Small firms struggle

Despite the construction boom, smaller contractors and subcontractors are struggling.

HBJ Gateley Wareing, ANALYSIS, Business

Despite the regional construction boom, a number of smaller contractors and subcontractors are struggling. CW looks into why this is the case and how firms can avoid financial pressures.

The UAE's construction sector is so large that one could imagine any company looking for a share of it would find easy pickings.

With the industry experiencing double digit growth almost every year and new mega-projects being announced all the time, it may be hard to believe this is not always the case.

For the small subcontractor, the cost of taking on a main contractor is very prohibitive.

Owners of companies and legal experts say that smaller firms are finding it difficult to compete.

Exact figures do not exist, but last year it was estimated that 300 people and businesses went into bankruptcy or insolvency.

Construction Week spoke to a number of contractors and sub-contractors about the issue. One industry expert told of a specialist subcontractor who completed some high-quality interior work on a shopping mall.

Two years after it was finished, it hadn't been paid and was facing bankruptcy. This case was not unique.

One subcontractor said: "I know of at least five companies which have gone under in the last year."

"We are at the mercy of the main contractor. We live under a constant threat. They have so much power we cannot fight them."

"If there is a problem with getting paid, the contractors can find a way out, but the subcontractors are the ones who end up going under."

But the managing director of one contracting firm, who asked not to be named, had a different opinion.

He says: "It is very difficult to find a small subcontractor on whom you can rely these days in Dubai."

He also says that he had also heard of a number of smaller firms - those which employ less than about 50 people - going out of business last year.

He explains: "Because these small subcontractors are usually using illegal workers, many of them have shut down since the amnesty last year or reduced their activities considerably."

"Because they are small, they do not get work permits for their people."

But the intense pace of construction and the big workloads meant that the smaller firms had to be employed.

He says: "You try to use the bigger subcontractors if you can. They are reliable, but they are overbooked and over-stretched because it is such a busy time for them."

"You don't get an appropriate response from them. They will not give you a price because they are overworked."

"They often have more work than they can afford. Their technical department is overbooked because of the charges."

He says the issue of inflation meant that the smaller ones could not be relied on when it came to costing of jobs.

He says: "The subcontractor will give you a price, let's say AED10,000, during tender and then afterwards he will give you a price of AED 20,000."

"I know there is inflation, but many of them do not seem to have business ethics."

"In Europe we have staff, whereas here you have labour. This is the major difference."

"You generally have people who you can rely on, while here people shift between jobs very easily."

"You can rely on your subcontractor to know what it is doing [in Europe] because its staffs are well trained."

He said that in Europe, a job which would require 1,600 people to complete, would require about 4,000 workers in the UAE because they were not properly trained.

Because of the rise in conflicts between parties, lawyers have become increasingly involved.

Paul Taylor, partner, HBJ Gateley Wareing UK LLP, believes there is a way to find an amicable solution.

He says the drawing up of contracts is the crucial period in any development.

"These problems arise because smaller subcontractors are at the end of the food chain, which is the end of the cash flow chain," he says.

The squeeze on cash is always downwards and they end up as the last ones to be paid.

"There is regulation in UAE law to protect them once they've completed their work. But, for the small subcontractor, the cost of taking on their main contractor is very prohibitive."

"Going to court or arbitration means they are not going to get a result for two or three years because of the nature of the process."

In the UK, there is a system of 28-day adjudication, which means that subcontractors have to be paid within this time or the debtor faces a High Court writ.

Taylor says: "Over here, there's no such legislation. There is general UAE law, which says that if you've complied with your contractual obligations, you should be paid, but of course it doesn't always happen like that."

He says the main area of concern should be in the contract signing period.

"Subcontractors have to avoid signing up to a pay-when-paid clause," he says.

"In other words, you only get paid when the main contractor is paid by the employer. If the employer and main contractor fall out, money will not flow down the pay chain."

"This is regardless of whether the subcontractor's work may have been perfectly good and may have been finished. The more dangerous contract is the pay-if-paid clause, which says that you only get paid if the contractor is paid by the employer."

Taylor said these contracts were reasonably common, especially for smaller firms which did not have the leverage to negotiate.

He says: "Subcontractors should be looking at contracts where there are regular payments, regardless of whether the main contractor has been paid."

"This should be stand alone in paying from the top to the bottom."

"They should also look for upcoming cost for materials for the job they are about to undertake."

"Advance payment is a common way of alleviating some of the risk of having to pay upfront and then not be paid back."

He claims that although the temptation could be there to take on as much work as possible, subcontractors should be selective.

He says: "I appreciate that everyone wants a slice of the action, but subcontractors are in a very precarious position. You have to be very careful about who you subcontract for, rather then just taking any job. It's commercial common sense to work for people you know and trust rather than people you've never worked for before."

"You can have as much work as you like in terms of turnover, but if you don't have some cash flow coming in then you can't pay the bills and you are in trouble."

"There is so much work out there, you can be a bit selective and not have to take any risks. The message is clear - you can turn them away," Taylor says.

Although some disputes end up in arbitration tribunals, most of them are settled between the parties through negotiations. Taylor says this should always be the best solution to problems.

He also says that contractors would lose out if they did not pay their subcontractors.

He says: "It's not going to do the main contractor any good, because if the subcontractor goes bust because they haven't paid them then they will have to find someone else."

"It's kind of self-defeating on the part of main contractors because they will have to end up paying more in the long-run."

"Ultimately, they are small specialist workers. The best argument they have is that they are specialist subcontractors."

"If you don't treat us properly and we either go under or are forced to suspend the works because you haven't paid us, it will cost more and take more time to hire someone to come on site and replace us. Does the main contractor really want this hassle?"

And with time being such an important factor in projects, this is perhaps subcontractors' main bargaining chip.

By being selective about jobs and taking care when signing contracts, subcontractors can avoid pitfalls which could lead to them going under.

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