This year has not been positive for the local Drake & Scull International (DSI), or for that matter, for any other contractor in the UAE. The Dubai-listed contracting firm has secured just AED2.53bn ($689m) worth of contracts in 2015, 57 per cent less than the total haul of wins for the company in 2014.

Shrinking size of business is not the only concern as declining profitability is also causing a few stirs among the shareholders. The company reported a net loss of AED985m for the third quarter of this year, a sharp contrast to a profit of AED21.37m for the same period last year. DSI has attributed the first quarterly loss of 2015 to one-off provisions and revenue adjustments in the “current challenging market conditions”.

It was just at the end of last year when DSI reported a project backlog of AED14.5bn, revenues of AED4.9bn and AED166m profit, but it already feels like an event from the distant past.

With a few weeks left in this year, chances are slim for DSI to increase the total contract awards figure in any meaningful way. But whatever number the company ends the year with, be it the backlog, profit or its revenues, the year-end performance should be reviewed in perspective of changed economic realities.

It’s fair to say that the struggle to keep afloat was not unique to DSI this year. What’s happened at the company is a reflection of the headwinds, which pretty much every contracting business in the UAE is facing.

Reality check

There is no arguing that the times are hard. Even harder for Arabtec, which was part of the consortium that built the Burj Khalifa in Dubai. The company is plagued by just more than the overall weakness in the contracting business. The company, which made the headlines with multi-billion dollar agreements (not signed contract awards) in the first half of 2014, stayed in news for all the wrong reasons in the latter part of the year. The power struggle and ensuing management upheaval in mid-2014 saw the ouster of its chief executive and the new management embarked on the cost cutting spree. Since then, the largest listed contractor in the country, has reported a net loss for every quarter in 2015.

“If you look at the financial numbers, you will realise that they are not far away from the reality of what’s happening in the contracting sector,” said Harshjit Oza, the Cairo-based assistant director of research at Naeem Holding, who covers real estate and banking sectors in the Middle East and North Africa.

Arabtec’s backlog shrunk from AED24bn at the end of 2013 to little over AED20bn at the end of last year. It has yet to report 2015 numbers, and it’s unlikely that the company will come close to the figures from the past two years as it hasn’t announced contract wins of any significance in 2015.

Even the $40bn housing project in Egypt, once deemed the lifeline which could turn the tide for the company, hasn’t come to fruition. It has been delayed numerous times and it is not clear if Arabtec will get the deal at all. The company says that it has an agreement with the Egyptian government and it is still negotiating terms on the project, while the country’s Housing Minister Mostafa Madbouly told MEED last week that those agreements were not binding and that the government will now look to press ahead itself with the programme to build one million housing units.

The poor performance of some of the UAE’s leading contractors is closely tied with wider economic challenges that may have stalled and delayed some major schemes.

In 2014 the market was bullish with approximately $92bn worth of construction projects awarded in the UAE. This figure has fallen by almost 50 per cent this year with only $29bn worth of projects awarded so far this year, according to regional projects tracker MEED Projects.

The 50 per cent decline in awarded contracts in the UAE this year is due to the fall in oil prices and an oversupplied real estate market dampening confidence. Both Dubai and Abu Dhabi have an oversupply of real estate after the delivery of large and previously delayed real estate schemes over the past three years

Cash crunch

Even if Arabtec, or for that matter any other contractor gets the project, its biggest worry would be how to get enough cash to build it.

Bank finance, the traditional source of funding for the builders, is hard to come by. Lenders themselves have fallen on hard times with the liquidity crunch forcing them to turn away from high-risk contracting finance.

“These companies are facing huge issues of working capital. What they [contractors] need is some support from the client side as payments are not getting through,” Oza said.

In the absence of bank financing, the only option left to contractors is to reduce the cost base and spin off some of the assets to free up liquidity.

DSI is doing exactly that. The company has said it will sell some of the non-core businesses to address the cash flow issues. The fit-out specialist Depa, on the other hand, has chosen to carry out a group-wide organizational restructuring and laying off staff to cut the costs.

The problems of getting stuck with delayed payments and having the banking credit lines squeezed to a trickle are further accentuated by a lack of new business. It’s a classic case of getting trapped between a rock and a hard place where contractors can’t supplement the cash stuck in one projects with a new one.

“The other trouble for them is that there aren’t many contracts being awarded and to beat the competition, the contractors are bidding at very low margins, just to stay in the race,” Oza explained.

The six-member GCC economic bloc, which accounts for about a third of the world’s proven oil reserves and heavily rely on sale of crude for revenues, is going through a major economic shock. With average daily price of oil coming down to $53.6 a barrel this year, from $98.9 during 2014, it’s likely the governments in key gulf markets including the UAE will cut capital expenditure to plug the budget deficits. This will mean the new contract awards will recede even further.

“This, I believe, is going to be a recurring theme,” said Oza “The cut in capital expenditures will have a direct impact on the contractors as one of their main sources of income was from the government spending on infrastructure related projects.”

Shifting Focus

Companies such as DSI are is countering the lack of awards with a shift away from the general contracting business to more niche engineering contracts. The engineering business’ contribution to total awards was 91 per cent in the first nine months of this year compared to 36 per cent achieved last year, according to a DSI official.

The shift in the project awards in favour of engineering business is a result of DSI “selective tendering strategy targeting high margin projects in specialised sectors’’ to ensure improved profitability, the official said, adding that the company will continue to bid for business in core markets with an increasing weighting towards the UAE.

While DSI is trying to explore the niche business opportunities, it may not be a feasible option for a giant like Arabtec. It grew at a breakneck speed in the hay days, building its stature with a pipeline of high-profile projects. It will be difficult for Arabtec to abandon that strategy now and start hunting margins in engineering contracting.

One option perhaps is to seek support from its shareholders. Abu Dhabi government-owned Aabar controls the company but a regional real estate and contracting analysts believes Arabtec will have to do a lot more in terms of putting the house in order before the government decides to bail it out.

“There will be help coming at some point, but before that, the company will have to clean the books, get over with impairments and reduce cost,” the analyst added.