Improving market will bring new challenges

16 October 2014

Margins are expected to creep up as order books fill

On 13 October, contracting consortiums submitted bids for the two main construction packages on the Mecca Metro.

The urban rail network is the third to be tendered in the GCC in the space of two years, and is just the latest example of how the dynamics of the region’s construction sector have improved since 2011.

Over the past three years, large-scale infrastructure projects such as the Riyadh and Doha metros, and the midfield terminal complex at Abu Dhabi International airport, have given the order books of contractors and consultants a much-needed boost, after the painful landing following the collapse of Dubai’s real estate market in late 2008 and early 2009.

As order books swell, the hope is that margins will improve. In 2008, the market flipped overnight from a sellers’ market into a buyers’ one, as clients stopped negotiating contracts with comfortable margins and began competitively tendering work to drive prices down.

The ploy worked and firms quickly engaged in a race to the bottom as they struggled to secure new orders. Quickly, they began to say that work was being awarded to firms that had priced in no margin, and those complaints have now rumbled on for more than five years.

As 2015 approaches, there are signs that this trend may be finally starting to reverse. As firms take on more work, they are less likely to be as aggressive when bidding for new work, meaning margins will creep up again.

As margins improve, companies will start to believe that the global financial crisis is finally in the rearview mirror. But with that will come a host of familiar challenges for those that worked in the region before 2009, as resources become increasingly scarce and cost inflation erodes those margins that firms thought they could enjoy again.

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