Navigating crisis-induced price spikes

04 August 2021
As the construction industry grapples with higher costs, clear communication and consensual project adjustments are key to addressing stakeholder interests

MEED's RETURN TO INFLATION report includes: 

> The spectre of inflation looms
> Facing the threat of a super cycle
> The quandary of oil hitting $100 a barrel
> Inflationary pressures in the region grow

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For all the long-term planning that goes into it, construction predominantly involves balancing risks and decision-making on a continuous basis. A bolt from the blue, such as a sudden surge in material prices, tests an organisation’s resilience, impacting cash flow and project quality. 

Increased costs are bad news for contractors trying to hit the golden mean of delivering on time and within allocated budgets. But once in a century, when an unprecedented pandemic strikes, these increases may threaten the survival of companies. 

Covid-19 has had a significant impact on supply chains, affecting project delivery timelines due to a slowdown of available materials and labour in the Middle East. Late last year, there was a sudden increase in the freight charges of imported building materials, making life more difficult for developers and contractors in the UAE.

Halfway through 2021, the GCC construction industry is staring at a monumental challenge. There has been an average increase of up to 25 per cent in the prices of steel (structures and reinforcements), aluminium, copper and chemicals since the start of 2021. 

Staying afloat 

Quite a few of the projects that contracting companies signed in 2020 were done to stay operational. Those wafer-thin margins have been further diminished by higher material costs. This overall squeeze on profitability has placed a strain on the supply chain and, in turn, contractors – leading to project suspensions and, in some cases, terminations of parties or whole projects.

Long-standing contractors such as Amana, in business since 1993, have braved many a cyclical downturn and understand that value is created through transparency and innovation.

Transparency allows real challenges to be flagged – whether they concern costs, time, quality or simply communications – and to be addressed in a timely manner. This allows a company to focus on getting the job done without compromising project quality. 

The pain and gain of material price fluctuations is shared with clients and the supply chain. In a competitive market, contractors may well choose to share the pain by absorbing part of the price hikes, improving vendors’ cash flows and minimising further risks for all parties.

Candid communications

Forecasting of material price is an important function for effectively managing projects in terms of accurately estimating, tracking and controlling projects. Last year, when material prices started moving upwards, one of the immediate ways in which Amana responded was through clear communication.

All stakeholders were urgently contacted in order for project-critical decisions to be considered in the light of the updated risk assessment. Senior executives spoke to all clients and sent out written communications conveying critical information updates.

We sought clarity from clients: were they looking to move forwards with their projects as scheduled to ensure timely delivery, or did they prefer the project cash flow be staggered by slowing the job and allowing themselves time to get better visibility on the market’s needs? This was supported with detailed cash flow forecasts that enabled clients to make informed decisions.

Given the number of clients, it took nearly two months for the feedback to come from everyone. In the interim period of uncertainty, we decided that, as a company, we needed to approach the challenge as one community, taking financial decisions to offset the burden of increased costs. While we ensured that no one lost their jobs, every employee was made to contribute 30 per cent of their pay in the form of unpaid leave during this time of uncertainty.

Clearer priorities

The end result of this candid and thorough communication was a great deal of clarity on the priorities and needs for the 45 projects we had running across the GCC, and on how they could be best managed to serve the common interests of clients, contractors and supply chains. 

As a result of proper planning, passing on some of the cost to the client, and aggressively making technological shifts — such as the adoption of modular construction techniques — to reduce material and labour requirements, we managed to complete each project on time.

Our active projects at the time included the Jaguar Land Rover project in Jafza, Dubai, on which work began in March 2020 and was completed 12 months later, according to the original delivery time committed to, but with a compressed duration.

The unpaid leave for the company’s employees was stopped at the end of May 2020, and later all contributions were returned to staff. At the beginning of this year, we also released bonuses to those entitled.

The road ahead is fraught with more and perhaps bigger challenges, but even in the most uncertain times, clear and consistent communications can make for smoother collaborations in a relationship, including those between clients and contractors.

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