This article is extracted from the report 'UAE Construction After Covid-19'

For most of the past five years, the UAE’s construction sector has been struggling with problems of a slowing market - a lack of new projects and weakening cashflow.

From project delays and cost overruns to unfair slow technology adoption, the consequences of these challenges were damaging the sustainability and reputation of this critical industry.

It is no surprise that therefore the construction sector is one of the worst-affected industries by the Covid-19 pandemic, which has accelerated the challenges that were already crippling the industry.

“Before the real impact of Covid-19 was felt, we already found ourselves in a construction industry that was under tremendous pressure due to a lack of cash in the system,” says Sean McQue, director of construction at UAE contractor Alec. “Businesses were unable to perform and deliver as they were carrying extensive legacy issues caused by non-payment for works they had already executed. The effects of Covid-19 have exacerbated this problem.”

The novel coronavirus was first detected in China in late 2019 and has since appeared on every continent save Antarctica. By 12 July, more than 12.5 million people around the world had tested positive for the virus, and 560,000 deaths were confirmed.

MEED's extensive coverage of the coronavirus pandemic in the Mena region

The UAE announced its first confirmed case on 29 January and initiated a nationwide disinfection campaign on 26 March, with strict curfews in place. The economic impact of the Covid-19 pandemic far outweighs that of the financial crisis of 2008-09.

While the crisis of 2008 was a financial catastrophe caused by insufficiently capitalised banks, the Covid-19 pandemic is a physical contagion. Its impact on human health has rendered entire countries helpless.

Additional costs

The UAE’s construction industry was one of the few sectors exempted from the lockdown during the nationwide sterilisation campaign. Project sites remained active, although operations were not spared from the disruptions of the virus.

Social distancing had to be implemented on ground and inside vehicles ferrying workers to and from sites, adding time and costs for contractors. Meanwhile, supply chain disruptions meant procurement of materials was delayed.

“There is now news of businesses going under on a daily basis and our industry is fast losing whatever capacity and capability it had,” says McQue. “A good economy cannot function without a robust and healthy construction sector.”

The entrenched culture of bidding at unrealistically low prices to win work leaves little margin to accommodate unexpected challenges down the line. Contractors now find themselves struggling to absorb the costs and fulfillment burdens that Covid-19 has introduced for ongoing projects.

The economic slowdown has added strain on paymasters’ financial resources — including government spending for major infrastructure schemes. This has meant existing challenges around payments and cashflow have been exacerbated.

“On the back of what was an already shrinking market, the current Covid-19 situation along with lower oil prices is resulting in a low level of new project opportunities for designers and contractors, which is likely to lead to reduced volumes of work over the coming 12-24 months,” says Jason Sams, construction divisional manager at UAE-based contractor Khansaheb.

“The low-price strategy being seen across the market is placing pressure on key parts of the supply chain, causing instability and unreliability, particularly financial, on resources and overseas procurement.”

For sites that have had to be shut down due to Covid-19 challenges, layoffs and salary cuts have become commonplace. McQue notes that everyone has adopted a “wait-and-see” attitude and are holding onto cash.

These issues ultimately leave room for disputes, as project parties find themselves unable to meet their contractual obligations.

“In these times, huge market challenges and volume reduction is anticipated,” says Sams. “Across the sector, supply chains and subcontractors have been exposed to significant pressure, which may lead to a number of them going out of business. There have been strategic changes, which have seen the focus move away from hospitality, retail, residential and commercial [projects] to infrastructure, industrial and agricultural [schemes].”

According to UK-based data analytics firm GlobalData’s Covid-19 Sector Impact review, the UAE construction sector posted growth of 3.3 per cent in real terms in 2019, and was expected to grow by 4.3 per cent in 2020, driven by government initiatives. However, following the Covid-19 outbreak and subsequent knockdown of oil prices, GlobalData now expects construction output to contract by 1.9 per cent in 2020 and a recovery to 3.8 per cent in 2021.

This central forecast is based on a positive scenario that the outbreak will mostly be contained in the second quarter of 2020, such that restrictions on travel will be eased thereafter.

Research conducted by US-based McKinsey Global Institute highlights a similar forecast. “If things go well, construction activity could be back to pre-crisis levels by early 2021,” says Ghassan Ziadat, vice-president of major projects at McKinsey & Company. “But longer-term lockdowns could mean it takes until 2024 or even later.”

The Dubai government was already taking steps to regulate the real estate market, as oversupply marred property prices, even before the Covid-19 outbreak.

In August 2019, UAE Vice-President and Prime Minister and Ruler of Dubai Sheikh Mohammed bin Rashid
al-Maktoum established the Real Estate Planning committee to balance supply and demand. It is expected that this will result in fewer projects being brought to the market in the coming years, which invariably mean fewer project opportunities for contractors.

Thus, a larger pool of players was left to compete for far fewer wins. Such an environment is likely to encourage low-price tender bidding to secure contracts, leaving little room for investments in areas such as technology, talent and research. It is time to rework the approach to construction, to create a more productive, streamlined and cost-effective industry. Covid-19 has emphasised the need for this change.

The Dubai government was already taking steps to regulate the real estate market, as oversupply marred property prices, even before the Covid-19 outbreak.

Government stimulus

“Growth in these times is the challenge and the current pipeline of tenders for the industry is presenting real concern,” says Alec’s McQue. “The normal reaction from governments that wish to stimulate economies in difficult times such as these is to invest in infrastructure. We anticipate this happening in the short-to-medium term, which will be great news for the construction industry.

“There has already been news coming out of Abu Dhabi in this respect, stating that infrastructure spending will be directed at local businesses, which makes a lot of sense.”

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• Covid-19 slashes contracting demand
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As liquidity dries up, contractors find themselves left with little choice but to slash down prices even further. However, this could be damaging in the long term.

“Developers that are suspending projects with the intention to re-bid or negotiate lower prices with incumbent contractors are making a mistake,” says McQue.

“Not only are they damaging the whole supply chain associated with the project, and the greater economy along with it, they are just adding cost to their own development. They will ultimately end up paying the same price and will just delay the completion date, creating further loss of benefiting from the completed asset.

"Contractors will react by cutting costs where they shouldn’t, and the quality and safety of the developments will be affected.”

McQue believes the outbreak has brought greater attention to “the need to change”.

“The construction industry has for too long been reluctant to adopt new technologies and that has resulted in many inefficiencies and it is simply no longer sustainable for the sector to continue to operate in this manner,” he says.

A key reason for this waste and inefficiency, McQue notes, is the lack of collaboration during projects.

“Collaboration — whether it happens in-person or in a digital space — is crucial in construction,” he says. “This mindset had already begun to change, with recent events reinforcing the need to adopt cloud collaboration tools, which allow employees to continue to work from home or anywhere where they feel comfortable. Increasing complexity of projects means innovation is essential.”

Related reads:

• Driving collaboration to remove waste
• UAE Construction Think Tank recommends standardised contracts
• Collaboration vital for UAE's urban development plans, say experts from Arup

McQue says robotics will open new frontiers for the industry, while cloud collaboration and artificial intelligence tools are mature enough to enable firms to operate more effectively even in challenging circumstances.

“If, for a long time, adoption of these tools was a matter of choice, today it has changed,” he says. “Companies not embracing the digital revolution will be sidelined by those that do.

“Companies must become more agile and flexible in the way they operate, allowing employees to become more productive.”

This report is produced under the MEED Mashreq Construction Partnership.To learn more about the report or the partnership, log on to: www.meedmashreqindustryinsight.com