Dropping margins are making contractors more selective about the projects and clients they engage with, as well as encouraging greater financial control in the sector, a Dubai-based business leader told Construction Week.
Rajesh Kumar Krishna, chairman and chief executive officer of Beaver Gulf Group, said contractor margins in Dubai currently top out at around 7%.
“Gone are the days when Dubai contractors used to make 20-25% margins; with good clients that have cash flows in place and don’t delay their payments, the margins are between 4-7%,” Krishna said.
“It’s the general standard [now] if you have strict cost control measures in place. Our vertical integration helps us with achieving those prices, because we don’t have to sub-contract [every task].”
Regulatory changes and fees are impacting contractor costs, which are further tightened as developers seek greater returns on investment.
These factors are driving up the competitiveness of contract bids and making tender pricing even more important for construction firms, Krishna explained. As a result, select contractors are declining to work on the projects that are not financially sensible for their organisations.
Krishna said it is necessary for contractors to work with clients that have a good track record of stakeholder management, and to negotiate the right contract terms, including advance payment timelines.
“Your performance has to be good enough to convince your clients to pay you on time and to expedite your payments when needed,” he continued.
“We haven’t had bad debts or payment delays beyond 60 days in the last three to four years – that is why we’ve been successful and the company is growing: because of the good clients and the projects that we’re able to select, and our prudent cash flow management.
“If someone offers me a better [price] and a 20% margin, [but promises to pay] in four months, I don’t go for the project. Pay me in 30-45 days and give me a 7% margin, and I’ll do the job – and continue doing it – for you.”
This May, multi-service advisory, PwC Middle East, found that the region's “governments and industries continue to face challenges and pressure to perform and deliver 'more for less' on social and economic infrastructure projects, despite an increase in oil prices compared to 2016”.
PwC Middle East's Capital Projects and Infrastructure Survey, which included responses from project owners, developers, contractors, external advisers, and financiers, found that for contractors, the spending slowdown in 2017 caused “increased pressure on an industry that was already thinly capitalised”.
Funding constraints on capital projects impacted those at the end of the food chain, with contractors reporting that the biggest challenge they face in 2018 was “payment delays by clients, with availability of funding coming second”.
Krishna is not the only industry leader backing tighter contracts and greater selectivity in terms of clients and projects. In the last 12 months, the Middle East’s mechanical, electrical, and plumbing (MEP) leaders have frequently discussed the need for their industry to more judiciously manage the volume of work it takes on.
Subhash Pritmani, vice president for general management at Al Sabbah Electro-Mechanical Company (SEMCO), said earlier this year that MEP contractors must refrain from overworking their resources in pursuit of higher incomes.
“We are unsettled as an industry and many of us have not learnt [from what] happened in the past to MEP companies [that accepted too many projects],” he told MEP Middle East last month.
“MEP contractors should not book a job in anticipation of the revenue. Bite only what you can chew.
“Securing a job is an event, but executing the job is [...an] arduous journey. Don’t get enamoured or carried away by the booking order – you have to deliver the job, and you need to see how the banks, your supply chain, and your main contractor are supporting you. This is important.”
Pritmani called on tighter contract clauses to ensure MEP contractors can secure more timely payments, especially in light of potential project variations. Similarly, this May, Dimitri Papakonstantinou, managing director at Plafond, said equitable contract terms would significantly benefit the MEP sector.
“It’s still a buyer’s market, and there are a lot of contractors taking on contracts with clauses that aren’t equitable,” he told MEP Middle East.
“We are very conscious of it and we are trying as much as possible to push back on certain key clauses in contracts, but it is certainly not something Plafond can do by itself. It’s a market-wide phenomenon.”