Contractors face myriad challenges

Gerhard Hope , August 3rd, 2010

MEP services in the region have experienced an incredible growth rate of 19% over the last three years, due to the construction boom and soaring oil prices.

However, this figure tumbled to 5.5% between 2008 and 2009 due to the slowdown in the construction industry resulting from the global financial crisis.

Despite this, the market is expected to grow at a compound annual rate of 11% during the next five years, according to Frost & Sullivan senior research analyst Vivek Vijayakumar.

Following the recent sharp decline, growth is expected to pick up again towards the end of 2010, or at the beginning of 2011 at the latest, and then continue its upward trend until at least 2013. This is very good news for the MEP contracting sector in particular.

Indeed, the MEP contracting sector in the UAE seems in an ideal position to take advantage of the new growth trend. “The UK is definitely the more challenging business environment at present. It is really down compared to a year ago. In comparison, the sector over here is far more stable, and there are still opportunities available.

“Our challenge at present is to take advantage of these opportunities, and to formulate an all-encompassing growth strategy to take us forward,” said Drake & Scull International PJSC (DSI) MEP director Charles Lever. Al Habtoor-Specon MD Thrasos Thrasyvoulou concurred: “Personally I believe that, after the initial shock of the downturn in late 2008, the market in general has absorbed this and stabilised.”

Stabilisation
As an example of this stabilisation, sub-contractors are expected to be able to bid for the MEP and related finishing works contracts on the long-delayed Dubai Lagoon project within the next four months. Developer Schön Properties said the project will require one or two additional contractors for each set of works, depending on the size of the sub-contractor.

For Zones 2 and 4, there are seven sub-contracts outstanding, including the MEP and elevator contracts, as well as those for finishing works such as joinery, paint work, marbling and kitchen fit-outs. Sensaire has already commenced with the MEP works for Zone 3, which are scheduled for completion in 2011, while the MEP works for Zone 1 have also begun, with a view to handing over the first eight residential towers by the end of 2010.

Salah Yatim, project director for Commodore Contracting Company, the main contractor for Zones 2 and 4, said: “We will be finalising the other packages for Zones 2 and 4 with Schön in the near future. Each package will be awarded according to the overall programme. One or two sub-contractors will be required, depending on the size of the company, and whether or not they can cope with the work across the two zones.”

“We will hopefully be inviting companies to bid for the additional subcontracts for Zones 2, 3 and 4 in the next three to four months, depending on the market conditions,” confirmed Schön Properties VP Danial Schön. The development, which currently covers 1.9 million square feet and consists of four separate residential zones, will be handed over to end users in stages, with different contractors working on different zones at different times.

Problems
What are some of the problems facing the MEP contracting industry at present? “The market is fragmented and highly competitive due to the presence of many small- and medium-scale companies at the local level, which have capacities to carry out either one or two of the three types of services by competing directly with other contractors, or by sub-contracting with top companies, thereby providing more opportunities for the growth of local players,” said Vijayakumar.

However, increased competition has had an impact on pricing. “I have recently seen a drop in prices. A lot of MEP contractors, in order to sustain themselves, are becoming more competitive. I hope they will not go to the extreme of dropping prices to the level where quality is sacrificed and projects cannot be executed properly. This is a dangerous thing, in my opinion. Clients must be very cautious in this respect,” warned Thrasyvoulou.

A notable trend of the current MEP contracting market is the focus on infrastructure. The slowdown has meant that “the infrastructure now has time to catch up,” said Lever. “The pace of building was so rapid during the boom period that infrastructure tended to lag behind general construction. A lot of unfinished projects in Dubai will invariably be scaled back so they can be completed in the context of the current market conditions.”

Simon Rawlinson and Andy Dedman, writing on building.co.uk, agree that this is a trend of the broader global MEP contracting sector. “High levels of investment in public sector facilities, which emphasise low running costs and occupier productivity and comfort, have generated a healthy workload for MEP contractors. Increasingly stringent building regulations require holistic solutions that, in turn, require greater integration between the design and installation of the building envelope and the building services.

Specialist
“Similarly, specialist building types such as data centres and hi-tech factories require huge power and cooling capacities, as well as extremely high levels of resilience and standby capacity. On both hi- and low-tech projects, the opportunity to reduce energy demand and carbon emissions by smart design and installation is substantial, demonstrating once again the pivotal role of the M&E specialist in reducing carbon.”

Rawlinson and Dedman also point out that “building services contracting differs from most other trades in terms of the role of direct labour, the importance of the work undertaken by sub-subcontractors, the extent of co-ordination required between trades, and the extent of design work that can be shared between consultants and specialists.
“In other trades, there can be a greater degree of fragmentation in the delivery of work on-site.

Ductwork and ductwork insulation, for example, are often carried out by different trade contractors. Similarly, water and air systems can be installed by different specialists. Furthermore, specialist trades related to discrete systems such as sprinklers, fire alarms and lightning protection need to be brought into the supply chain. Other elements of the supply chain are component manufacturers, as well as specialist consultants such as testing and commissioning engineers.

“Depending on the procurement route adopted, an integrated services contractor may be asked to deliver a one-stop service that could include some or all of the services design, as well as the co-ordination and management of the works on-site. At the other extreme, some main contractors have chosen to split up the MEP works into trade and system packages so as to minimise layers of overhead and management, and to maximise commercial leverage.

“Another aspect of services design and procurement that differs from architectural and structural trades is the scope for ambiguity around responsibility for design, design review and co-ordination. Delegation of design responsibility from the consultant is commonplace throughout the industry, either through full design-and-build procurement or contractor-designed work packages.

Potential
“In the current marketplace, any inconsistency in contractual documentation has the potential to be used as the basis of a claim. As a result, the specific range of consultant duties on a project should be stated in tender and contractual documentation,” Rawlinson and Dedman stress.

“Testing and commissioning is another critical element of the installation process, but one that is not always given the priority it deserves. Initiatives such as BSRIA’s Soft Landings programme involve the consultant and contractor team being engaged to work with the building user during design, pre-handover and during the first three years of operation to support operative training, performance optimisation and capture of user feedback.”

Apart from such issues relating to the internal set-up of the MEP contracting market, the sector in the UAE, for example, also faces specific geographical challenges. “Dubai, due to the previous unsustainable boom and the sudden global downturn that soon followed, has suffered more than other areas in the Gulf in terms of growth, fewer new projects, and a slowdown in existing projects, especially hotels and residential/commercial developments,” said Thrasyvoulou.

This has lead to many MEP contractors looking further afield for work, to Abu Dhabi, Saudi Arabia, Qatar, and even as far afield as Syria and even South-East Asia, in the case of DSI. “For us, the region has a lot of opportunity, so we are looking at expanding across the entire region,” said Lever.

Value
Hastie Group Limited, for example, has just clinched four projects in Qatar with a total value of A$66 million. “These projects demonstrate the value our Middle East customers place on our ability to provide an integrated range of MEP services from a single source,” said Hastie Group MD David Harris.

Hastie has been appointed by Leighton Contracting Qatar to provide MEP services, including fire and CCTV, infrastructure control systems (SCADA) and instrumentation and chlorination work for an A$233 million water infrastructure project that includes nine reservoirs. It will link two Qatari communities. Hastie began work on the project in June, with completion expected in 15 months.

Ironically, while many of the major local MEP contractors are looking increasingly beyond Dubai and even the UAE, other global players are turning to the UAE for growth. Voltas of India saw its MEP revenue shoot up by 13% for the year ended 31 March 2010, mainly due to its international order book, which includes several high-profile projects in the UAE.

This includes a recent AED6.25 billion, 26-month contract for the T2 and T3 towers in Abu Dhabi’s Central Market project, awarded to Voltas by main contractor Arabian Construction Company LLC, on behalf of client Aldar Properties PJSC. The scope of work includes supply, installation, testing and commissioning of the complete MEP systems for the two towers.

Value drivers

Innovation: Increased efficiency of chillers and variable speed DC motors on pumps and fans. Value engineering: ‘No frills’ standardised products such as air-handling units that can be produced at minimum cost and lead time.
Plug-and-play: Structured cabling in cores, Internet protocol security and controls that use the IT network, or intelligent fire detection systems.
BIM: Increased use of BIM in high-value, high-risk areas such as plant rooms and risers is enabling contractors to design systems more effectively, and to take into account the need for installation, maintenance and replacement. The benefits in terms of clash detection, automatic component scheduling etc. are increasingly important for specialist contractors.
Prefabrication: Plant-room assemblies, riser modules, fan-coil units and valve assemblies are good opportunities for prefabrication, whereas many contractors prefer to site-install elements such as pipework, where there are fewer programme and quality benefits to be secured, and a greater risk of rework should co-ordination errors occur.
Design rationalisation: Specification reviews and rationalisation of containment are two examples from electrical contracting where savings can be secured. Similarly, moving from a unique specification to a performance specification on some lighting components may give greater flexibility.
Globalisation: An increasing range of standard-compliant products can be sourced low-cost in China and the Far East.

MAJOR MEP CONTRACTORS
ALEC MEP
Based in Dubai and Abu Dhabi, ALEC is a high-level contractor with a US$1 billion a year turnover. It established its MEP business unit in 2006, focusing on turnkey MEP solutions, full maintenance and call-out FM, and energy-optimisation strategies, including energy audits on existing buildings.
www.alec.ae

ARABIAN CONSTRUCTION ENGINEERING COMPANY (ACEC)
Located in Doha, Qatar, ACEC is a conglomerate established in 1967. It is ISO 9001-2000 certified, offering a complete range of electrical and instrumentation systems and control and automation systems, representing well-known manufacturers in Europe and the Middle East.
www.acecgroup.com

DANWAY
Entered the field of generator hire and service in 1976, growing from 25 employees to 1 200 at present. Comprises MEP, contracting, industrial and retail systems and interiors and joinery.
www.danwayllc.com

DRAKE & SCULL INTERNATIONAL PJSC
A regional market leader delivering world-class, integrated engineering through design-and-build MEP, civil contracting and water, power and infrastructure engineering. Established in Abu Dhabi in 1966 and in Dubai soon thereafter, it has since expanded as far as South East Asia.
www.drakescull.com

ETA M&E DIVISION
The MEP division of the ETA-ASCON Star Group. Offers design, supply and installation services in air-con, electrical, sanitary, plumbing, fire protection, ELV and BMS systems.
www.etamne.com

THERMO LLC
Established in 1976, focusing on multi-services co-ordination and a combined team approach, it offers conceptual design and development all the way through to procurement, installation, testing and operation and maintenance.
www.thermo.ae

VOLTAS
Founded in India in 1954, it offers engineering solutions in HVAC, refrigeration, electro-mechanical, water management and treatment, BMS and indoor air quality.
www.voltas.com

EMIRATES ELECTRICAL ENGINEERING (AL ROSTAMANI)
The Al Rostamani Group, founded in 1957, has a diversified portfolio including construction, building materials, infrastructure development, telecoms and recycling.
www.alrostamani.com

AL HABTOOR-SPECON
Established in Dubai in 1970, Al Habtoor Engineering is one of the largest construction companies in the Middle East, with 35 000 employees. Al Habtoor-Specon focuses on MEP.
www.habtoor.com

ROTARY-HUMM M&E SERVICES
The Rotary Group is a member of the Hastie Group, a leading MEP services provider in Australia, New Zealand and the Middle East.
www.hastiegroup.com.au

MAC AIR LLC
A multi-disciplinary company established in 1998, offering total building MEP and FM.
www.macairllc.com

SENSAIRE SERVICES LLC
Established in the UAE in 1983 as an air-con installation and maintenance contracting company, it has transformed into a true building services engineering contractor.
www.sensaire.ae

Cost drivers

Cost penalties: There are some systems, such as ventilation, where some cost penalties are incurred due to the need to reduce fan speeds to save energy which, in turn, requires larger ducts and air-handling units. Sourcing of low-cost sheet metal for ductwork and simplified air-handling plant has helped to mitigate these costs.
Commodity prices: The movement of cash into commodities in search of better returns and as a hedge against dollar depreciation has pushed up copper prices by more than 20%. Most MEP products have a high degree of value-add, so a big jump in commodity prices should not result in a corresponding rise in factory gate prices. However, steel and copper pipework and large-diameter cables contain a higher proportion of metal and will be affected more.
Preliminaries and margins: Building services contractors have higher overall margins than main contractors, reflecting the costs of running design teams and the high level of co-ordination and supervision required on a typical project, and the need to invest in fixed assets such as prefabrication facilities and BIM libraries.