The UAE's construction sector needs to see changes in how its contracts are put together. Project owners should not be using performance guarantee bonds as a weapon to punish contractors. Image used for illustrative purposes. Image Credit: Atiq-Ur-Rehman/Gulf News Archive

Dubai: Banks in the UAE are going to take the lead position in ensuring funds flow through the construction sector smoothly, and where possible allow contractors to overcome the constant problem of delayed payments.

The new attitude on the part of banks come into being as part of the additional responsibilities on the sector following the COVID-19 outbreak and what it has meant for the economy.

“Liquidity has always been an issue for contractors because of delays in payment,” said Mohammed Khader Al Shouli, Executive Vice-President and Global Head of Contracting Finance at Mashreq Bank. “The difference is that UAE banks are more open now to extend the repayment terms.

“When a contractor issues progress payment certificates (PPC), they get certified and get paid within 30-40-90 days by the project’s client. When that does not happen, the contractor has to arrange for it from own resources or wait until the client pays up.

“Today, we know there will be delays in those payments. So, if we had discounted PPCs, and it’s supposed to be paid within 30 days, we look at extending it based on tenor of the payment from the client. We will not force the contractor to pay up.”

UAE banks’ exposure to the construction industry is estimated at 15 per cent plus.

Stimulus and more

Among the COVID-19 relief measures for the economy, the UAE Central Bank requires banks to be more lenient on payments due from clients – individuals and businesses alike. The message from the top is to give more flexibility on loan paybacks and in any transaction clients have with banks.

According to Al Shouli, easing contractors’ pain became a high priority area for banks in Dubai even before the Central Bank directives.

“In the first week of March itself, Dubai banks had made a joint statement in support of all companies affected by the COVID-19 spread,” he added.

The construction sector had been most vulnerable, with delays in payments reaching contractors at the top of the list. The sentiment among industry sources was that a COVID-19 led slowdown of the economy would further squeeze liquidity across all categories, with subcontractors most at risk.

The UAE has about $710 billion of building and civil engineering projects currently planned or underway. There would be revisions once the full impact of the COVID-19 impact is felt.

Time for change

Mashreq and a group of construction industry facing businesses had been leading efforts to get the construction industry to change its ways. And an ideal way to do it would be to adopt standardized contracts across all projects. Another proposal is to have project owners inform stakeholders about the funding model to be adopted for the scheme.

“Introduction of government incentives could encourage greater collaboration,” states the wishlist issued by Mashreq.

Performance bonds – a burden too heavy?

On whether project promoters should stop requiring contractors to take performance guarantee bonds, Al Shouli said: “A performance bond is standard document requirement in any project anywhere in the world. The issue here is one of behavior.”

In recent times, several contractors have been complaining of misuse of performance guarantee bonds, which are taken out by contractors as a certain percentage of a project’s overall value. If the client feels the end result has not been to stipulated standards, he can encash that performance bond.

According to some industry sources, this has become a tactic among some project promoters to boost their cashflow.

“Performance bonds must be encashed by the project owner only if there is a “lack of performance” on the part of the contractor or when deadlines are not met,” said Al Shouli.

“But in the UAE, performance bonds have been used in more open-ended ways and not related to performance. It has become a pay up demand from project clients and irrespective of whether the contractor has done his job or not.”

Mohammed Khader Al Shouli of Mashreq Bank

Will the industry listen?

The wishlist calls for a change in payment terms, including “extended payment periods” and “pay-when-paid” clauses. It also calls on project promoters to remove “on-demand” bonds and change legislation around bond conditions.

“In the past, it used to be wishful thinking, and hoping people would listen,” said Al Shouli. “These proposed changes must apply to everyone in the industry, not just contractors.

“With the pandemic, all the issues in the construction industry have been brought forward – intensively. It’s showing us that we need to evolve to be able to deal with issues that, sometimes, have no direct connection with the industry or economy.

“If we had contracts that were balanced and clear, we could have had today a much better construction sector. But one of the issues that will happen is that a lot of contractors will be forced to delay projects because of the pandemic.

“You need to have contracts that would allow you to do that without getting into a lot of debates and disputes. Banks do not want to be exposed to a sector that is under so much stress and which could cause defaults. Because all that will be reflected in our future provisions."