Construction firms under pressure to cut prices

Angela Giuffrida

• Last Updated: November 21. 2009 8:23PM UAE / November 21. 2009 4:23PM GMT

Construction companies are being asked to cut their fees by up to half as developers take advantage of increased competition for orders amid a work drought.

The overall cost of building has fallen by about 35 per cent in Dubai and 20 per cent in Abu Dhabi from a peak in the third quarter of last year, figures from the construction consultancy EC Harris show. The decline has prompted developers to lock contractors into longer-term deals for lower fees.

Now the price squeeze is forcing some contractors to abandon bids as profit margins are put under increased pressure.

“We were almost at the point of signing on the dotted line when we were asked to cut the price to 50 per cent of the original, and we had already given them an extra competitive price,” said Chris Christou, the manager of Cebarco-WCT, which built Aldar’s Formula One circuit in Abu Dhabi. “People have to be fair with their suppliers.”

A six-year building boom drew construction companies from all over the world to the Emirates as a surplus of bids and a shortage of contractors allowed firms to pick and choose projects.

Contractors could command a profit margin of 15 per cent or more during the construction boom, but are now taking between 5 and 10 per cent, with some agreeing to forgo any profit, said Stephen Humphries, a director at Davis Langdon, a construction consultancy.

“We’ve seen it with groundworks and foundations contractors for the simple reason they own a lot of plant and equipment. Doing something which generates money is better than doing nothing,” he said.

“Companies that have a lot of plant and equipment are buying work just to keep people occupied and keep machines generating revenue. But most other parts of the industry are prepared to sit and wait.”

Simon Light, the head of client solutions at EC Harris, said developers had an opportunity of between “six to 12 months” to buy cheaper construction services. He expects the price fall for construction materials in Dubai to reach a bottom by the end of the year, while prices in Abu Dhabi have already stabilised.

agiuffrida@thenational.ae