In with the new

GCC states are forecast to continue spending big on capital projects over the next few years but is there a case for looking at new ways of procuring them?

Is the region ready to move away from traditional forms of procurement?
Is the region ready to move away from traditional forms of procurement?

The falling price of oil over the last six-to-seven months has sparked debate on the implications for GCC economies.

However, despite the uncertainty this brings, reports from various market analysts still point to a trend of increased public spending by governments. A study by Ventures Middle East in November, for example, said that the value of construction contracts awarded in the GCC in 2014 would soar to $195.7bn, up 22% from $159.87bn in 2013.

Since then, GCC nations have continued to set expansionary budgets, even – as is the case with Saudi Arabia and Oman – if this means running at a deficit and relying upon reserves to finance plans.

If governments are indeed determined to carry on spending big on capital projects, it has been suggested from various corners of the industry that this should be accompanied by a wholesale rethink on the way they are procured in order to guarantee quality and efficiency. Fixed price, lump sum contracts where clients remain in control of the entire process continue to dominate the market.

However, according to Christopher Seymour, partner and UAE head of property at EC Harris, there is growing sophistication in procurement, with numbers of projects being run as design and build contracts increasing – “evidence of two-stage tenders becoming more prevalent,” he said.

Builder Royal BAM Group said that although two-stage tenders are becoming more common, they still lag well behind take-up in other parts of the world.

For example, BAM Construction UK figures for 2014 on tender bids show that design and build accounted for 84% and traditional contracts just 16% of tenders submitted. However, figures for BAM International in the GCC for the same period show traditional deals accounted for 90% of bids submitted and design and build just 10%.

“The GCC needs to look at mature markets such as the UK and ask itself why its current route is so different and if it is missing out,” said Gulf states area manager Patrick McKinney.

“If we look further into the future, we expect to see government departments and major developers looking to secure their work on framework contracts, but this is probably some way off.

“In the meantime, we expect to see a decline in single-stage tenders as the clients get the message that if they want those professional services provided by a contractor like BAM then it’s not about the lowest price wins.

“It’s about how we can make their buildings better. Contractors who have secured major projects [on lump sum deals] will see the cumulative risk associated with a rising market coming back and biting into their bottom line to an unstainable level.”

David Skinner, operations director of Oman-based contractor Al Turki Enterprises, said that design and build arrangements require a disciplined client who can leave a contractor to deliver what it has proposed due to the fact that it limits their input post-award.

“Design and build should reduce costs and time as each bidder will focus on his strengths,” he added. “Cost-plus (cost-plus-margin contracts) is unlikely, however, as this is seen as an open cheque book where the client will have to pay for the contractor’s inefficiencies and may also be ripped off by the contractor loading all sorts of additional costs onto the project.

“I have spent some time trying to sell clients different contract procurement methods from alliancing to cost-plus to GMP and management contracting or construction management, but they nearly always revert to a priced bill of quantities, sometimes re-measurable or sometimes lump sum as this is what they are comfortable with and can’t be criticised if it goes wrong, as ‘this is the way we always do it’.”

Christopher Cross, a Dubai-based partner at international law firm Hogan Lovells, believes that a catalyst for an increase in partnering arrangements could result from greater emphasis being placed on contractors bringing their own project finance, which in turn should reduce input costs for clients.

“Expo 2020 in Dubai and the recent upsurge in commercial/residential development have meant off-balance sheet financing allows government and quasi-government entities to make the most of their existing assets,” he said.
“In addition, the return to the market of certain Far Eastern contractors bringing their own capital has had a similar impact. In order to get volumes of projects completed, the industry requires more than existing finance.

“The change in financing methods has meant that staff need to be re-educated away from the traditional FIDIC-based, EPC models we tend to see in the Middle East.”

External financing seems to be gaining some momentum. Ferdinando Fiore, trade commissioner at the Italian Trade Agency, for instance, told CW that Italy would be opening a UAE office of the Italian Export Agency (Sace) in the next few months; while contractor Carillion used UK Export Finance (UKEF) to help secure the contract in October to deliver phase one of the new office district for the Dubai World Trade Centre (DWTC).

Steve Yazdabadi, regional manager director of Wates Construction, also believes bank and government project finance alternatives will start to drive a change in attitude to some schemes.

“Longer term international bank finance – 15 to 18 years – or international government export credits will both demand a stronger business case, a whole-life appraisal of a project and, in the case of export credit, a significant home country content of the project. The benefits for the country are clear in that projects will produce better considered, higher quality and more energy- and maintenance-efficient buildings.”

Yazdabdi said lower oil receipts could cause governments to look at alternative ways to procure projects. However, the current regulatory framework in the market is geared towards a traditional consultant/contractor/client split.

“Pockets of the industry are well capable of meeting the challenge, although for many the change in attitude from short-term capital cost to longer term, whole lifecycle will be too much of a challenge,” he added.

McKinney agrees with Cross that a change from the widely-used FIDIC form of contract to an NEC-type contract form promoted by the UK’s Institute of Civil Engineers is an area that deserves serious consideration as it is a process that is already underway in several other markets.

“These new forms of contracts advocate collaboration amongst the different stakeholders and are very much what the industry in the GCC needs,” he said. “Ask any contractor when was the last time they put in a tender that was under the client’s budget and they will just smile and scratch their head.

“Cost consultants need to up their game and clients need to be more open on their budgets and involve contractors on the dynamic cost plan at an early stage. Budget overruns are probably the main single cause of project delay and it’s telling that most contractors now include value engineering as part of their bid.”

Ahmad Al Naser, managing director of Drake & Scull Engineering, said it has invested heavily in an Oracle-powered ERP management software system in the UAE and would be rolling it out gradually in other markets. He said the software has given the firm the flexibility to manage complex pricing and rebates for purchasing contracts – something that clients are now demanding on projects.

“The greatest benefit of all this is that we have been able to reduce the time between the raising of a requisition at the project, and the delivery of the requested service/material to the project site, which helps to eliminate unnecessary delays, allowing project progress to continue on, or even ahead of, schedule,” he said.

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