Cutbacks strain tender estimating capacity

09 April 2012

Contractors across the region are struggling to keep up with the volume of tenders being issued by clients after a virtual standstill in 2009-10

In numbers

$64bn: GCC construction and infrastructure projects at tender or prequalification stage in GCC

$200bn: Projects currently at the design stage in the GCC

$56bn: Value of GCC construction and infrastructure awards in 2011

Source: MEED Projects

In a market where contractors have spent the past three years complaining there are not enough opportunities for new work, it is with some irony that companies are now complaining that they do not have enough tendering resources.

“It’s crazy,” says an Abu Dhabi-based contractor. “We are desperate for work, but we are declining to participate in tenders because we don’t have enough resources to tender all the jobs we want to chase.”

The contractor is not alone. Since 2008, the volume of construction and infrastructure contracts awarded across the region has plummeted. According to regional projects tracker MEED Projects, there were $82bn of construction contract awards in the GCC in 2008.

UAE construction contract awards 2008-11 ($bn)
Source: MEED Projects

In 2011, this figure had fallen by 30 per cent to just $57bn, even with a buoyant Saudi market. In the UAE, which was the most exposed to the collapse in property prices, the value of work awarded in 2011 fell to $17bn from $43bn in 2008.

Construction job cuts

A smaller market meant that construction companies across the region have been forced to scale back their operations to suit the market requirements. “We have scaled back massively,” says a Dubai-based contractor. “At the peak of the boom in 2008 we employed about 40,000 men, we now employ less than 20,000 and that number is getting smaller.”

Tendering in new markets is a bit more complicated. Everything is new

Dubai-based contractor

The bulk of the jobs that have been shed have come from projects that have either been completed or cancelled since 2008. The majority of the layoffs have been labourers, although some have come from contracting companies’ overheads, which include office-based staff including estimators that prepare tenders.

With the market at a virtual standstill in 2009 and 2010 and few new projects being tendered, companies could cope with smaller tendering teams.

GCC construction projects, by status ($bn)
On hold910
Source: MEED Projects

The problem is that since then there have been a growing number of contracts being tendered. According to MEED Projects, contractors are currently tendering or prequalifying for $64bn-worth of construction contracts in the GCC, some 14 per cent more than the $57bn that was awarded on 2011. And with nearly $200bn of work scheduled for award by the end of 2013 that is still in the design stage, tendering for more projects is expected to start later this year.

For estimators this means there is a lot of work to be done and with cash flow still strained, contractors are not prepared to invest heavily in new head office staff. “A few firms are hiring staff, but they are the exception rather than the rule,” says a regional recruitment consultant.

Geographic diversification for contractors

Compounding the problem, contractors have diversified geographically in recent years to find new work. Many local businesses are now in the process of becoming regional players with a presence in most of the key markets.

GCC Construction awards 2008-11 ($bn)
Source: MEED Projects

Saudi Arabia and Qatar are the two most popular markets. With a large population backed by vast energy reserves, Saudi Arabia is considered to be a long-term market for construction companies, while Qatar is expected to become a boom market as Doha gears up for hosting football’s 2022 World Cup. This is putting further pressure on head offices’ estimating resources as they start pricing tenders for new markets where contractors do not have established connections with suppliers.

“Tendering in new markets is a bit more complicated,” says a Dubai-based contractor. “Everything is new. You have new clients, new suppliers, and new rates to deal with.”

Clients across the region are keen to capitalise on low construction costs. Although in the oil and gas sector rather than construction,  Abu Dhabi demonstrated the benefits of counter-cyclical investment in 2009 and 2010. It awarded $25bn of work in 2009, compared with just $587m in 2008 when costs were at an all-time high.

There are still lots of clients talking, but you never really know whether they have the funding in place

Dubai-based contractor

To ensure attractive prices, clients are issuing tenders to a large number of contractors, forcing them to compete aggressively. For example, in 2011, Etihad Rail issued invited more than 20 groups to bid for the contract to build the first phase of the UAE’s federal rail network. “When the list has more than 20 consortiums it is risky,” says the Abu Dhabi-based contractor. “The contract will go to whoever made the biggest mistake in their pricing. That scares off some companies, but other are desperate for the cash flow and still participate.”

Increased competition for construction firms

The risks contractors now have to take to win work is starkly different to the market they operated in during the boom. In 2008, contractors refused to tender for work, could almost dictate terms to their clients and secured lucrative cost-plus and partnering deals.

For example, the UK’s Laing O’Rourke secured a lucrative partnering deal with Abu Dhabi-based developer Aldar Properties, and the local/Australian Al-Habtoor Leighton Group teamed up with another Abu Dhabi developer Tourism, Development and Investment Company (TDIC). Both of these agreements ended abruptly as Abu Dhabi’s property market crashed in late 2008 and early 2009.

Qatar was also keen to establish alliances, and Doha-based developer Qatari Diar Real Estate Company teamed up with international contractors, including Germany’s Hochtief and France’s Vinci Grand Projets.

Today the opposite applies. With so many firms competing for each contract, the chances of a bid resulting in a signed contract has diminished. “The odds are against you at the moment,” says an international contractor. “But you make your own luck. You increase your chance by [carefully] choosing the jobs you go for, and when bidding coming up with good solutions that will give the saving the client is looking for, while still producing a margin.”

Yet regardless of how ingenious a contractor’s solution is, clients sometimes appear to not want to award contracts. With cash flow still a problem for many developers and government agencies, some projects have stalled several times during the tender process.

Examples of this have included delaying the final contract award after a contractor has been verbally selected, retendering contracts, redesigning packages to make them cheaper, and changing the method of procurement. The most high-profile example has been the main construction contract for Abu Dhabi’s Louvre Museum. Contractors were first approached for a design and build contract for the museum in 2009 and 12 groups were prequalified. The tender was then scrapped and replaced with a traditional construction contract once the design was completed. The tender for that contract was released in 2010. After more than a year of negotiations with Canada’s Brookfield Multiplex and South Africa’s Murray & Roberts Contractors (Middle East), contractors were invited to prequalify for the main construction contract again in March, with new companies hoping to join the list of bidders.

Other projects in Abu Dhabi have suffered similar delays. “We have a list of tender submissions in Abu Dhabi that is three pages long,” says a local contractor. “We are still waiting for a decision and some of them were submitted a year to 18 months ago.”

To avoid wasting time and resources bidding for contracts that will not be awarded, contractors are having to be more selective. The challenge is choosing the right projects that have sufficient funding in place.

“It is really difficult at the moment. There are still lots of clients talking, but you never really know whether they have the funding in place until the job starts,” says a Dubai-based contractor. “Normally, the answer would be to work with existing clients that are already paying you on other projects. The problem is most of our clients aren’t paying, which is why we need new work.”

Infrastructure schemes preferred

Some markets are better than others. For more than five years, the real estate sector had been the most active market for contractors across the region. But it has been plagued with financial problems for more than three years now as investors are no longer buying large volumes of property off-plan.

As a result, construction companies are now focusing on winning work from government-backed infrastructure projects, which while may be slow to pay, are generally expected to pay contractors for their work. “Real estate is dead. Infrastructure is the market now,” says a regional contractor. “For infrastructure, there are three main areas, transport, power and water, and social projects.”

If these markets turn out to be as active as contractors hope, then they will ultimately have to expand, meaning that more resources for business development and tendering will be made available. Before that happens though, most contractors will have to survive on their existing resources, or rely on stop-gap measures such as outsourcing and the use of freelance staff. “I have been quite busy working for a number of major players on specific tenders,” says a Dubai-based estimator. “These companies need to beef up their estimating teams for large tenders and I have been brought into help on a project by project basis.”

Others will have to make do with the resources they already have. “For now we have to get by with good old fashioned hard work,” says an international contractor.

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