China giant's CSCEC ME's Yu Tao on legislative protection for contractors
The future of Middle East construction relies on improved contract tendering and pricing practices that can safeguard regional contracting businesses, Tao tells Construction Week [VIDEO]
Leading a construction company is no easy task. The job involves a large number of stakeholders and project elements that builders must simultaneously manage – a situation that is only compounded by the payment and progress delays that are endemic in the industry.
It is not entirely surprising, then, that Yu Tao, president and chief executive officer of China State Construction Engineering Corporation Middle East (CSCEC ME), refuses to slow down in Q4 2018, despite the growth his team has recorded this year. Tao, who was ranked in second place in the 2018 Construction Week Power 100 list, led the Chinese contracting giant to new contracts worth $1.6bn (AED6bn) in the first half of 2018, achieving much of the firm’s order book target for the year.
With 2017 revenues of $750m (AED2.8bn), the company has been engaged in projects such as the 150,000m² Silicon Park, a smart city project at Dubai Silicon Oasis; the steel works at Abu Dhabi International Airport’s Midfield Terminal Building; the new headquarters for the National Bank of Kuwait, located in Kuwait City’s central business district; and the UAE’s iconic Dubai Water Canal, which opened in 2016.
CSCEC ME’s kitty is full of high-profile projects and clients, with which Tao is optimistic about extending his work. One of these customers is Dubai’s Roads and Transport Authority (RTA), for which the contractor delivered Dubai Water Canal. In July 2017, CSCEC ME was awarded the RTA’s $165m (AED605m) contract to work the R1048/2 Expo 2020 Dubai road package. In addition, the firm has noted progress on the Motor City Masterplan that it is working on for the UAE’s Union Properties.
Tao tells Construction Week that while his team is “a bit relaxed” thanks to its billion-dollar order book for the year, the Chinese government-owned company will continue to be selective about – and committed to – the work it delivers, in 2018 and beyond. On the side-lines of the Leaders in Construction Summit UAE 2017, Tao told Construction Week that the industry lacks “synergy”, and that stakeholders are so focused on their own interests that they end up disregarding what is best for the projects they are working on. Almost a year later, Tao says that the industry “is still very challenging”, adding that his firm still faces “great difficulty on certain projects”.
He continues: “For some reason, the payments are very slow. Often, clients create variations, and it takes a long time to conclude and get paid for the variation. In between, we may already have spent the money, so the whole supply chain – including the main contractor, sub-contractors, and suppliers – will all suffer. I think we need a change, and we have to understand the project is not only the ‘baby’ of the main contractor – it also belongs to the client and the consultant.
“Of course, the contractor takes most of the responsibility to deliver, so that is why we need to call for the whole industry to look into the possibility of simplifying payment procedures and ensuring they are made on time.
“That is because it is not my money [as the main contractor] – it is the client’s money, and it has to be used wisely to get the project done. That is our ultimate target.”
This year, the issue of variations and payment delays in the Middle East has been a focus for the entire construction sector. For instance, ALEC’s Kez Taylor – ranked number one in the 2018 Construction Week Power 100 – also voiced his concerns regarding these market challenges, and explained that greater collaboration is required to resolve the problems.
With two of the Middle East’s most influential construction leaders expressing their concern about payment delays, what can be done to improve the situation? Let engineers be engineers, Tao recommends.
“Sometimes, I [feel] I am no longer a contractor, because a lot of my time is spent resolving disputes and getting money back,” he explains. “Sometimes, we are forced to go to court or enter arbitration, which we do not want to do, but it happens. I have to think about how we can continue and deliver – we do not want one problem affecting our company and causing our clients to suffer.
“I believe we need government support to form the right culture in the construction industry, and we should have standardised contracts. Instead, if you look at the market, you will find that developers have their own forms of contracts, and they will have made a lot of changes from FIDIC (International Federation of Consulting Engineers) standards. This makes the conditions very difficult to understand, [leading to different interpretations], which ultimately leads to disputes.”
However, as Tao points out, contract clarity, or the lack thereof, is only a part of the problem. While he commends the work of the construction-specific division of Dubai International Financial Centre Courts, Tao says more needs to be done – both locally and regionally – to expedite dispute resolution and keep legal costs at manageable levels.
“I believe [governments] should create a special construction court, which has a judge that is familiar with construction disputes and industry problems. This would help to raise efficiency, and experts handling the cases means we would be able to conclude [disputes] quickly and go back to work. We cannot be stuck there forever.”
Tao adds that even arbitration, which is a something of a preferred dispute resolution option in the Middle East, comes with baggage: “I think it is often used to further delay payments,” he says.
“The payment may already be late, with either party pushed to the limit, causing them to start arbitration. But even arbitration may not help us get our money back – I am sorry to say that, but it is […] a fact. The procedures are way too long. They are too expensive. And, when you finally have the arbitration award, it takes a long time to enforce and get your money back. All this consumes too much of our time.”
Contract drafting and pricing trends are the factors that Tao says he will need to monitor before CSCEC ME moves to establish a large-scale presence in Saudi Arabia. The labour-intensive construction sector could also do with guidance from the kingdom’s government with regards to its Saudisation scheme, which aims to increase the number of Saudi nationals employed within various economic segments, Tao explains.
“We have noticed that quite a few contractors have lost a huge amount of money in Saudi Arabia,” he continues. “Of course, there is a combination of factors behind this, but one of the biggest reasons is contract prices.”
Corporate survival is challenge amid such market conditions, which also fail to incentivise contractors, CSCEC ME’s top boss explains. He adds that “the country and the industry [must] appreciate the value of the contractor”.
“We work so hard [in difficult weather conditions], and we contribute a lot to the country’s development,” he says.
“We have built so many iconic developments for the Middle East, but what is the status of contractors? They are not making profits. So, for me to enter the Saudi Arabian market, there has to be a reasonable construction cost [associated with working there].”
Having worked with what he considers to be some of the UAE’s – and the Middle East’s – top clients, Tao has insights that may benefit the market at large, and he explains that the priority for the regional industry must be to improve contract drafting and tendering practices.
Contractors “cannot just be squeezed on time and cost, and [made to] compromise on [their] conditions” by clients that sometimes take up to 18 months to conclude contract negotiations, he says. This is one of the common contract problems in the region Tao believes could be significantly improved by emulating procedures followed in more mature construction markets, such as that of Singapore.
He explains that in the Middle East, the problem is intensified due to the numerous rounds of public bid-openings that are conducted, which may compel contractors to compete on reduced costs all the way through the process, until a firm is finally awarded the contract. Eventually, builders are faced with low compensation and a high degree of risk on the project.
“At the end of the day, I do not think the client will save money, contractors will maintain quality, or the project will be delivered on time – it is the completely wrong approach,” Tao says.
“[Clients] get all the profit margins they can out of you, give you all the risk, and still want you to perform as a top-class contractor. How is that possible?”