Late payment cannot become a long-term habit

UAE construction firms may continue to face challenges in the coming years but, as the market improves, it is vital that late payment is not allowed to become a long-term habit

COMMENT, Projects, Challenges, Construction, LATE PAYMENTS

The past two years have not been easy for the UAE’s construction sector. The sliding oil price has resulted in a plethora of problems for our industry, chief among which is late payment.

Construction by no means the only sector to have been plagued by low liquidity. Findings released by Coface revealed that, on average, the amount of time that its UAE clients had to wait to receive payments doubled in 2016.

Even so, the France-based insurer found that construction firms were among the UAE’s latest payers last year, with delays of up to four months. And this trend hasn’t gone unnoticed within the industry, as evidenced by the company’s burgeoning client portfolio.

Massimo Falcioni, chief executive officer for Middle East countries at Coface, explained: “We have seen our business jump 63% in the last two years as firms sought a way of mitigating risk.

“I believe 2017 will be better than 2016 because many of the fragile firms are no longer in the UAE. Firms have rationalised and streamlined their businesses, lessening their labour costs by 35% to 45%. [They have also] reviewed credit policies, and some [are] now demanding advance payment,” he told The National.

Although Coface predicts that the UAE’s construction sector will continue to face payment-related challenges in 2017, there are indications that the green shoots of recovery may be breaking ground – albeit gradually.

In late January, the team responsible for the delivery of Expo 2020 Dubai revealed plans to award 47 construction contracts, worth a total of $3bn (AED11bn), in 2017. Last week, reports emerged that Dubai would secure a loan of the same amount to fund the expansion of Dubai South and Al Maktoum International Airport, in preparation for the World’s Fair.

While Expo 2020 certainly represents a bright spot on the horizon for the UAE’s construction community, it’s encouraging to note that it is not the country’s only source of tenders at present. Since the beginning of the year, large-scale projects have also been announced within sectors such as hospitality, industry, and housing.

It is therefore crucial that as the construction sector continues along this gradual growth curve, delaying payment is not allowed to become the default position. Preventing this behaviour from turning into a long-term habit – even in the good times – will require a top-down approach. Developers have to ensure that they are paying contractors and consultants in a timely manner, and this practice must represent the norm throughout the supply chain.

Hopefully, those at the top of the pyramid will be incentivised to pay their bills on time by the culture of selectivity that is continuing to develop within the UAE’s construction community. Companies operating below the level of developer have had to become more aggressive when it comes to chasing monies owed – and rightly so. Faced with clients that seem reluctant to pay their bills, some suppliers have even demonstrated a willingness to walk away from projects.

The key-client mentality that has become common among contractors and consultants active in the UAE should also serve to motivate prompt payment. Many of the industry’s largest players are targeting the firms with which they would most like to form long-term relationships. The flip side of this coin is that developers that garner a reputation for delaying payments could well find themselves fishing in an ever-shrinking pond.

When times are hard, a culture of late payment is understandable, but it is still detrimental to the industry as a whole. If the UAE’s construction sector is genuinely committed to the creation of a sustainable business environment in the longer term, it cannot afford to fall back on this learnt behaviour. Old habits may die hard, but if we do not act together to kill them off, they are liable to lead to negative supply-chain reactions.

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