Stats needed to put clause into effect

ISSUE: A lack of indices is making it hard to incorporate 'escalation clauses' into contracts.

A lack of government indices and statistics for the UAE construction sector is making it difficult to incorporate 'escalation clauses' into contracts, according to industry experts.

While contractors are turning their backs on contracts that do not include escalation clauses, developers argue that a lack of indices has prevented them from including clauses that mitigate price risk.

"If there's ever been a need for escalation clauses in contracts, then it's now," Melvyn Ford, general manager at CSHK Dubai Contracting said at MEED's Arabian Construction Summit.

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"We can't even make up for the inflation with exaggerated quotes anymore. Even a 15% quote above the norm would only get us a five or six per cent profit, which was the same four years ago.

"Contractors now very rarely take on work where contracts do not include escalation clauses. Clients think they're kings, and that's wrong - they need to change their mentality and work together.

In markets such as the UK and US, contracts that include escalation clauses and other risk-lowering clauses are incorporated based on government
indices and statistics.

But in the UAE, government statistics are largely inadequate, if available at all.

"Escalation clauses in contracts need indices and there are none here," said Ali Kolaghassi, vice president, Saudi Oger.

"Indices have to come from the government. We don't mind including escalation clauses because it would help us as well.

"Contractors sometimes overestimate material prices and quote more than the actual cost, meaning we end up paying more than we would have done. At the end of the day an escalation clause would be better for us all, but we need something to base it on.

According to Michelle Nelson, a partner in legal firm Masons Galadari, while government indices are important in assisting with escalation clauses, their absence doesn't prevent contracts from including them either.

"Indices do go a long way in helping to understand the market, but that can be done via other sources as well," she said.

"But their absence does not in any way restrict developers from including escalation clauses in contracts. In fact, it would protect both the client and the contractor.