In a rapidly expanding market, controlling costs will always be a major headache for contractors. But unlike previous years, when steel and cement prices dominated headlines, raw material costs will be a secondary concern in 2008.

“Contractors are very concerned about labour costs at the moment,” says a UK-based quantity surveyor.

The labour issue has been brewing for the past year, before contractors working in Dubai bowed to pressure and increased workers' wages by 20 per cent, following a strike in early November by the emirate's largest contractor, Arabtec Construction.

The decision is not expected to affect on-going projects, but contractors have indicated they will factor in any losses incurred on existing work in future tender prices.

“The 20 per cent uplift in salaries will definitely have a dramatic impact on tender prices in 2008,” says the quantity surveyor. “As labour costs go up, clients have to realise they cannot afford to build seven days a week, and they will be forced to look at working sensible hours with sensible programmes.”

Skills shortages

As the region hires increasing numbers of workers from its traditional recruiting grounds in South Asia, finding staff with the relevant skills is becoming a real challenge. And although it does not have a direct impact on costs, it does reduce productivity.

“To bring people to the Gulf is not as easy as it was before,” says Anil Manibhai Naik, chairman and managing director of India construction company Larsen & Toubro. “You can still find workers, but not those who are highly skilled.”

Labour costs have also been affected by soaring accommodation costs and new regulations designed to improve working conditions. “New municipality rules for accommodation mean that contractors can only fit six men to a room,” says the quantity surveyor. “One contractor I spoke to said his accommodation costs in Jebel Ali had increased by 50 per cent over the past year.”

To make matters worse for contractors, a large proportion of the UAE's labour supply has been cut as a result of a recent amnesty for illegal workers. A three-month grace period allowed workers without the correct permits to either leave the country or normalise their residency status. Although large contracting organisations were largely unaffected by the amnesty, many smaller companies suffered as casual workers left the country.

With stiff penalties for hiring illegal workers, contractors cannot afford to take the risk. “The Labour Ministry used to turn a blind eye to workers without residency visas,” says another Dubai-based contractor.

“But now if anyone is found on site without the correct paperwork, the company will be blacklisted. Because of this, we have introduced a new policy where no one is allowed access to our sites without a visa with the company he says he works for.”

This is impacting on many of the key trades used on construction sites, such as block work, tiling and plastering. “Before a subcontractor might have had 50 masons,” says a Dubai-based contractor. “But 60 per cent of these men will not have had visas, and they have left. For the subcontractor, this means he is not looking for work any more.”

Plant problems

The result is that contractors now find it difficult to find subcontractors. “Subcontractors are so busy that they can choose who they work for,” says Essam Atef, procurement director at Al-Shafar General Contracting. “This means we are now running after subcontractors looking for enquiries.”

Plant hire is another area that has been hit hard. “It is difficult, and it is the manpower issue again,” says the Dubai-based contractor. “I called a hire company recently and they said they had a crane, but no operator.”

Rampant material price escalation has been an issue for contractors working in Dubai for more than four years. The bad news for the industry is that as development gathers pace elsewhere in the Gulf, costs will continue to rise as cities such as Abu Dhabi and Doha begin to compete for resources.

Just as its tower blocks get taller, construction costs in Dubai keep rising. “Costs have increased by about 30 per cent this year,” says Atef. “I expect next year to be the same, as Abu Dhabi starts to boom.”

After weathering the storm of sharp steel price increases in 2003 and 2004, together with cement shortages, contractors in Dubai had been hoping that costs would begin to level off. This does not appear to be happening, as nearby Abu Dhabi and Doha begin to develop together with smaller markets such as Ajman, Umm al-Qaiwain and Ras al-Khaimah.

“The whole region is starting to go silly,” says a UK-based quantity surveyor. “Clients are competing with the rest of the region for resources.”

Since 2005, Abu Dhabi has launched $140bn worth of real estate projects, including the $40bn Yas island, the $27.2bn Saadiyat island, and the $14.7bn Al-Raha Beach. And after a six-month lull following the Asian Games, Doha has started work on the $5bn Lusail project, together with the Barwa Residential City, and Al-Waab City projects, and is planning to start work on Doha port and the Qatar-Bahrain causeway by the end of 2008.

In the northern emirates, Umm al-Qaiwain is building Al-Salam City, which will double the emirate's population, while Gateway City is expected to have a similar impact in Ras al-Khaimah.

Demand dynamics

As activity starts on these projects, demand for raw materials will steadily increase, putting further upward pressure on prices, particularly for steel and concrete. “A month ago, steel was about AED2,330 [$632] a tonne,” says Atef. “Today, it is AED2,550 a tonne, and that is a special price. Most people will pay AED2,580 a tonne.”

Regional demand is not the only factor. International supply and demand dynamics also have an impact. “International price increases are another problem,” says Atef. “Ground granulated blast furnace slag has increased by AED20 a cubic metre.”

The problem is particularly acute when sourcing material from Europe. “Exchange rates are an ongoing problem for international products from Europe,” says the quantity surveyor. “Transport prices are another issue. With sky-high oil prices, shipping materials into the region is expensive, and that has an impact on costs.”