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Are false economies harming Dubai construction?

The temptation to choose cost over value represents a false economy, and could be negatively impacting Dubai’s construction sector, explains Thomas & Adamson’s Zander Muego

Zander Muego is director of UAE construction and property consultancy at Thomas & Adamson.
Zander Muego is director of UAE construction and property consultancy at Thomas & Adamson.

Dubai has changed dramatically over the last three decades, becoming a major business centre with an increasingly dynamic and diversified economy.

The emirate enjoys a strategic location and serves as the biggest re-exporting hub in the Middle East. My employer, Thomas & Adamson, established offices here, having identified the exceptional opportunities that the city offers to both national and international companies. Such characteristics sound like the perfect recipe for a successful economy; crash aside, Dubai has enjoyed significant economic success.

However, now is the time to look ahead and assess the long-term consequences of the way in which companies have become accustomed to doing business. Using the lowest cost as the determining factor when procuring goods or services can create false economies, which can do more harm than good.

The problem
Quality over quantity is a simple and well-understood concept, but it’s one that is difficult to reconcile with today’s price-sensitive corporate environment. Dubai is an attractive place to do business with low barriers to entry and significant business opportunities and, in many industries, this translates into a very competitive marketplace.

The high levels of competition increasingly result in products and services becoming commoditised, putting a downward pressure on prices. But while it makes commercial sense to capitalise on competition and the related low costs, treating certain products and services as commodities can result in longer-term issues and related costs that far outweigh initial savings.

The construction industry is a great example of this. There are significant construction projects, both currently progressing and in the pipeline within the UAE. The size and scale of these can be significant in comparison to many other locations throughout the world. These significant projects attract competition from both multinationals and established local businesses – and competition is fierce.

In construction, as with many industries, there are various tensions within the project objectives that need to be considered when developing a procurement strategy. Trade-offs are required to find the right balance between the various stakeholder objectives. As part of an international business, I see different approaches across different regions and, in the UAE, cost considerations are often weighted more significantly than other factors. But this focus on minimising initial capital expenditure (CAPEX) is often misaligned with the wider objectives of the project stakeholders.

With commercial developers, for example, there can be significant financial incentives in getting projects finished quickly, thus accelerating the income stream that comes from the completed asset. Conversely, delays can increase interest payments and impact commercial viability. This can quickly offset the apparent CAPEX savings that can be made from selecting contractors and suppliers with the lowest-tender cost, but which subsequently fail to deliver on time or to the desired level of quality.

For complicated projects in the UAE, basing the final selection on the initial price point alone can result in:

  • Project delays, as the tenderer struggles to mobilise sub-contractors and procure long lead materials, usually due to a lack of cash flow and administrative delays in procuring bonds and guarantees;
  • Poor quality control, as less-qualified and, ultimately, lower-cost site-management personnel are deployed to the project;
  • Demotivated site operatives, often as a result of being overworked, and/or receiving delayed salary payments;
  • Unprofessional or non-existent health, safety, and environmental (HSE) protocols, increasing the risk of injury (or worse) to those involved in the project, with knock-on effects to the project and developer’s reputation; and
  • Increased installation and quality issues, resulting from all of the above and causing prolonged snagging and commissioning durations, ultimately delaying handover and impacting end-user satisfaction levels.

The long-term implications of these issues are conceptualised in the term cost of poor quality (COPQ), which refers to the costs related to – and that result from – the provision of poor-quality products or services. COPQ can impact all levels of the supply chain, but have a particular impact on clients and end users, who have to live with the issues over the longer term.

Tangible actions
The determination of the procurement strategy and, ultimately, the product or supplier choice, needs to be based on a wide range of factors, and how you weigh up the importance of these different factors should be based on your business’s priorities and strategy. Businesses cannot lose sight of the importance of using the correct balance of criteria.

Selecting the lowest-priced tender might appear to represent good value initially, but will this tactic provide the most appropriate solution for your business? Have the long-term implications been factored into the evaluation process, and are there whole-life cost implications between different options that need to be considered?

Thomas & Adamson recently completed a very demanding project in the hospitality sector in Dubai, during which this very issue needed to be addressed. The project had exceptionally challenging time constraints, not to mention a very demanding budget.

After a fast-track competitive tendering process, there were two clear front runners to take on the role of main contractor: one company that had proposed a particularly competitive price, and another that was more expensive but significantly more experienced in delivering this type of project.

Ultimately, in selecting the contractor, the likelihood of achieving the aggressive completion date together with track record of producing the desired quality were factored into the analysis, and the more expensive contractor was awarded the project. In turn, savings were achieved in other areas of the project to offset this initial expenditure.

The result has been a successful project, completed quickly and to a high level of quality, with a minimal number of snagging issues and an early launch for the venue.

This is just one of many examples that Thomas & Adamson can site, relating to the benefits that arise from taking a holistic view of vender selection and procurement. While cost is almost always an important consideration and, in some cases, essential to project viability, it is also important to ensure that the right levels of technical competence, product quality, personnel, and service exist as part of the offer.

In summary
Quality over quantity – or, in this case, cost – is an age-old lesson that too many of us forget when making important procurement decisions. While a cost focus may support short-term financial viability of any given project, there can be significant wider implications that will ultimately impact the success of any investment over the longer term.

Businesses must adapt their procurement strategy to reflect the complex business world in which we operate. In turn, this will help your company to achieve sustainable, long-term profitability, rather than having to focus purely on short-term costs.

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