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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Hi Craig.
I don’t know which contractors you’ve been working with but I am Contracts Department Director of my Company and we don’t suffer from the same disease as we won’t let it happen. It just needs some professionalism within both the Contractor and Client side in order to satisfactorily complete a Project. Unfortunately the Client side generally does not support that professionalism at site level.
You refer to the low prices tendered by Contractors and yet Clients accept them knowing that they are unachievable. We, as a company, rarely win a project from first position at tender stage due to the acceptance by our Clients that they get what they pay for. If they are naïve enough to accept the lowest tender even though they can see that it is not achievable then they should accept that there will be problems. We are often told that our rates are too high at tender stage and the Client’s team offer lower rates which they have cherry-picked from the other tendering contractors. We do not accept these below cost rates!! However, Client payments, and the cash flow restrictions placed on us due to delays in these, are the major cause of problems to our business.
The reason that the Contractors are the suffering Party again comes down to the constrictive nature of the payments made and leaving of the important matters such as legitimate EoT & variations payments until the end of the Project for leverage rather than determining them as works proceeds in accordance with the Contract. The Clients generally claim that the Contract is for their benefit and not for the benefit of the Contractor, despite the intention of being an impartial document, and only accept it when it suits them, ignoring the facts of the matter. This is repeatedly seen in the rebuttal by the Client’s representatives of correspondences sent by the Contractor in compliance with his obligations under the Contract. Such correspondences may be relevant requests for information or the like and which the Client’s Representative will try and turn back as “claims” and quote some completely irrelevant passage from the documents which deny the Contractor his rights to even ask for information.
We could debate this point for a very long time, however, suffice it to say that all Parties to a Contract need to behave in a manner that does not affect the project completion and not evade any of their obligations.
I agree with Craig’s comment that some of the blame for losses falls on the Contractors however I can’t see that such major companies as HLG, Arabtech, Carillion etc. with all their cost control measures in place, can be so naïve to allow such losses just to drain out. These must also be associated with cash flow and Employer financial promises, together with any possible legal cases taken against the Employers for the same, in order to show such huge losses as reported. The only other reasonable explanation is that they have made bad investments which have depleted their overall company equitable value.
It is unfortunate that developers always work on rates per sq m/ft for both rental and sales income and any Contractor that exceeds their expectations in this regard is seen to be “too expensive”. I’ve lost count of the number of times that I’ve told developers that construction costs are not determined by a sq m rate of built-up area. This is generally what leads to the engagement of contractors at undoable prices. More fool the contractor for taking those prices as something will have to give, quality or health and safety, in order to make the project profitable, or even cost effective..
Robert,
I’d love to agree with you on the point of Contractors and their cost control measures, however, I have seen first hand, in more than one of the listed Contractors above, just how costs are controlled. I won’t say any more.
The significance of such major losses, as i’ve seen generally are:
1. Low tender price to win work and taking the risk that procurement gains will be increased, but never are,
2. Variations occur which are not administered properly due to insignificant staff to deal with the volume and contractual nature,
3. Design responsibilities not being managed (Contractors build, designers design principles),
4. Claimsmanship settles in,
5. Delays cost more money and cash flow stops due to mistrust and claimsmanship,
6. Only 1 party suffers and its not the owners.
Records are extremely poor and not actually in the control of the contractors, but their many subcontractors. They don’t like open book and positioning sets in.
It needs experience heads to be able to identify early on when projects are going wrong and for corrective action to be taken, before the losses that we are seeing set it.
‘Sad and disappointing’ times for construction companies regionally and now internationally with Carillion news more recently. I heard today that Carillion’s share price has dropped from 192p to 53p in the last 3 days – on the back of the news that they made provisions for GB 845m hit (GB 375m relating to UK projects & GB 470m for overseas projects). On a yearly turnover of GB 2.5bn.
Having worked away from contractors for 8 years now having moved into claims and disputes with consultants, I am not surprised at these headlines but find the news very disappointing. Contractors build things, designers design things, yet these simple concepts have been lost in construction in my mind. The Middle East is lost in the concept of lump sum pricing/cheapest price wins based on incomplete (and sometimes concept design) high risk procurement strategies leaving contractors with the massive and unsustainable risks that come with that, which, I see as the main reason for such financial loss. The payment regimes in the Middle East are also unsustainable and ‘NEED’ to change soon, otherwise such bad news stories will continue for similar organisations.
It can’t all be building owner/employers at fault for such financial loss. Internal commercial reporting must need to be reviewed and overhauled.
Something has to change. Campaigns need to start. Local governments, major developers/employers and the industry as a whole need to collaborate to change the mindset and current concept of construction. If this does not happen, we will see more international contractors pull out of these regions and the industry will suffer and quality will disappear.
Good & useful info.
The article is absolutely correct, however the first point has to be with the Government and changing the culture of the developers, with whom the payment problems initially lie. Too many projects are commenced without being fully designed and all the creases ironed out. As most projects in the region are let on a Lump Sum basis this lack of completed design or design changes during the project duration lead to major variations to the documentation upon which the Lump Sum is calculated, and consequently major price variations. The variations are not settled early enough during the project duration leading to lack of payment for the changes and financial pressure placed on both Contractor and Subcontractor who are required to complete the changes without payment. Payment of variations and any resulting Extensions of Time are generally left until the end of the Project when the Employer has his building and can “negotiate” the Contractor down by holding the liquidated damages charges as a sword above his head even though the Contract allows for these matters to be decided as the Project progresses. If these matters are addressed then there will be a smoother implementation of the projects and less of a problem as discussed in the Blog referred to.
To add to this guest blog, news broke today that UK contractor, Carillion, is to pull out of Saudi Arabia, Egypt and Qatar, a consequence of construction spending slowdown that accompanies two years of falling oil prices. This adds another factor to the commentary above. Full article: http://www.arabnews.com/node/1127406/business-economy