UAE price restructuring “detrimental” to construction
EXCLUSIVE: Four firms come forward to CW anonymously to reveal the financial repercussions from COVID-19
The economic fallout from the COVID-19 pandemic has piled further pressure on the construction sector, with some leaders warning that restructuring fees could hurt fragile and vulnerable firms.
With several media outlets reporting that UAE contractors will have to go through the whole pricing negotiation process with developers and clients, Construction Week has dug for answers by reaching out to the industry to find out the facts on this matter.
One global consultancy firm, who asked to remain anonymous, confirmed the rumours on price restructuring having been asked by one of its clients to provide a 25% temporary discount for all its on-going supervision activities on invoices from the 1 April to 1 August 2020.
The spokesperson from the firm said: “I’m hearing that contractors have been asked to re-price at the tendering process across the board. We have been asked to restructure our costs on the supervision side of all of our projects, with a 25% temporary discount on invoices from 1 April until 1 August."
They added: “The remainder of our projects are continuing as normal, but at a relatively slower pace, while design activities and discussions with clients are continuing. Regarding the design side of our firm, which accounts for about two-thirds of our business, we haven’t experienced any pressure on fees for our on-going projects across the UAE and Saudi Arabia.”
Another firm, who also agreed to speak with Construction Week, but once again in confidence, revealed that they had one client “flirt” with the idea of a price renegotiation, which they said would prove “detrimental” to the project and would sacrifice on quality.
“At this time, we had just one client who has flirted with the idea of renegotiations. This was for a fast track project, which due to the current situation, dates were reset,” a spokesperson for the contractor said.
“However, this suggestion was not entertained as most of the supply chain was locked in place. Having renegotiations down the chain would prove detrimental to the project and most certainly would sacrifice on quality. This project of course had no contract in place as the terms negotiations were ongoing; however progress on site had begun."
They added: “Apart from that, no other projects of ours have actually suffered on this particular reason as we have been shielded. Most of our clients are diversified and we don’t generally pickup projects from one segment primarily.”
However, another consultancy firm said that despite not experiencing or hearing of any of its clients adopting these tactics, they hoped the construction sector would not resort to this.
“It [price restructuring] definitely happened during the Financial Crisis of 2008/09, but back then fees and construction costs were quite inflated, so businesses could largely cope with the reductions,” said the spokesperson.
“However, this time around we are starting from an already very aggressive market, so this will only serve to prey on this vulnerability and fragility.”
The spokesperson added that companies, fighting for survival, will not be able to deliver, and this will almost certainly result in claims for variations and more disputes.
“Morally this is entirely the wrong thing to do in such extraordinary times, where every part of our business and social communities are affected.
“What the market needs is some tangible stimulus that creates stability and confidence now and into the future, and encourages collaboration and solidarity. Essentially, some of the values that the UAE was built upon.”
This view was echoed by another major contractor in the region, who said that they had also not been contacted by any of its clients regarding price renegotiations.
“If this is in fact true, I don’t believe it makes much sense and cannot imagine any practical discounts of any significance. The work has generally already been procured in a competitive market, so they already have the lowest price,” the contractor's spokesperson said.
“Markets are already under pressure so mark-ups are very thin. The COVID-19 crisis has added costs to projects, not reduced them.”
Is it legal to change project pricing once a contract has been signed?
While the industry has confirmed the financial burden that COVID-19 is placing upon them, what are the legalities of price restructuring? Is it actually legal to do this when a contract has been signed?
According to global law firm Squire Patton Boggs’ partner, Thomas Wilson, renegotiating construction contracts is in fact legal.
“Even where a contract is signed, either party is free to ask for a renegotiation, i.e., ‘ask for a better deal.’ However, a signed contract can only be amended by agreement,” Wilson told Construction Week.
“Typically, an employer cannot force a contractor to accept less money for his work, or intervene to slow the contractor’s performance and delay its entitlement to payment. Most construction contracts do have provisions under which employers can suspend contractors’ work for a period of time.”
He concluded: “However; but such suspensions typically cannot go on indefinitely and will not reduce the contract price. In fact, suspensions typically increase the cost to the employer because the employer becomes liable to pay the demobilisation, stand-by, and remobilisation costs of the contractor.”