Lower construction profits are new reality

After six years of growth, the current downturn has given construction firms a rude awakening, forcing them to rapidly rewrite their business plans, according to the findings of the MEED Gulf Construction Outlook Survey.

If the speed of the downturn caught many in the industry by surprise, most are now adjusting fast. The pursuit of higher revenues in a booming market has been replaced by the need to protect profit margins in a shrinking one.

Rapid expansion over the past few years has led to many companies becoming bloated and inefficient. Their aim now is to become leaner to remain competitive in an oversupplied market.

The industry is entering a period of sharp consolidation as companies cut costs. According to the MEED survey, 70 per cent of construction firms are preparing to make significant job cuts this year.

The greatest concern for companies is their growing exposure to late or non-payments by clients. Some 96 per cent of respondents say they expect to see a rise in contract disputes over non-payments in the coming year.

The overwhelming majority of those who responded to the survey also expect companies to fail because of cash shortages within the construction industry.

The biggest decision for many firms over the year ahead will be whether or not to pursue legal action against influential but non-paying local clients. To do so could undermine a company’s chances of winning work in the future, but to not do so could lead to significant losses or even insolvency.

The best option is for clients and their suppliers to share the pain by extending credit terms or rescheduling work. This will be unpalatable to many but the reality is that a lot of clients cannot pay at the moment. Reduced profits in the short term are a far better option than no payment at all.