Finding ways of beating the rising cost crisis

As rising construction costs hit crisis point, Conrad Egbert explores ways in which business could be done better.

ANALYSIS, Materials

As rising construction costs hit crisis point, Conrad Egbert explores ways in which business could be done better.

The current construction cost situation has propelled three major issues into the spotlight.

The first is the reluctance of developers to move from fixed-price to cost-plus contracts; the second is the need for the UAE government to lift the price cap on cement, while the third is the need for an industry watchdog.


In the meantime, the only other thing that can be done is to remove the cap and make grinding feasible.

While fixed-price contracts remain the norm for developers, material suppliers are raising their prices almost on a weekly basis.

The black market economy is also on the up, with cement being readily available to the highest bidder at prices reaching US $109 (AED400) per tonne.

The UAE Ministry of Economy set a price cap of $80 per tonne on cement last June. But, unfortunately, because of the absence of a government body, the cap is largely being ignored.

Last week, circulars were sent out by a couple of readymix companies to various contractors informing them of the raised prices of concrete, which contractors have said they have to agree with through fear of being cut off the supply chain.

"Cement and aggregate prices are going up so obviously ready mix suppliers are going to raise their prices as well," said Julian James, regional aggregates and concrete director, Tarmac Middle East.

"If you go to any of the cement suppliers and ask them for a quotation they'll give you one at the capped rate and say there's nothing available; and then when you go along with your money, you'll actually get some cement.

"The supply chain for imports of cement needs to change, and change quickly, because at the end of the day all imports are available. Pakistan has a load of excess cement and so does China. And if that situation changes quickly then the price will come down back to the cap, or close, but that supply chain will take a while to gear up.

"In the meantime, the only other thing that can be done is to remove the cap and make grinding feasible."

James added that removing the cement price cap would promote parity in the market.

"Then you'll have supply and demand on an even keel because people can afford to buy clinker and make grinding profitable. So supply will match demand, which will then find an equilibrium price-wise."

Thomas Barry, general manager, Arabtec Construction said that the capped price would inevitably have to be removed and a new price set.

"It's being blatantly ignored so it will be removed at some point, and a new one that is workable needs to be set," he said.

"Also, there is no doubt that the highest bidder gets his share of material in the market. If you're willing to pay the price that is being asked, you'll get your share.

Barry added that setting a new cap would also eradicate the black market within the industry.

George Eapen, chief estimator, J&P Contracting said, that the cost crisis is restricting the company from taking on more work.

"The current situation is restricting us from going for as many jobs as we would like to because we're just not sure how much we'd have to shell out to procure materials.

Offering an explanation to the current scenario Dr Imad Al Jamal, vice president, UAE Contractors Association, said sellers are taking advantage of the cap due to the free economy.

"Generally, sellers always tend to sell higher than what they agree. And it's a free economy; you cannot really control prices in this sense. They make an agreement, but since there is no forceful instrument or punishment under the law, they can take advantage.

He added that the smaller buyers were suffering the most.

"Small and medium-sized companies are the ones suffering because of their financial constraints.

Contributing to the problem is the absence of an enforcement body to monitor and regulate prices in the market.

"There is no governing body that looks after the dealings in the industry," said Philippe Dessoy, general manger, Besix.

"Suppliers constantly raise their prices and developers sign fixed-price contracts, which makes us the losers. It's not fair, and so an impartial body that does not have a vested interest should be set up to set things right when things like this happen.

"If the situation doesn't change soon, I don't see contractors taking on much more work as it's no longer viable for them.

Dessoy added that the situation could now mean that new and bigger international contractors, who can absorb the losses, will have to be sourced.

RELATED LINK: Contractors want cost-plus contracts

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