Crisis for Gulf Construction Companies?

Let’s take a look at what has been happening in the Gulf construction market recently.

Drake & Skull announced plans for a major restructuring after suffering losses in 2016 of AED 787M, an improvement on 2015 when they lost AED 939M. A few weeks ago 8,000 employees of the 40 year old company Saudi Oger received letters announcing that 31st July 2017 will be their last day at work. The company apparently owes $3.5Bn to Saudi banks. Arabtec needed a cash injection early this year too after announcing losses of AED 3.4Bn in 2016. In 2015 the losses were reportedly at AED 2.35Bn. In March last year Al Jaber missed a debt repayment of AED16.2Bn which had been put in place in 2014 to restructure the company and in August, they announced the sale of their share in ALEC and the Shangri-La Hotel Abu Dhabi to finance yet another restructuring exercise. Then there’s the fall out between Al Habtoor and Leighton, the list goes on and this is just the tip of the iceberg for the Gulf construction industry…the small sub-contractors, sub sub-contractors and suppliers don’t make news in the financial press.

What is going on with contractors in the Gulf? Is there no work?

We hear of grand new schemes coming on line almost every week, Jumeirah Central, Marsa Al Arab, Dubai Harbour…and this is in addition to works already underway at Expo 2020, Dubai South, Abu Dhabi Airport etc. and we’re only talking of the UAE. The best bellwether to indicate the strength of the local construction market is simply to drive around and observe the number of tower cranes…there are plenty.

It’s not 2008, so what is the problem?

In another article I wrote about the issues Contractor’s face and how, given the current environment, they should be tackled. It was all about rigorous contract and claims management. The article received a great number of comments and responses (see original LinkedIn post). Most were about, not how to manage in the current environment, but how do we change the environment of the Gulf construction industry?

These are the issues, which you raised, with my comments and potential solutions:

Pay Contractors on time and in turn pay Subcontractors and suppliers promptly. In other markets pay-when-paid is outlawed. Project bank accounts or ESCROW arrangements can be used to pay all on time. In the Gulf 180 days is not unheard of to pay the main contractor. Why not pay into a project bank account, which triggers payments to subcontractors/suppliers?

Change the methods of procurement. More collaborative working perhaps? Partnering could be used as well as less confrontational forms of contract. Who uses NEC forms in the Middle East? A big source of all the problems with the industry here are related to going with the lowest bid, regardless of whether the price is realistic.

Eliminate the use of “On Demand” bonds. Perhaps we could go for Project Bonds linked to Project Bank/ESCROW accounts.

Greater use of technology. More use of BIM and other technology to manage and monitor construction. Perhaps greater use of modular construction and 3D printing will help change an industry, which is notoriously slow to change.

Resolve conflict and disputes quicker and more cost effectively. Dispute resolution boards are almost always deleted from any FIDIC form of contract here whilst FIDIC makes greater effort to get them more universally accepted in their latest drafts for the new conditions of contract. The use of Adjudication mandated by law has helped speed up the dispute resolution process in other jurisdictions. Perhaps we should make greater use of Mediation?

More training and greater professionalism in the industry. Ways are needed to recognise on-the-job training and those involved in the industry need more training especially given that both operatives and staff come from such varied backgrounds.

How can we manage all that?

Easier said than done, I hear you say. How can we manage all that? Well in changing the environment of our industry, it’s a bit like changing the climate of our planet. There is a certain amount that can be done by changing attitudes, providing we all change, but it’s completely unrealistic to think it can all be done this way. Government intervention and leadership has to be the driver.

This has been done in two ways in other markets. First the Government and public owned authorities are the largest clients. If certain behaviours and attitudes are mandated on projects then those bidding have to adapt and change. That’s the carrot. The stick is also needed though, through government regulation and law changes. The construction industry is a huge industry in this region, which creates a lot of growth especially when you think of all the small subcontractors and suppliers. The governments need to realise.

The most important thing is that none of the measures above should be looked at in isolation. They are all part of a package. Outlaw pay-when-paid to subcontractors and suppliers, and you pass the problem up the line to the big contractors if measures are not in place to ensure they are paid.

We all know what needs to done and even how it needs doing if we are in the industry, whilst I hear those outside say, “What’s wrong, and with all this work how come construction companies are failing?”

This article was written by guest writer, Michael J. Lawrence MBA CEng MICE MCIOB FCIArb. 

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