Renegotiation of payment terms could harm industry

Jamie Stewart , June 8th, 2009

The renegotiation of money owed by developers to contractors in return for swift payment could hamper the recovery of Dubai’s construction market, the UAE Royal Institute of Chartered Surveyors (Rics) chairman has warned.

Some developers have been seeking a reduction – believed to be up to 30% – on money owed to long-term suppliers and contractors in return for accelerated payment.

But UAE Rics chairman Martin Seward-Case said that such moves could harm the reputation of the city in the eyes of the international construction industry.

“The entire scenario is highly regrettable and this is now affecting Dubai’s international reputation,” he said.

“The master developer willingly took on the risk. To have to wipe off 30% of the value of invoices will, in many instances, mean that the service provider may have operated at a loss for those works.”

Master developer Leisurecorp confirmed that it is involved in the renegotiation of contracts with suppliers and contractors on its Jumeirah Golf Estates development.

“In response to the current global economic climate, Leisurecorp is having discussions with long-term suppliers to realign contracts to these new market conditions,” a Leisurecorp spokesperson said.

“At the same time, we are offering more favourable payment terms to our own customers.”

Leisurecorp is one of the development arms of Dubai World, alongside Dubai-based master developer Nakheel.

A Nakheel spokesperson confirmed that it is involved in renegotiations to “reassess its business objectives,” adding: “We are in discussions with all our key suppliers and contractors to help secure jobs and ensure that projects are on track.”

Last month, Nakheel announced it was restructuring the contract for a Jumeirah Golf Estates sewage treatment plant with Suez Environment subsidiary Degremont and Belgium-based contractor Besix “to better suit the revised population needs in the emirate of Dubai.”

The renegotiated contract covers a plant with 50% the capacity of the original design. 

Besix general manager Philippe Dessoy confirmed that the contractor is currently involved in the reworking of a contract to cover infrastructural work at Jumeirah Golf Estates.

“The existing contract for work was terminated and there is a new discussion going on,” he said. Dessoy confirmed the renegotiations did include the downsizing of contracts, and added that renegotiations may take “a few more months” to conclude.

Gulf Technical Construction Company executive director Saleh Muradweij said that in the case of the renegotiation of money owed, some contractors may not be able to accept a reduction.

“If they have liabilities and commitments to suppliers down the chain then they cannot afford to agree,” he said.

“In some cases it may pay to accept the terms if the contractor has got a buffer in their contract, but I can’t assume they do because nobody works for a 30% profit.”

To avoid such a situation in future, Seward-Case said lower barriers to entry to allow for greater competition among consultants and contractors would be among the most effective.

He also called for all facets of the supply chain to adopt a more responsible approach to pricing in the future to avoid levels of inflation seen in construction costs last year.

“The supply chain should use a “bottom-up pricing approach” where the cost of the service is supplemented by a reasonable level of economic profit,” he said.

The Rics is a globally recognised organisation for professionals in the construction, real estate, land and environmental asset sectors.