Contractors: Think twice before offering discounts

It may be tempting for contractors operating in the GCC to offer discounts, but it is equally important that they consider the longer-term ramifications for their businesses

COMMENT, Business, Contractor, Dubai, Hyundai Engineering & Construction, Korea, Laing O' Rourke, Middle east, Saudi Arabia, Saudi aramco

It’s been a good week for Hyundai Engineering and Construction (Hyundai E&C). On Friday, 28 October, the South Korean firm revealed that it had bagged a $727m (SAR2.72bn) contract to build a gas treatment facility for Saudi Aramco’s Uthmaniyah plant (page 8).

It’s interesting to note, however, that the contractor may have had to barter in order to secure the deal. Sources told Reuters that Saudi Aramco only selected Hyundai E&C to build the facility after a discounted price had been offered.

It’s important to point out that the Reuters report has not been officially confirmed by the companies involved. And even if true, this is the nature of business. As someone who wasn’t party to any of the negotiations, I have no reason to suspect that either company received a raw deal. Niether Hyundai E&C nor Saudi Aramco grew to become multibillion-dollar corporations without knowing how to spot a lucrative business opportunity.

That being said, while it may make sound financial sense for a company the size of Hyundai E&C to offer a discounted price for a megaproject like Saudi Aramco’s Uthmaniyah facility, this rule should not necessarily be extrapolated across the rest of the GCC’s contracting sector. In today’s challenging construction environment, it may be tempting for smaller outfits to submit low bids, but doing so will not always be in their longer-term best interests.

The risks associated with a lowest-price mentality were highlighted at CW’s Leaders UAE 2016 (CW 625). Speaking during a panel discussion on low liquidity, Mark Andrews, MD of Laing O’Rourke Middle East, said: “There are contractors that get themselves into a cash flow problem to the extent where they believe the solution is to get the next advance payment. They get into a cycle [wherein,] in order to pay the wages, they’ve got to win the next job and get the next advance payment to cover the problems on the last one. That’s a very slippery slope.”

Essentially, Andrews was describing a viscious cycle. Contractors awaiting money for previous projects may be tempted to bid low in order to obtain advance payments to cover historic costs, and then, when this situation reoccurs, they may be tempted to do the same thing again, ad infinitum. But it is not healthy for our industry to operate in this way.

It is perfectly reasonable for clients to ask whether a job can be completed at a lower price, but it is equally reasonable for contractors to say that it can’t. What is not reasonable is for clients to exploit smaller contractors’ liquidity challenges to squeeze already-tight margins even further.

By the same token, contractors operating in the GCC must have the courage to push back when necessary. Winning work for its own sake is in nobody’s best interest; discounted rates are only advantageous if the party offering the discount can afford to do so.

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