Construction wages stable despite cutbacks

16 May 2012

Pay has remained the same since the end of the region’s construction boom in 2008, but overheads have gone down, meaning overall costs have dropped

It has been a tumultuous few years for the construction industry. As real estate prices across the region started to fall in 2008, planned projects were cancelled and schemes under execution stalled. The impact on contractors was severe. They made losses on existing contracts and to win new work they had to slash their margins and outbid other firms in an increasingly competitive market place.

Wages have remained steady over the last three or four years. It’s difficult to cut wages; you could end up with a riot

Dubai-based estimator

According to regional projects tracker MEED Projects, the value of construction contracts awarded in the GCC fell by 40 per cent in 2009 to $48bn, from $81bn in 2008. The worst hit country was the UAE, which was the region’s largest construction market at the time. In 2009, it awarded $17bn of contracts, a drop of 60 per cent from the $43bn awarded in 2008.

Buyers’ market for real estate

As the volume of work collapsed, the construction sector moved from a sellers’ to a buyers’ market and costs plummeted. According to cost tracking service MEED Cost Indices, construction costs in the UAE dropped by 15 per cent in 2009 and a further 21 per cent in 2010.

“Costs fell dramatically in 2009,” says a Dubai-based cost consultant. “The supply chain had expanded dramatically during the boom and it was simply too big to be sustained by the projects that were still going ahead.”

For three years, contracting companies have downsized, restructured and cut costs to remain competitive. For workers and staff, this has meant job cuts and in the UAE the number of layoffs ran into the thousands.

“Our workforce has been slashed,” says a Dubai-based contractor. “We were employing more than 30,000 men. We are now down to 11,000 and we are looking at how to get that number even lower.”

But while material costs have fallen, wages have held firm. They are generally more stable than the prices of materials and other commodities because there is a human and social element involved.

“Wages have remained steady over the last three or four years,” says a Dubai-based estimator. “It’s difficult to cut wages; you could end up with a riot.”

There has been industrial action before in the UAE. In 2007, construction companies in Dubai agreed to increase labourers’ wages by up to 20 per cent following disagreements at leading firms. “Labour disputes were a constant problem,” says an Abu Dhabi-based contractor. “Most companies were affected in some way.”

The issue is made even more sensitive by the international criticism of workers’ conditions in the UAE. New York-based Human Rights Watch has published several hard-hitting reports criticising contractors and clients in the country for the way they treat workers. In March this year, it issued an 85-page document that urged the developers and cultural institutions building projects on Abu Dhabi’s Saadiyat Island to increase efforts to improve working conditions and reduce the abuse of migrant labourers.

Labour rates in the UAE

Although workers’ wages have not changed, labour rates for contracts have fallen as add-on costs have been reduced. Since 2008, rates have remained at about AED8 ($2.17) an hour for general labour, AED10 for masons and AED12 for drivers and plant operators.

“Rates do change,” says the Dubai-based cost consultant. “General labour rates are about AED8 and we normally work on the assumption that the contractors’ rates are about 220 per cent of the wages, which means wages are AED3-4 an hour and the rest is made up of additional cost and mark-up.”

Unlike other markets, the GCC relies almost exclusively on expatriate labour, which means contractors have to provide accommodation, food and transport.

“It’s a unique market,” says the Dubai-based contractor. “In other parts of the world, a labourer will ride his bike to work and live in his own house, so all you have to pay is his wages. Here you pay for everything, which means the cost of labour is actually not very competitive, when you compare it to places like the Far East and Turkey.”

There has been some respite in labour costs, largely due to lower accommodation costs following the property crash.

“Labour wages may not have changed, but costs certainly have,” says a UK-based contractor. “Camp costs soared in 2007-08. We were paying just AED30 a day in wages [for each man] and about AED35 in other costs. Today those other costs are down to about AED10.”

Housing workers in the Gulf

The cost of accommodation for labourers increased sharply in 2007 and 2008 for two key reasons. The first was regulation. The pressure from non-governmental organisations such as Human Rights Watch meant that authorities became stricter on labourers’ living conditions.

“Regulations meant costs went up,” says the cost consultant. “It meant instead of six men to a room they could only have four, and that meant contractors needed more camps and that inevitably drove labour costs up.”

The second reason was simple supply and demand. With an unprecedented number of projects under way, contractors’ workforces expanded rapidly, meaning new camp facilities had to be built or rented. The number of men that needed to be housed was enormous. In 2008, Dubai’s largest contractor, Arabtec Construction, said it expected its workforce to grow to 50,000 men, while regional giant Consolidated Contractors Company employed 170,000 men across the region.

The demand was so great that in 2008, investors said that even though luxury residential developments such as the Burj Khalifa and the Palm Jumeirah attracted more attention, building a labour camp was the best property investment in the region.

“The best real estate investment at the moment is labour camps,” a Dubai-based contractor told MEED in 2008. “Demand is strong, availability is low and landlords can really take advantage of the situation.”

In 2009, that attitude was reversed and contractors that had bought land and built new camps were keen to sell. “We built a camp two years ago and we don’t need it now. I doubt we can sell it, but we would if we could,” an international contractor told MEED in 2009.

Other costs that affected the price of construction in less obvious ways also rose as inflation reached double digits before 2008. In the aftermath of the credit crunch, these fell too.

“Food and transportation costs are also important,” says the Abu Dhabi contractor. “When you have to feed thousands of men, things like the price of basmati rice and eggs suddenly become relevant to a contractor.”

Salaries for professional staff staying outside camp facilities have fallen. Although some firms have forced pay cuts on staff, the main way salaries have been reduced is by retrenching staff and hiring cheaper replacements.

“Not many people have been forced to accept a pay cut,” says a Dubai-based recruitment consultant. “What we have seen are pay freezes, which in real terms are effectively pay cuts as inflation rises, and new hires being taken on for less pay.”

Firms have been recruiting in different markets to get cheaper hires. “Western expatriates who were on large packages have been replaced by staff from Asia who generally command lower salaries,” says the recruitment consultant.

The region’s construction market is now out of equilibrium, with more contracting resources than the market requires in the UAE and not enough good contractors in Qatar and Saudi Arabia. Many firms are restructuring their businesses, downsizing in the UAE and establishing new operations in Doha, Riyadh and Jeddah.

“Our clients have made the change now,” says the head of a Dubai-based contracting company. “They have downsized so that their resources now match the volume of work or development they plan to carry out in the future. The construction industry hasn’t gone through that process yet. We need to restructure so our resources match what our clients are planning to do. Once everyone has done that, the market will work again.”

Firms are starting to bring in new management teams with a mandate to restructure and revitalise businesses still geared up for the pre-2008 real estate boom rather than the more modest development plans being prepared in 2012. This requires a different skillset from the operational roles that were required before. New, often more expensive executives are being brought in from overseas to effect that change.

“Overhauling a business that has been operating for 20-30 years is not an easy job,” says the recruitment consultant. “If you have a record of delivering change, the package you can command is substantial.”

Justifying labour costs

These new managers will be looking at labour and how efficient it is. Although wages are low in the Middle East, the cost of labour in the Gulf is actually quite high due to the extra costs required to maintain a labour force of non-nationals. This cost can be justified if the labour is efficient and delivers. If it does not, managers must explore alternatives.

“We have already started to look at new technologies to reduce the amount of labour we need,” says the head of a Dubai-based contractor. “We are looking at adopting modern, innovative construction practices such as modularisation. The hope is that, if it works, we can cut our costs while at the same time delivering a better product for our clients more efficiently.”

New technology will not decrease wages, but with less labour needed it will mean costs for contractors come down, and in a market that is becoming increasingly competitive that can only be a good thing.

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