Procurement: Private-private partnerships

23 December 2005
Developers and contractors are beginning to realise their fortunes are linked.

Ahmed al-Sayegh of Abu Dhabi’s ALDAR Properties has strong views when it comes to client/contractor relationships: they need to change. "It is time for contractors and developers to consider themselves as partners and set aside the ‘them and us’ mentality. It is in the interests of everyone," the ALDAR chairman says.

Al-Sayegh is not alone. At Dubai-based Nakheel, development director for Dubai Waterfront Robert Lee acknowledges change is in the air. "The traditional methods of procurement may be coming to an end because of the current supply situation," he says. Supply shortages are nothing new to the UAE construction industry. However, it is clients who are now having to consider alternative procurement strategies if they want to secure contractors and deliver projects on time.

Up until this year, it was contractors that were struggling with shortages. In mid-2004, cement shortages meant many sites around Dubai ground to a halt. Contractors faced the grim prospect of paying escalated prices for whatever available supplies of cement it could find, or face penalty clauses imposed by the client. Cement was not the only basic material in short supply. Steel reinforcing bar (rebar) was spiking on the back of escalating world steel prices driven by China’s construction boom.

Hard lessons were learned. Contractors suffered substantial losses on individual projects as they were forced to swallow the price hikes in order to deliver projects on time. Since then, they have shielded themselves by factoring in potential material price escalations to their tenders. Material prices have stabilised, as local cement production ramps up and domestic steel production capacity comes on stream.

Instead, the supply constraint affecting projects has been the contractors themselves. Most have grown considerably and some new players have entered the market. But there remains a severe shortage of quality companies capable of tackling large projects.

Demand now outstrips supply. Most contractors have order books that are either full or close to it, and have few resources to spare. They no longer need to aggressively look for work, and many are quite prepared to decline tendering for a project. "We can afford to be selective now: it’s not like we need to go out and look for work," says one international contractor.

Buyers’ market

Developers are aware of the dangers. In theory, the main challenge for real estate developers is to sell properties. The insatiable demand for freehold property in 2003 and 2004 meant developers were able to sell every last unit on major developments in a matter of hours. But although sales may not be a problem, the usually straightforward task of delivering a project is proving to be a far different experience. Part of the reason is that real estate development is new to the region and most developers have no experience when it comes to tackling major projects.

At the start of the Dubai boom, tendering was a fairly straightforward process. A big project would attract the attention of all major contractors. Even if several were too busy, enough would remain interested to ensure a leading contractor would take on the job. Competitive tendering resulted in good prices from the clients’ point of view.

That is no longer the case. Many developers are now forced to retender or invite less qualified companies as they struggle to attract more than a handful of bids. For developers that sold properties in 2004 on the basis of last year’s construction costs, a nightmare scenario is emerging. In extreme cases, the bids they receive are over budget, forcing the project to be retendered. This extends the procurement process, shortens the construction period and typically forces a developer to take on a contractor that may not have the relevant experience to get the job done on time. The end result is delayed delivery dates, poor quality, disgruntled investors and penalty payments.

Developers, like contractors last year, are now considering ways of protecting themselves from these problems in the future. For many, the solution is direct negotiation. "I am advising all my clients now to get a contractor interested in the project, negotiate and keep them interested," says one UK-based consultant working in Dubai.

For contractors, negotiating eliminates much of the uncertainty they face with open tenders and allows them to plan ahead and allocate resources more effectively. "I have one client who is even prepared to wait three months for us to start because we don’t have the resources available at the moment," says a local contractor.

Risk share

For long-term projects, clients are now looking at establishing partnerships with contractors so both parties share the risk and work together to deliver the project on time and on budget.

"Design and build and construction management are two examples that are not widely used in Abu Dhabi. We don’t trust our contractors to design. We have used design and build on the Diabetes Centre and it has worked well. The idea that design and build means you lose control of costs is baseless. This is an invitation to partner," says Al-Sayegh.

Although contractors can benefit from having more control over the design process, many remain sceptical. Bad feeling still remains from the height of the material price escalations last year, when developers were quick to remind contractors that price escalations were their responsibility alone.

Scheduling is another area of concern. Construction timetables in the UAE are among the tightest in the world, as clients demand delivery dates that in many cases are simply unrealistic. Contractors will no doubt shy away from projects where they are invited to share the risk and where the margin of error is narrow.

Whether partnerships between clients and contractors develop will be revealed only with time. But if the industry is to continue to prosper, it must realise developers and contractors share a joint destiny. "As a collective group we need to make sure we deliver," says Dubai Waterfront’s Lee. "The risk is not only our projects; the risk is the whole of Dubai."

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