As the GCC boom has gathered pace, so too has demand for mechanical, electrical and plumbing (MEP) services such as air conditioning, electrical cabling and wet-room installation. Indeed, the limited availability of specialist MEP subcontractors has forced clients to bundle such work into large single-contract packages.
The handful of specialist firms in the market are also facing increasing competition from major contractors, who have started establishing their own in-house MEP divisions, and from smaller firms who started out as suppliers but are now exploiting the dearth in materials and manpower to fill a services vacuum.
The main contractors say that having their own mechanical and electrical resources will give them more leverage during the construction of projects.
“There used to be a lot more specialist contracting,” says one European consultant. “Many of these companies have taken on a lot more functions in-house – more multi-service offerings. On that basis, maybe their scope is expanding.
“We are simply looking for arms and legs – for companies with resources. The biggest issues facing the industry are finding MEP and cladding contractors. It is very difficult to advise a client on which contractors have the capacity to do a project.”
Higher-specification design is also placing increased demand on mechanical, electrical and plumbing services, increasing the pressure on the sector to provide complete service offerings at a time when supplies of good quality services are at a premium. When clients and contractors ask themselves if an MEP subcontractor has the capacity to take on a job, they examine a range of issues including manpower, access to building materials and supplies, and associated cost issues.
Industry insiders say identifying reliable MEP subcontractors is a challenge. A sensible approach, they say, is for the main contractor to enter an exclusivity agreement with a subcontractor at the bidding stage, although this raises the risk that the subcontractor takes advantage of the situation by ramping up prices. Having in-house capability is an advantage but cannot provide a guarantee that third-party MEP subcontractors will not be needed.
Today, there are less than 10 industry leaders, and about 50-60 smaller companies involved in MEP work, whose numbers could swell to 100 as new firms enter the market.
ETA Mechanical & Electrical Division (M&E), the MEP branch of local conglomerate ETA Ascon, claims to be the biggest, with revenues expected to be about $900m for 2008.
As the dominant company, it says it has the contacts and prestige to lock in resources earlier and cheaper than its smaller competitors. The main contractors are reassured by the scale of the subcontractor, it says.
Whether such firms enter into partnering agreements depends more on the nature of the project than any notion of a regular arrangement between two companies. Historically, clients would select MEP contractors, but today they are more likely to be chosen by the main contractor.
On major projects such as Burj Dubai, client Emaar Properties stipulated that a joint venture of MEP firms should be created to spread the risk. An ETA M&E-Hitachi-Voltas consortium beat the Drake & Scull-Thermo partnership to the $272m award in 2006.
ETA had been looking to partner with Samsung Construction & Engineering of South Korea, which was eventually awarded the project’s design contract.
Several factors affect the choice of MEP partner, including access to financial and human resources, past experience, references, pricing, accreditations and relationships.
“Selection, for me, is [based on] what work we are trying to do and what work they have done previously,” says the consultant.
“One calibre [of partner] is required for high-rise, another for hotels. You do not want to use new people who lack experience. [But] it is getting harder and harder to be selective. The issue is just about workload and people being available.”
Inflation has also hit the MEP market. About 50 per cent of materials costs can be locked in by prompt negotiations with suppliers. MEP players are more willing to demonstrate flexibility on materials costs than on labour.
“Closing deals back to back can minimise risks,” says Ashok Kumar Agarwal, senior executive director of ETA M&E. “However, the rest of the time costs can get out of control, especially when clients constantly change designs. All contractors are in trouble financially.”
He says this is an issue government clients should address to prevent cost overruns.
Engineers have incurred living costs rises, entailing salary increases of more than 180 per cent over two years. Agarwal says an AED7,000 position now commands an AED20,000 salary. The rising cost of labour and labour accommodation, often paid by the MEP contractors, is another factor that was not planned for.
It is clear that the MEP demand-supply mismatch has given subcontractors the ability to be selective about who they work with. A lack of housing has made construction the focus for the MEP sector in recent years.
“There appears to be a major thrust on commercial and residential development, but soon the industrial sector is bound to expand,” says one Bahrain-based MEP consultant.
The regional MEP market is estimated to be worth $14.5bn in 2008.