Laing O'Rourke Middle East's MD on construction bonds and disputes
Mark Andrews talks to CW about the UK giant's pursuit of design and build projects, and the challenges of construction bonds and disputes
Overall sentiment and confidence in the Gulf’s construction sector has seen a marked increase over the past two years, according to Pinsent Masons’ GCC Construction Survey, which was at the start of 2018. The law firm’s findings showed investor sentiment improved in the region by approximately 7% in the last two years, growing from 32% to 39%.
Once again, the UAE was rated the top country to deliver growth in 2018, with 38% of the surveyed respondents expecting the Gulf state to provide the greatest opportunities throughout the year – a modest 2% rise on 2016. The Gulf’s skyline is not short of cranes – in part thanks to the ambitious state-sponsored building projects under way in the region, such as those aimed at supporting the Saudi Vision 2030. However, Pinsent Masons’ findings revealed that 20% of its surveyed regional professionals expect their order books to decline by more than 10% through the year.
While highlighting a cautious optimism that pervades the market for the time-being, such figures show companies operating in the Gulf are still facing challenges. These hurdles may not be exclusive to the Gulf, or even the Middle East, but contending with them requires each regional construction leader to innovate and adapt in a way that best suits their business. Take the example of UK-headquartered contractor, Laing O’Rourke, which like its contemporaries in the Middle East, is pursuing growth against a backdrop of squeezed budgets and consistent drives from developers towards the bottom line price.
“We’re very selective as to which jobs we will work on and who we will work with,” Mark Andrews, managing director of Laing O’Rourke Middle East tells Construction Week. “It’s about trying to achieve a critical mass where we can hopefully turn a profit rather than looking at growth for growth’s sake.
“I think undoubtedly for some contractors it was all about growth, particularly those that were looking at initial public offerings (IPO) or were listing because there was this sense that the share price was driven by the backlog. Those of us that have been in construction for a long time know that if you take on bad jobs, it does not matter how many you have got – you are not going to make any money. Instead, ‘you are going to lose your shirt’".
With this in mind, selectivity is key for Andrews, who wants to find clients that “look at the broader value proposition beyond just price”.
“The market is still very much price-driven and that does challenge contractors that are trying to offer a high-end prospect,” he explains, adding that some developers in the region “just look for the bottom line price and every line of the estimate”.
“While there are some contractors that are happy to play in that game, […] I question the sustainability of it,” he says.
Instead, Laing O’Rourke adopts a design and build approach when it is possible to do so. Andrews says he likes the model for several reasons, the most fundamental of which is that it “tends to result in shorter bid lists”. For example, it may help to filter out some of the lower tier contractors that are unable to implement design and build effectively.
Andrews adds: “The other reason is that it offers the opportunity to design-in a more constructive solution, so that work that can be done safely, sustainably, and drive [the scope for] off-site construction.
“We fundamentally believe that anything that can be built in a factory should be built in a factory. In many parts of the developed world, there is now a general move for the industry to go down that route.”
Exemplifying this approach was the firm’s work as the main contractor on the Aloft City Centre Deira hotel, which was topped out in September last year. Spanning 28,800m2, the project, which broke ground in June 2016, features 304 guest rooms, including 29 suites.
“We used as much offsite manufacturing as we could,” Andrews says of the hotel, which is located in the popular Dubai neighbourhood of Deira.
“We used double bathroom pods that were assembled in a factory with pre-installed risers. We were dropping 10.5t modules that were fully equipped onto the floor and then basically putting a hollow core on top of modules for the next floor.”
October 2017 also saw Laing O’Rourke Middle East win a contract to expand Dubai’s Khazna Data Centres, building and fitting out its Pods 4, 5, and 6 in Dubai and Abu Dhabi to double the data centre’s capacity. This project too, Andrews explains, is a “full design and build data centre”.
He adds: “Data centres have very high mechanical, electrical, and plumbing (MEP) content. So they present some unique challenges and the way the phasing of that job out is just a little different. We are looking at modularising everything that we could. We’ve done a lot of data centre work in the UK where we build heavy modules in our own factory.”
By combining its operational efficiency investments with high-quality construction delivery, Laing O’Rourke is justifiably able to pitch itself as a high-end contractor, and cement its position as a company that safely delivers high-quality projects within a reasonable time frame, Andrews explains.
“I think we are probably seen as one of the fastest contractors,” he says. “There are clients in this market that perhaps to do not value timeliness of delivery, and there are others that do.
“We were the lead contractor on the Hilton Garden Inn near the Mall of the Emirates a couple of years ago. That was a full design and build contract, and 18 months after [we received the] contract, there were paying guests in the hotel. That’s pretty much unheard of in Dubai, but it can be done with the right methods of construction and the right cooperation between the client, contractor, and designers. This is the sort of value proposition that Laing O’Rourke offers and this does mean that we are looking at a pretty selective part of the market.”
Local strategic partnerships are of key importance to ensuring its preferred design and build approach remains successful, with key supply chain partners of crucial value to Andrews and the firm.
“When you have some [supply chain partners] that have relatively unique skills, it just makes sense to put those kind of arrangements in place. I believe others in the market attempt to do the same thing, but some of the pressures in the industry have caused parts of the supply chain to struggle – there’s an inevitability around that. So you have got to pick the right partners and work sensibly with them.”
Supply chain issues stem, in part, from the liquidity squeeze prevalent across the Middle East’s construction market, with dynamics such as oil prices and labour also compounding the situation. The good news, according to Andrews, is that crude prices are now less influential in the market. While he concedes that “there are liquidity issues” in the market, concerns that do not relate to oil price – including the regional construction industry’s post-Expo 2020 Dubai prospects – are also present.
He explains: “If you go back to 2016, the oil price was probably that much more significant for the construction industry here in the Middle East. In the intervening period, there has been a raft of further economic issues at both the global and local level, which probably mean that the recent increase in oil price isn't going to make such a massive difference going forward.
“For anywhere in the Middle East, it’s good when the oil price goes up. You can’t get away from that. But I think when you see everything else that's going on in the world and here, it become a less significant issue.”
Andrews believes the dispute resolution process in the region also has room for improvement, particularly given Laing O’Rourke’s work in other construction global centres, such as London: “What you see here is a lot of variation that comes because of poor engineering, late engineering, or client change during the course of a job. The account can get trawled out for a very long period, [which means] you do not get the final count result at the time a job completes. This can drift into the defect liability period, and there’s no real mechanism to resolve that quickly.
“But what we’re seeing around the rest of the world is rapid dispute resolution processes that call that during the course of the job.”
An industry-wide discussion to improve the dispute resolution process is under way, and Andrews believes there are models being used elsewhere in world that can be incorporated in the Middle East.
“[However], you do sense that there’s a reluctance to take that on and perhaps – given the market is very price-driven with liquidity shortages – it makes it very difficult for the clients to take that jump,” he adds.
Bonding requirements for certain projects in the region are also an important consideration for Andrews. There are primarily four types of bonds in construction – one each for bids, advance payment, performance, and retention.
“Not all tenders here require a bid bond, but quite a lot of them do,” Andrews explains. “For example, if we put in a tender, then with it, we have drop in a bond – typically, this would be 1% of the value. That is a way for the client to ensure that if they award you the job, you will do it [as is mentioned] in the tender. To be honest, it is an archaic principle that most of us [contractors] have a real problem with because why should you have to put up a bond just to bid on a job? It’s quite bizarre, and of course, raising bonds from any bank costs money.”
Generally, he adds, contracts in the region include advance payment bond stipulations. For example, a client could specify more than 10% of the contract price as an advance payment to a contractor, but in exchange, would say they require bonds of the same value. Andrews calls this an “absolutely standard” practice in the Middle East, adding: “It is a means of getting leverage, used by clients here as an insurance policy so that contractor won’t just pocket the money and disappear; historically, that is what they were used for.
“However, the reality is that the minute you enter into a contract, there should be legal mechanisms that ensure all parties perform.
“In terms of retention bonds, clients here are typically hold 10% of what’s due on a contract as retention, and release elements of that retention when the job is complete and ready for takeover. But they will release it against the bonds, which means the retention bond will be held for the defect liability period, along with the performance bond.
“At the end of a job and after we have completed – sometimes even years after – the client may still hold, for example, 10-20% of the contract value in bonds”, Andrews adds. This can be a problem for contractors, because “in order to take on new work, you need to be able to raise new bonds”.
He continues: “Because there are so many contracts where the final accounts or claims do not get resolved in a timely manner here, these bonds just hang out for a long time after a job has been completed. You cannot recover them, so you can’t use that part of your facility to bond new work.
“Where companies have got some degree of financial difficulty, raising bonds in the current market is going to become more challenging. That could have the effect of weeding out some of the competition,” Andrews concludes.