Expert view on mitigating risks
It’s tacitly agreed that a cash flow crunch and other challenges persist in the construction and MEP sector. What needs to be understood is a method on mitigating risks. Rajiv Pillai speaks to Vasanth Kumar
Cash flow is a common issue for contractors and sub-contractors going under. This can be bad for a project in terms of time and money. It is always in the client’s best interest to ensure that the supply chain is paid promptly.
Keeping that in mind, predicting cash flow is important in order to ensure that an appropriate level of funding is in place.
Construction Week had a recent interview with Niall McLoughlin, senior vice president at Damac Properties, who revealed that cash constraints amid low market fluidity are driving down the number of MEP contractors in the UAE’s construction sector.
McLoughlin said that the relationship between a project’s main and MEP contractors is crucial, “because if the former is facing financial challenges, then that [trickles down] to all contractors, including MEP”.
Some of the ideal strategies to mitigate risks, according to experts, are projecting future cash flow, spreading out costs, shopping for the best prices, approaching pay roll correctly, processing change orders rapidly, sending automated invoices immediately, accepting electronic payments, training the project manager on cash flow management, avoiding over-billings and under-billings, among other things.
The main point to understand is that construction companies operate differently from most businesses because no project is the same. Therefore, improving cash flow requires some different strategies. A lot will depend on the project manager’s ability to manage cash flow. Most importantly, the project manager should be highly qualified.
Vasanth Kumar, ex-CEO and co-founder of Arabian MEP/Al Malki Group, provides some tips when it comes to mitigating risks, particularly the clause on force majeure.
Kumar says that according to a recent survey, there are only eight primary causes of project delays in the Middle East from contractors point of view, namely, changes in scope (55%), performance of material and equipment suppliers (45%), contractor or subcontractor performance (40%), realism of overall timescales (35%), project team capability (25%), scope definition (20%), contracting strategy and risk transfer (20%) and, least of all, force majeure events (10%).
Kumar says: “It is important that companies should review their existing contracts to see what contractual rights and obligations they have in respect to issues such as – failure to perform obligations, force majeure, notification and mitigation requirements, material adverse change, etc., and should immediately engage a crisis management team to take stock of the situation and work on risk mitigation plans. Mitigating risks requires positive approach and learning lessons from past events.”
He says that there are remedies available within standard forms of contracts such as force majeure clause, insurance policies and compensation from the regulatory bodies and special ad-hoc committees, if any.
“It is a widespread misperception amongst contractors that invoking a force majeure clause would automatically protect the company from both contractual default and financial damages. It should be noted that force majeure comes under excusable delay, which is generally non-compensable as the events are beyond the control for the project owner as well. So under the circumstances, a project owner may grant a time extension to contract duration and not back charge the contractor with liquidated damages,” says Kumar.
Whilst most of local construction contracts are (International Federation of Consulting Engineers) FIDIC-based, many have extensive amendments to force majeure clauses.
However, Kumar says that clause 19.2 of FIDIC requires the affected contractor to notify the employer in writing within 14 days after the company has become aware of the events leading to force majeure and depends on how long the problem lasts and how severe they are.
Kumar says: “Force majeure provides only a limited relief to contractor’s obligations and may not help in recovering additional costs incurred by the contractor. So the affected contractor will incur cost overruns due to prolonged completion period which could have significant impact on financial results.”
He concludes: “As an industry, we are good at producing risk registers but are less good at mitigating risks. If we were better at mitigating risks then more projects would be completed on time, at the right cost and of the required quality. Improved people skills are needed to ensure this, though, as it will require a change in mindset.”