table show that 62.5% of the respondent were male while 37.5 were female.

TABLE 4.4: CATEGORY OF STAKEHOLDER

Q U A I I CAT I O N FREQUEN PERCENTA

L CY GE%
t
C Li e n 3 6.25

r
C o n t ra c t o 1 5 31.25

30
 t
C o n s ul t a n 1 2 2 5

n
C r a f ts m e 1 8 37.3

l
T o t a 4 8 100

The table above show the category of stakeholder they belong to, 6.25% belong to Client,

31.25% of the respondent are contractor, 25% are consultant, and 37.5% are craftmen.

Table 4.5: PROFESSION OF RESPONDENT

QUALIFICATIO FREQUENC PERCENTA

N Y GE%
B u i
3
l d 1 0 2 0 . 0
e r
7
Engineer 8 1 6 . 6

5
Town planners 6 1 2 .

Architectur 6
2 4 . 1
e
7
Quantity Survey 2 0 4 1 . 6

Estate 6
2 4 . 1
Management
T o t 0
a l 4 8 1 0
Source: Field Survey, 2017.
The table above shows that 20.83% of the respondents are Builder, 16.67% are Engineer,
12.5% are Town Planner, 4.16% are Architecture of the respondents respectively, and

31
41.67% are Quantity Survey, while Estate Managementare 4.16.

Section B: What are the techniques and approach to small and medium construction
firm adopt in profit making?

Table 4.6: High quality product strategy?

RESPO N D E N u r Percentage%
NT m b
e
Strongly Agreed 3 0 1 . 5 7

Agreed 1 0 0 . 4 1

5
Disagreed 5 0 . 6

Strongly disagreed 3 0 . 0 3

Undecided
T O T A L 4 8 2 . 6 6

Source: Field Survey, 2017

The table above indicates that 1.57% strongly agreed that high quality strategy is a
technique for improving the profitability of small and medium construction, 0.41% agreed,

0.65% disagreed, while 0.03% Strongly disagreed.

TABLE 4.7: Centralized Strategy Techniques?

Respondent Number Means

Strongly Agreed 35 1.82

32
Agreed 5 0.21

Disagreed 5 0.21

Strongly Disagreed 3 0.06

Undecided - -

Total 96 2.31

Source: Field Survey, 2017

The table above shows that 3.65 of the respondents strongly agreed that centralized
strategy is the techniques for improving the profitability of small and medium
construction firm,, 0.21, agreed with the statement, 0.21 also Disagreed while 0.06
strongly disagreed

TABLE 4.8: Attached Strategy Techniques?

RESPONDENT Number Mean

Strongly Agreed 30 1.56

Agreed 10 0.41

Disagreed 5 0.15

Strongly disagreed 3 0.07

Undecided - - Total 48 2.20

Source: Field Survey,

33
The table above indicates that 1.56 strongly agreed that attached strategy is the
techniques for improving profitability of small and medium construction firm while
0.41 agreed, 0.15 disagreed and only 0.07 strongly disagreed.

TABLE 4.9: Marketing Strategy is techniques for improving profitability of small

and medium Construction Firm?

RESPONDENT Number Mean

Strongly Agreed 30 1.56

Agreed 3 0.16

Disagreed 5 0.61

Strongly disagreed 3 0.21

Undecided - - Total 48 2.1

Source: Field Survey

The table above indicates that 1.56 strongly agreed that marketing strategy is a
techniques for improving profitability of small and medium construction firm while
0.16 agreed, 0.61 disagreed and only 0.21 strongly disagreed.

SECTION C: What are the concept and measure small and medium scale adopt?

TABLE 4.10: Building Stable Team is a characteristic of small contracting company

34
RESPONDENT Number Mean

Strongly Agreed 25 1.3

Agreed 15 0.62

Disagreed 5 0.15

Strongly disagreed 1 0.02

Undecided 2 0.02

Total 48 2.12

Source: Field Survey

The table above indicates that 1.3 strongly agreed that Building Stale Team is a
characteristic of small contracting company, while 0.65 agreed, 0.15 disagreed and
only 0.02 strongly disagreed.

TABLE 4.11: Appropriate management system is a characteristic of small and medium

contracting company

RESPONDENT Number Mean

Strongly Agreed 22 1.14

Agreed 14 0.51

Disagreed 7 022

Strongly disagreed 2 0.04

35
Undecided 3 0.03

Total 48 2.02 Source:

Field Survey,

The table above indicates that 1.14 strongly agreed that appropriate management
system is a characteristic of small and medium scale companies while 0.51 agreed,
0.22 disagreed and only 0.04 strongly disagreed.

TABLE 4.12: The existence of strategic view system is a characteristic of small and
medium contracting companies.

RESPONDENT Number Mean

Strongly Agreed 33 1.72

Agreed 10 0.41

Disagreed 5 0.15

Strongly disagreed - -

Undecided - - Total 48 2.29

Source: Field Survey,

36
The above table indicates that 1.72 strongly agreed that the existence of strategic view
system is characteristics of small and medium contracting companies while 0.41 agreed,

0.15 disagreed.

TABLE 4.13: Good business management is a characteristic of small and medium

contracting companies?

RESPO T N u m r M e A n
NDE b e
Stron y Agreed 4 0 2 . 0 8
g
A g r e e d
Disagree
5 0 . 1 5
d
Stron y disagre ed 3 0 . 0 6
g

Undecid
d
TO TA L 4 8 2 . 3 0
Source: Field Survey,
From the table, I deduced that 2.08 respondents strongly agreed that Good business
management is a characteristic of small and medium contracting companies, 0.15
disagreed, while 0.06 strongly disagreed.

TABLE 4.14: Good financial of operating system is the concept and measure adopted by
small and medium scale cmpanies?

RESPONDENT Number Mean

37
Strongly Agreed 38 1.98

Agreed 5 0.21

Disagreed 5 0.15

Strongly disagreed - -

Undecided -
-

Total 48
2.34

Source: Field Survey

The table above indicates that 3.96 strongly agreed that Good financial of operating
system is the concept and measure adopted by small and medium scale companies,
0.21 agreed, while 0.15 disagree.

TABLE 4.15: Good Time Management is a characteristic of small and medium contracting
companies

RESPONDENT Number Mean

Strongly Agreed 5 0.26

Agreed - -

Disagreed 43 1.34

Strongly disagreed - -
38
Undecided -
-

Total 48
1.60

Source: Field Survey,

The above table shows that 0.26 of the respondents strongly agreed that Good Time
Management is a characteristics of small and medium contracting companies, while 1.34,
disagreed with the statement.

SECTION D: What are the ways of improving productivity and managerial issues of
small and medium construction firm?

Table 16: Lower cost of human resources is the concept of measures small and medium

scale

Adopt.

RESPONDENT Number Mean

Strongly Agreed 35 1.82

Agreed 5 0.21

Disagreed 5 0.15

Strongly disagreed 3 0.10

Undecided - -

39
Total 48
2.20

Source: Field Survey

The above table shows that 1.82 of the respondents strongly agreed that Lower cost of
human resources are the concept of measures small and medium scale adopt, 0.21
also agreed, 0.15 disagreed while, 0.21 strongly disagree.

Table 17: Organization Advantage are the concept of measures small and medium scale

adopt

RESPONDENT Number Mean

Strongly Agreed 40 2.08

Agreed - - Disagreed 5
0.15

Strongly disagreed 3 0.10

Undecided -
-

Total 48
2.34

Source: Field Survey

40
From the table, I deduced that 2.08 of the respondents strongly agreed that
Organization Advantage are the concept of measures small and medium scale adopt,
0.15 disagreed, while 0.10 strongly disagreed.

TABLE 4.18: Quality of Personnel are the concept of measures small and medium scale

adopt

RESPONDENT Number Mean

Strongly Agreed 40 2.08

Agreed 5 0.21

Disagreed - -

Strongly disagreed 3 0.10

Undecided -
-

Total 48 2.40

Source: Field Survey,

The above table shows that 2.08 of the respondents strongly agreed that Quality of
Personnel are the concept of measures small and medium scale adopt, 0.21 agreed
,while 0.21 strongly disagreed.

TABLE 4.19: Implementing policies are the concept of measures small and medium scale

41
adopt

RESPONDENT Number Mean

Strongly Agreed 33 1.72

Agreed - - Disagreed 15
0.48

Strongly disagreed - -

Undecided - - Total 48
2.19

Source: Field Survey

The table above indicates that 1.72 strongly agreed that Implementing policies are the
concept of measures small and medium scale adopt while 0.48 disagreed.

TABLE 4.20: The need of skilled craftsmen in the industry cannot be underrated?

RESPONDENT Number Mean

Strongly Agreed 80 4.17

Agreed - - Disagreed 10 0.31

Strongly disagreed 6 0.13

42
Undecided - - Total 96
4.61

Source: Field Survey

From the table, I deduced that 4.17 of the respondents strongly agreed that the need of
skilled craftsmen in the industry cannot be underrated, 0.31 disagreed, while 0.13
strongly disagreed.

TABLE 4.21: Aging of skilled workforce causes labour shortage?

RESPONDENT Number Mean

Strongly Agreed 76 3.96

Agreed 10 0.42

Disagreed 10 0.31

Strongly disagreed - -

Undecided - - Total 96
4.69

Source: Field Survey

The above table shows that 3.96 of the respondents strongly agreed aging of skilled
workforce causes labour shortage, 0.42 agreed with the statement, while 0.31 disagreed.

43
TABLE 22: Poor remuneration of skilled labour in the industry causes problems of
attracting & retaining workforce?

RESPONDENT Number Mean

Strongly Agreed 10 0.52

Agreed - -

Disagreed 86 2.69

Strongly disagreed - -

Undecided - - Total 96 3.21

Source: Field Survey

The above table shows that 0.52 of the respondents strongly agreed that Poor
remuneration of skilled labour in the industry causes problems of attracting &
retaining workforce, while 2.69, disagreed with the statement.

Table 23: Labour shortage have impact on time, cost and quality of work?

RESPONDENT Number Mean

Strongly Agreed 70 3.65

44
Agreed - - Disagreed 10 0.31

Strongly disagreed 6 0.13

Undecided - - Total 96
4.09

Source: Field Survey

The above table shows that 3.65 of the respondents strongly agreed that labour
shortage have impact on time, cost and quality of work, 0.31 also disagreed while
strongly disagreed

Table 24: Lack of motivation of skilled craftsmen causes shortage of labour in the
industry

RESPONDENT Number Mean

Strongly Agreed 80 4.17

Agreed - - Disagreed 10 0.31

Strongly disagreed 6 0.13

Undecided - Total 96
4.61

45
Source: Field Survey

From the table, I deduced that 4.17 of the respondents agreed that Lack of motivation
of skilled craftsmen causes shortage of labour in the industry, 0.31 disagreed, while
0.13 strongly disagreed.

4.3 Discussion and Analysis

The factors identified above have been analysed from the literature reviewed and can
be considered to be the base factors influencing the performance of small construction
companies.

As they provide the basic foundation of the contracting company’s components and
mechanism to perform well in the construction industry. If one of these factors has not
been put in place or has not been found to be at an appropriate standard, the likely
result will be serious problems for the company. For instance, if the financial
management of the company has been inefficiently managed and yet the other factors
have been well managed, then that is not going to fix the problem of poor financial
management, and vice versa.

These factors can be categorised into two groups based on their contribution to the
improvement of the small construction companies. The first category can be seen to
be the intra organization success factors. These factors include matters such as
appropriate organization structure, building stable teamwork, appropriate management
systems, the existing strategic view, good business management, good financial
management and good time management. The second category of factors can be seen
to be the inter-organization success factors. These combine to build up a good
reputation for the company through careful project selection, the achievement of good
project performance, the use of expert advisors, good change order procedures and
change management skills.
46
 CHAPTER FIVE

5.0 Summary of Findings, Conclusion and recommendations

5.1 Summary of findings

Small and medium construction enterprises place an important position in the national
economy and become the main force in the development of social productive. They
are also in the dominant in urban and rural construction and play an active role on
promoting technological innovation and keeping economic development stability.
Small and medium enterprise development strategy management is an inherent
requirement of the development and the key to grasp the fate of the entire enterprise.
In all walks of life transform the mode of development, small and medium
construction enterprises actively explore the development strategies suited to their

47
development, so as to get long-term survival in the fierce competition and continue to
thrive.

5.2 Conclusion

A construction’s/firm’s working capital requirement cannot be established by

principles, formulae or rules. Rather, they are determined or influenced by a number
of individual factors, the following factors are affecting the profitability of a small
medium construction firm. They are as follows:

Economic recession: The nature of construction performance and workload is often

related to the economy of developing nations like Nigeria. Where there is a boom in
the economy, construction activities will increase, therefore increasing the scale of
operations of a firm. This leads to an increase in level of stock and debtors, therefore
necessitating an increase in working capital requirement of the firm. The reverse is the
case when the economy is in recession and contractors require less working capital.
Also most construction works in Nigeria take place during the dry season when the
weather is very conducive for outdoor activities. However, there is reduction in
construction activities during the rainy season, as rain or wet conditions disrupt
construction activities. According to Pandey (2000), most construction firms
experience seasonal and cyclical fluctuations in the demand for their products and
services.

Price Changes/ Inflation: In a period of rising price levels, i.e. inflation, the cost of
goods will rise, and companies that need to maintain the same level of current assets
will need more working capital. The low value of naira, the fact that a lot of the
importation of numerous resources for construction ranging from materials to
equipment/vehicle, unstable economic and political climate and government fiscal
policy in terms of increases in tariffs, taxes duties etc all lead to inflation in prices of
construction industry resources, and unpredictable increase in the cost of capital. In
such a scenario, the contractor’s working capital requirement for the project will rise
48
above what it should normally be, and the contractor will have to look for external
credit in order to finance the extra cost of increased working capital arising out of
increases in current liabilities due to inflation.

Delays in Interim payment and settlement of Claims: Interim payments assist in

reducing the size of contractor’s working capital requirement. When there is a delay
in payment of the certificates and claims, or where such arrangement is not in place,
the contractor’s working capital requirement increases and he will need to depend on
his personal or external sources to fund his working capital requirement. Most
standard forms of contract, such as the Standard Form of Contract for use in building
works, and that for Civil Engineering works incorporate clauses for periodic payment
to the contractor for the work properly executed at the time of issue of certificate.

They thus provide that the contractor should be paid periodically for the value of work
completed at the different periods. Such payments depend on measurement of work
properly completed and issue of interim certificates by consultants in favour of the
contractor. Normally, the client is expected to pay the certificate within two weeks of
its issue. However, the government who is the major client in the Nigeria construction
industry perennially delays in payment of interim certificates, sometimes, for as much
as several years. There is also delay by government in payment of contractor’s claims
in respect of variations, fluctuations, loss and expense and extension of time. These
delays lead to unpredictable fund flow for the contractor and makes financial planning
practically impossible. The contractor is therefore, forced to look for external credit to
fund his working capital requirement. Because he has to pay interest on the credit, his
level of profit drops, and if he cannot obtain the credit, the company will likely go
bankrupt.

Retention Money: In construction contracts, a provision is made for the client to

retain a certain percentage of the money paid to the contractor. This retention money
ranges from three to ten percent. Obviously this has the tendency to increase the
debtor’s account especially as the money can only be released to the contractor after
49
practical completion of the project. This reduces the contractor’s working capital, and
so puts pressure on him to source funds from other sources to finance his working
capital requirement with the attendant high cost of capital in Nigeria.
Taxation at Source: The standard form of contract provides for withholding tax to be
deducted at source before interim certificates and claims are paid to the contractor.
This tends to reduce the amount of working capital available to him and he may be
required to look elsewhere to make up the shortfall if he has to have adequate working
capital for the project. The public sector client is required under taxation law of
Nigeria to retain ten to fifteen percent of value of a contractor’s earned certificate to
cover the contractor’s payment of withholding tax and value added tax (VAT).
Therefore the contractor is taxed at source and often before the end of the year instead
of paying his tax after the end of the year. The implication is that the contractor is
prevented from using the value of the tax to fund his working capital requirement and
he resorts to borrowing from external source of credit to fund his current liabilities
shortfall.

Other challenges facing Small Medium Construction in the Profitability of

Nigerian indigenous contractors

Common challenges facing Nigerian indigenous contractors in the area of profitability

as obtained from oral interviews conducted by the researchers could be traceable to
the following factors which are by no means exhaustive.

Low awareness of the need for working capital management.

Usually a one man business and in most cases with poor technical skill, inadequate
manpower with no corporate organization.

Undercapitalization

Poor funding and cash flow problems

50
 High cost of construction finance
Indiscipline and reckless spending by indigenous contractors, diversion of contract funds
by uses other than the project.

Poor project planning and control. the contractor and makes financial planning
practically impossible. The contractor is therefore, forced to look for external credit to
fund his working capital requirement. Because he has to pay interest on the credit, his
level of profit drops, and if he cannot obtain the credit, the company will likely go
bankrupt.

5.3 Recommendations

Based on the findings of the study and in order to find a realistic solution to the
problem of poor profitability of small and medium scale construction by indigenous
contractors in Nigeria and increasing levels of working capital requirements, the
following recommendations are advanced:

Clients should pay contractors certificates and claims as and when due to avoid their
being forced to borrow huge amounts with the attendant high cost of capital which
increase his working capital requirement on a project. Delayed payment should attract
a penalty equal to interest on loan.

Establishing a “National Construction Bank” where indigenous contractors can get

loans at subsidized interest rates to meet their working capital requirement that
will enable them complete projects on time and so be able to compete with their
foreign counterparts.

The Government should initiate policies that will stabilize national minimum wage,
prices of petroleum products, value of naira against major foreign currencies, and other
fiscal and monetary measures that will stabilize the prices of construction resources so
51
that both inflation and fluctuations in prices of construction materials, labour and plant
will be curbed.

Due process should always be followed in award of contracts to ensure that the
indigenous contractors chosen for the execution of projects are properly
investigated to ascertain that they have the capacity to execute such projects in
terms of solid financial base, technical ability, staffing, administrative capability,
etc. This way, there will be more confidence that they will manage their working
capital better.

The National Construction Policy should be strengthened by government to enhance the

technological development of indigenous contractors’ capacity.

There is need for stakeholders in the construction industry such as clients and
professionals institutions to create more awareness among indigenous
contractors on the need for working capital management as a tool for efficient
project delivery through education in form of organizing seminars, workshops
and training programmes.

Indigenous contracting firms should be encouraged to build a credible corporate

image, instead of the ‘one-man business’ or sole proprietorship ideology.
Indigenous contractor must eshew the “know all’, “have all” sole proprietorship
mentality, which is restrictive, and embrace the corporate status. By opening up
or converting to a private or public company, the indigenous contractor will have
access to more working capital unlike a one man business which faces enormous
challenges in an environment where competition is stiff. Misuse of monies paid
to them as mobilization fee or advanced payments, certificates and claims for
personal gains should also be shelved. They must recognize the importance of
working capital management for construction and recruit qualified and
experienced managerial, financial and technical personnel for this purpose.

52
REFERENCES

Akande D.(2010). Managing Profitability for success. Retrieved from http:

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