Crisis time for the construction sector - commodity prices and shipping costs are already up in high double-digit terms. For local contractors, this is no time to be thinking about under quoting to win a contract at any price. Image Credit: Shutterstock

Dubai: Already hit with rising material and project costs, some developers in the UAE find they are having to deal with another problem – of having to change their main contractor midway into construction.

Market sources inform Gulf News that a leading Dubai-based contracting firm is facing cashflow/debt payment issues and has ceased work at most of its project sites, including some high-profile ones. The size of the payments owed is reportedly in the “hundreds of millions of dirhams”.

Multiple sources confirm that the contractor has ceased options in full. Gulf News tried to contact the owner of the firm, but he could not be reached.

Some of the developers affected are looking for other contractors to come in and take over - but that’s the easy part. What will prove more tricky will be to negotiate the project costs and other contractual obligations.

“These projects will see a 15-25 per cent upfront increase on costs – the terms agreed with the earlier contractor will no longer be valid,” said a construction industry source. “Shipping and steel price increases – by 20 per cent and over – will make sure of that.

“Project costs are changing every month because of global supply issues. This is what affected developers will have to contend with in naming a new contractor for their ongoing projects It is never easy to change contractors even in the best of times – these days, it is more so.”

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Keeps on climbing

The UAE construction sector has been trying to get a grip on spiraling shipping and material costs since October last year. Disruptions in the supply of key commodities after the pandemic broke out also added to the sudden and sharp cost inflation.

UAE-based contractors have tried to compensate by looking for alternate sources, but there is a limit to how much this has helped. The way things are progressing, the construction and real estate sectors will have to contend with cost increases for some more time.

Cautionary tale

Industry sources say that more construction firms will face disruptions or closures if they are not careful with how they price their work. “The commodity prices are all up year-on-year and any firm that acquired contracts based on the premise that costs will keep falling are left holding lumpsum contracts they can’t deliver upon and suppliers who they owe money to.

“The affected contractor has a lot of small and medium enterprise suppliers. This will have a disproportionate effect on them and they may have only just been surviving in the first instance.”

This industry source, however, sees one silver lining. Unlike an Arabtec, this particular contractor is “not a regional or international powerhouse of the industry. Having said that, this closure will leave some clients in a difficult place apart from the suppliers involved.”

The local project sector is yet to recover in full from the Arabtec fiasco, where one of the biggest names in the region’s construction space and the builder of the Burj Khalifa has gone in for liquidation. The process is still winding through the local courts, and some of the projects that Arabtec was associated with are still in limbo over the need to find a new contractor and rework the costs.

This is why the likely exit of another contractor will cause more soul-searching in the industry. Especially if it leads to subcontractors and suppliers that are owed money having to bite the dust as a result.