Contractors bidding for new work in the UAE risk winning loss-making contracts as they struggle to accurately prepare prices due to uncertainty over the 5 per cent value-added tax (VAT) that is due to be implemented on 1 January 2018.

Construction contracts typically have two to three year duration, which means work let today will be completed after the new taxation regime is introduced. The problem is a significant one as clients in Dubai are busy tendering projects that are due to be completed ahead of the Expo in 2020. “Our tendering department is very busy at the moment,” says an international contractor working in Dubai. “The big unknown looming on the horizon is VAT and it is causing a lot of confusion.”

The easy solution for contractors is to add a qualification to their bids that says prices will increase by 5 per cent once the tax is introduced. Firms say that while this would solve the problem it is unlikely to be accepted by clients. “The market is very competitive at the moment and clients call the shots,” says the international contractor. “Qualifications are routinely withdrawn during negotiations now, and I am sure the same would happen with anything added on VAT.”

Another option for contractors is adding the 5 per cent tax to their bids, but firms say that the competitive nature of the market means that any firm that does that would be at a major disadvantage when it comes to winning new work. “No one in his right mind would start adding 5 per cent to bid prices now,” says an Abu Dhabi-based contractor.

Without the 5 per cent addition, construction companies risk having to absorb the cost of the tax themselves. Firms are already pricing work with low single digit margins, which means there is a risk contracts end up making a loss.

The situation is expected to remain uncertain until the government provides more clarity on the details of the tax. “We have met with consultants working with the government and they do not have any details yet, it is very uncertain,” says another Dubai-based contractor.

“Experience from other markets has shown that the transition period when new taxes are introduced is chaotic,” says the international contractor. “We desperately need guidance from the government.”