Precast finance dilemma
Why the construction industry must look after precast sub-contractors
Why the construction industry must look after its precast sub contractors.
The cost of a building structure often reaches up to 30 to 40% of the overall construction cost. Precast is a worldwide recognised option used in many types of developments and the UAE is a recongised leader, but these firms are at risk.
Precast construction uses concrete elements manufactured in a factory and assembled on the construction site. The critical advantages of such construction technique are well documented: cost saving, improved quality, safety and sustainability, reduced construction time, etc.
However, one of the advantages of this construction technology is less well-known: it shifts a large part of the financing burden from the main contractor (MC) to the specialised precast contractor (PCC).
Traditionally, the first progress payment is due to the PCC after 60 to 90 days from certification of its site construction works.
However, the PC manufacturer incurs substantial costs prior to this first progress payment, largely exceeding the advance payment amount: The engineering costs related to designing the development’s concept design, securing its approval as well as drafting the shop drawings; the cost of material procurement necessary for the manufacturing process; The plant operating costs; the site delivery costs to shift the PC elements from the manufacturing plants to the construction site; and the site assembly costs.
The specialised PCC has to use his own financing until the payments on progress billing can start.
It is to be noted that a cast-in-place contractor benefits from a much shorter mobilisation period, able to start progress billing to the main contractor almost immediately after design completion, as the plant manufacturing and delivery processes are not required.
Thus, by selecting a PC technology, the MC not only shortens the overall duration on the construction period, but also delays the payments related to the civil works which positively affect his own cash management.
With the constriction in the UAE construction sector over the past few years, the profit margin of the PCCs has substantially shrunk, and is often much below the 5 to 10% retention applied on most developments.
The PC has to provide a performance bond and the retention percentage is retained by the MC on all progress payments and released one year after project completion. Thus, with a profit margin below the retention, the PCC operates on negative cash flow during construction, only recovering costs and profit one year after project completion.
As MCs are also struggling with high competition and a reduced profit margin, they tend to delay the payments dues to the PCC rendering his cash flow difficulties even more compelling.
Difficulties to secure his last payments and retention amount are also frequent, as the MC does not require the PCC's services any longer at that point in time. The timely payment of these dues is mandatory for the survival of the specialised contractor.
In order to preserve the ability of the UAE construction Industry to opt for the precast technology and its recognised advantages for the developers, the main contractors and more importantly the final users, it is therefore critical for the MCs to respect their contractual obligations, and for the developers to ensure that they do so.
The prompt support of the UAE governmental authorities to enforce contractual obligations is an absolute necessity when this is not the case, as the PCCs cannot extend for long his already lengthy cash-deficit situation without endangering his organisation.
Over the years, the quality and sustainability of construction developments in the UAE has increased drastically, and the local PCCs are major contributors to these national efforts to place the country.
They are currently at risk, and it is important to take their difficulties into consideration and assist them, in order to preserve a national expertise we are proud of.
Dr Daniele Pfeffer is chief operations officer of Gulf Precast Concrete Company.