Tenders are starting to emerge through the UAE’s construction pipeline but project promoters better be prepared to pay a higher price for them. According to a new report by UK headquartered EC Harris, tender pricing could be up by 4 per cent this year and gain a further 5 per cent each in both 2014 and 2015.
“As confidence begins to return to the global economy and funding becomes more readily available, we would expect tender prices to continue to rise,” said the report based on the firm’s Construction Cost Index. “Contractors will need to review their order books in 2013 and plan for slight increases in the cost of labour, plant and materials.”
All of this will be a departure from trends in the last two years. In 2011, tender prices dropped 3 per cent in line with input costs and remained flat into the next year as well. During this period, most commodity prices fell, with copper down 10 per cent, aluminium by 6 per cent and steel beams by 11 per cent. But it could all change.
“The construction industry continues to be in a state of consolidation, both for clients and contractors,” said the report. “The mooted merger of Sorouh and Aldar may result in a much larger, more influential and more powerful organisation that would be active in a much smaller market and would have enormous buying power.
“This could increase the challenges faced by contractors, who will be competing for fewer projects, for larger clients and with the added difficulty of securing working capital from banks. Sub-contractors are already facing challenges in securing funding and in being able to offer the required guarantees and letters of credit necessary to obtain materials from suppliers.
“These problems can only be overcome by the larger main contractors, which have bank facilities or cash reserves in place. These larger organisations are likely to be forced to deliver projects via contracts direct with suppliers and labour-only subcontractors; this, in turn, will require enhanced management skills to offset the increased level of risk exposure.”
So, what should contractors watch out for in a environment of steady pricing inflation?
“Flexibility in purchasing strategies is essential,” the EC Harris report added. “Purchasing and contracting strategies need to be developed while maintaining flexibility in a recovering market.
“There is, and will be, a much more assertive approach to debt collection and contractual management as all parties protect their own commercial interests. Risk mitigation through effective project controls will also be critical in an increasingly litigious market.”