Why are contractors paid so much less than bankers?

11 October 2004
According to MEED Projects, the business opportunity tracking service launched last month, more than $200,000 million worth of projects are under implementation or in prospect in the Gulf region. And according to the new MEED report, more than $46,000 million worth of project finance opportunities are now in or about to enter the market. As delegates at MEED's annual Project Finance conference discovered last week, the scale of demands being made by the Gulf project market has never been higher.

At a relaxed dinner with some of the region's most distinguished project financiers, there was a lively discussion about how much a top finance specialist could now expect to earn. There was no agreement, but the speculation was fascinating. It is no secret that fees and salaries are on the rise.

The tone of some of the debate the previous week at MEED's Major New Project Opportunities in Abu Dhabi conference was markedly different. There, construction company executives were vainly pressing for a shift away from the lump-sum turnkey terms applied to those winning engineering, procurement and construction (EPC) contracts in the Abu Dhabi oil and gas sector. Contractors are going to have to accept that the lowest bidder will invariably have an advantage and that the full risk of completing the project on time and on budget will fall on their shoulders. So, while bankers and associated business professionals such as lawyers will flourish in the Gulf project boom, contractors will once again struggle to make a decent living.

This is nothing new. It is reflected in the fact that engineering firms are notable for their absence from the list of the most world's valuable firms. Successful engineering outfits are often family-owned and privately held, like Bechtel. The construction industry for years has been a poor investment vehicle.

Why is this the case? Engineering firms are full of highly skilled and hard working people who deliver magnificent projects, such as power stations and water plants, without which we could not live. Employees of contracting firms everywhere deserve our admiration for their resilience for working in demanding conditions, often in remote locations. A bank employee rarely suffers injury at work. Death in the building industry, as the tragic accident at Dubai airport last month showed, is an accepted fact of life.

The petrochemicals industry has more employees with advanced university degrees than any industry with the exception of the natural resources sector. And only one industry has over the past two decades had a lower rate of return on investment: the natural resources sector. This fact provides a clue for solving the puzzle. Educated and clever people are not necessarily good at making money.

The construction industry, like petrochemicals and mining, is often driven by supply-side factors. It focuses on understanding the technology and resources the industry needs, but tends to neglect relations with the customer.

This formula worked when there was little competition within markets and there were technical obstacles to customers easily substituting one service for another. Globalisation and the technological revolution have ended all that. The customer is king, but it seems that this fact is still not fully absorbed in construction. As any conversation with an engineer working in the Middle East will highlight, relations between the customer, often a government agency, and the suppliers are often adversarial. The client fears overcharging and the contractor often aims to make money from change-orders. Hence the dominance of lump-sum contracts.

Part of the answer is for the construction industry to copy the investment banking industry, where the focus on the customer is increasingly intense. Most construction industry executives spend most of their time in the office or at the site. But they should,

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.

Get Notifications