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Newton's Law

Dutco Balfour Beatty's Grahame McCaig discusses the costs of the Dubai 'boom' and explains why not all companies will succeed.

COMMENT, Business

One of my responsibilities as general manager of a construction company is to attend an array of functions.

I meet people from outside our industry and after the usual small talk, it doesn't take long for the conversation to turn to the current construction boom and the inevitable perception that being part of it must be "the best thing since sliced bread."

It's times like these when my mind often drifts back to the early 80s and Sir Isaac Newton's words, as spoken by my high school physics master, Mr Barber.

"Always remember, boys," he would start in his thick Scottish accent, "the one true law of physics is that for every action there is always an equal and opposite reaction." How true those words are today in Dubai.

Firstly, I think it is essential to explain that the current boom Dubai is experiencing is by no means exclusive to construction. The issues and management challenges that ensue for our industry are characteristic of the ordeals faced by most, if not all, sectors of the economy.

The "reaction" to the upbeat economic climate to which wise old Barber referred is upon us and it demands some serious management strategy. It includes the following, in no particular order.

Human resource is at a premium. Let me qualify this with the adjective "capable".

There is always a dearth of inexperienced and inappropriately qualified people who survive (and pretty well, I might add) on the back of a boom, however it is the shortage of skilled staff, which poses a huge problem for the industry as a whole.

In our need to respond to demand, too many of us are driven by quantity and not quality when it comes to people. Company culture is being diluted and, in some cases, eroded with the massive influx of people to our industry.

The increased incidence of unacceptable HSE practices, poor quality, declining productivity and resultant programme delays are evident across Dubai. All this combined has a significant negative impact on companies' financial performance.

The solution - a huge improvement in assessment and selection techniques and a real commitment to employee training and development - is more easily said than done.

Price escalation, inflation, and the dramatic and negative impact on bottom line performance is a pressing issue facing our industry. Agreement to fixed rate contracts has been customary.

However with the present levels of price escalation associated with construction materials, these forms of contractual relationships are no longer acceptable to construction companies.

I would guess, given the rate of cost escalation experienced in the market over the past six months alone, that the magnitude of losses currently being forecast as a result of a contractual obligation to fixed rates must be substantial.

In fact, the sheer rate of price increases that we have witnessed in the market over this period, brings into question the validity of the market to continue to enforce existing fixed-rate contracts.

Surely it is not right that one set of market participants' profits due to consequential losses incurred by other participants due to circumstances beyond both parties' control.

The solution requires empathy and, as with most issues that face us in life, there is always a compromise position. Clients and contractors need to openly discuss these issues to try to find common ground.

As with most economic booms, the barriers to entry have been lowered and the number of new competitors appearing on tender lists is rising. There's nothing wrong with new players in a market and they are essential if we hope to deliver the vision for Dubai within current time expectations.

The problem is that it doesn't take long for newcomers to appreciate the need for "Dubai experience", which is closely followed by the reality that the only way of acquiring that particular attribute is to go out and buy it.

In reality, all that is happening is that the resource is being further diluted and spread out over more work, which potentially puts even more projects at risk of failure. The result is spiralling salaries across the industry as established companies try to retain their most valuable people.

I've always been an exponent of the principle that no one is indispensable but a handful of resignations from key individuals can be catastrophic for any business.

Clients also need to assume responsibility and begin prequalifying these new players to the market to ensure that they are capable and committed to supplying additional resources that will benefit the market as a whole.

While it is exciting to manage a business during a period like this, we must remember and appreciate that the consequences of an upturn demand attention to serious issues.

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