As liquidity tightens and project fundamentals are increasingly scrutinised, partnering could help developers save money and improve contractors’ margins.
Since partnering was first used in the region in Bahrain in 2006, clients and developers have steadily been adopting the strategy to reduce project costs and secure much-needed construction resources. As the popularity of partnering has increased, firms are seeking more sophisticated contracts to facilitate its use, and a new form of contract, PPC International, is facing its first test on two Dubai projects. Clients Tatweer and the Dubai Multi Commodities Centre hope partnering will help them deliver their schemes, University Hospital and the Time Zone Business Park respectively, which both began in 2008, on time and within budget.
“Partnering advocates the early selection of key specialists, including contractors, and has everyone collaborate at the right time,” says Andrew Greaves, partner at UK law firm Trowers & Hamlins.
Trowers & Hamlins wrote the PPC International contract to give firms an alternative to adapting traditional contract forms such as the International Federation of Consulting Engineers’ contract. “What this means is that innovative ideas are captured early and then reflected in the design,” says Greaves. “The buildability of this can then be tested and the potential cost provided with much more certainty.”
Essentially, a project team is established, which works as a single entity to deliver a set of joint objectives. Any gains, such as savings against a target cost, are shared according to a predefined agreement, as are cost overruns should the project be delayed or go over budget. The whole team shares the risk, and the reward.
Bahrain-based investment group Arcapita pioneered the approach, which was first used in the UK in the late 1990s, on its $200m headquarters at Bahrain Bay. The firm worked with South African engineering group Murray & Roberts and the local Nass Contracting on the scheme. “This was the first real example of proper two-stage partnering,” says David Mosey, head of projects and construction at Trowers & Hamlins. “They really did a great job and attracted a lot of interest.”
‘Two-stage’ refers to the contractor signing up to pre- and post-construction activities. During pre-construction, the contractor works with the client and consultant to test the design and find the most efficient way of carrying out the project. “It includes value engineering on a collaborative basis from project inception,” says Greaves.
Once the contract price is agreed and the scheme enters the construction stage, the contractor can make money on any further savings it helps the client make.
But today’s construction market is very different to that of 2006, when partnering was first used in the region. Until mid-2008, rampant inflation and limited contracting resources were the biggest problems for developers and clients, but that is no longer the case. Instead, developers face difficulties in securing financing and proving the viability of a scheme. “There is an inclination when times are tough for clients to lean on people and try to get lower prices,” says Mosey. “They may decide they don’t need complex procurement structures, and we can’t predict the extent to which people will bow to that.”
In November, MEED reported that some clients had reverted to lump-sum contracts. The Saadiyat Beach Residences project in Abu Dhabi, which is being developed by the Tourism Development & Investment Company (TDIC), was structured as a two-stage tender with Arabtec Construction selected to move to the second stage to negotiate the contract and sign a final agreement. But those negotiations ended without an award. The client is now inviting companies to prequalify for the project, which will be competitively tendered.
Mosey says there are several reasons why the current climate makes partnering even more relevant. “In a shifting market, there are major savings to be made and clients have to understand that it is imperative for contractors to make money,” he says. “Contractors will go in low to win the work, and the fact is that if they have a rubbish brief that has cost errors, these will be used for claims later. In a single-stage tender, contractors will bid low to win and store up any issues for a rainy day. If they lose money on the bid, they have to make it back somehow.”
Some projects are on hold because the client wants to reap the benefits of falling commodities prices and seek lower bids. But according to Mosey, should the client opt for a partnering approach, these savings will automatically be shared by the team, and the project will not have to be delayed.
Another advantage of the approach, says Greaves, is that it ensures all parties are aware of the potential risks before the project gets under way. “So in the case of financial issues, every party has an obligation to reveal any information that could adversely affect the project,” he says. “In the case of a developer that finds his funding has fallen from $100m to $75m, he has to bring that information into the project team, who will then deal with it appropriately, whether that means redesigning or rephasing the project.”
Despite the many advantages of partnering, some clients will always choose a single-stage approach. They do not want hands-on involvement with the scheme, but to transfer the responsibility to a contractor for a pre-agreed price. “It is not for everyone,” says Mosey. “Partnering is only for those who are interested in the detail behind the price.”
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.