Good planning can help GCC contractors weather the storm
Over the past decade, GCC construction companies have expanded quickly thanks to considerable investment by the region’s governments. Companies grew fast without enough control of costs and labour, nor did they develop the right skills and capabilities. Today’s environment is radically different, which means that construction companies must change how they operate to succeed in a more difficult market.
If firms do not make changes now, they will find struggle to navigate through the stormy regional economic and political climate. Moreover, they will find it difficult to fight off increasing competition from foreign contractors with superior project management capabilities. So what GCC contractors must do is change how they handle their largest costs, which for construction are labour and procurement, and have a more flexible organisational model. The organisational changes are important because they allow the new approaches to manpower and procurement costs to take full effect. With these changes, firms will be positioned for the unfavourable climate of today and for any future upswing.
The drop in oil prices, along with economic and geopolitical uncertainty, has directly affected the construction sector from Riyadh to Dubai to Muscat. Most GCC governments are adding new regulations, such as increasing the cost of foreign worker permits and encouraging the hiring of nationals. Customers in the region scrutinise costs more closely, often pushing contractors to assume greater project risks. For example, lump-sum contracts are more common, rather than the traditional cost-plus structure. Adding to the pressure are the foreign companies that are winning contracts through lower costs and strong project-management expertise.
In this environment, GCC construction companies need to have leaner operations and improved management capabilities in three critical areas.
First, companies need to manage labour more effectively. During the recent expansion, many contractors rushed to hire workers with insufficient control over quality. Instead, companies need to treat manpower as a critical resource.
Such improvements start with a centralised workforce plan that gives company leaders a clear understanding of their labour needs for the coming year – along with any critical shortfalls – across all projects in their pipeline. Creating an accurate HR database ensures companies have up-to-date information about the qualifications and performance of every employee. A better system for performance reviews helps companies identify and reward strong performers, while training or removing underperformers.
One noticeable area where GCC contractors can improve their efficiency is the so-called span of control. This is the ratio of employees in adjacent layers of the company, such as the number of foremen compared to the number of tradesmen or the ratio of construction managers to site engineers.
The rush to hire staff during the recent expansion means that we have GCC contractors with one indirect employee (such as staff working in offices, workshops and stores) for every two to three direct (blue-collar workers on construction sites). By contrast, their foreign competitors have aggregate span of control ratios of about one indirect employee to every four direct employees.
By increasing the “span of control”, and other manpower measures, GCC contractors can reduce the size of the labour force by 10 to 20 per cent.
Second, GCC construction companies should improve their procurement of goods and services – typically contractors’ largest costs. Based on our experience, some regional companies have notable inefficiencies in procurement.
A better procurement process begins with a data-driven analysis of everything the company buys and where. This helps leaders identify potential savings opportunities. As with labour, planning is crucial. Rather than ordering goods and services for individual projects, often at the last minute, contractors need a better sense of their procurement needs for all projects in the pipeline over the coming year. By grouping and aggregating purchases in this way, they can negotiate discounts.
The company’s finance department must be involved in procurement decisions, to negotiate better payment terms and conditions with suppliers. In all, these measures can lead to savings of 5 to 10 per cent on procurement – more for certain product categories.
Third, construction companies must develop more flexible organisations. Centralised manpower and procurement planning can break down internal barriers, allowing managers to better allocate resources.
Companies should also improve operational elements such as project management, cost controls and safety. For example, the GCC companies’ project-management capabilities are below global benchmarks. Strengthening these areas will help local players to fend off foreign competition.
Perhaps the most important measure is to instil a performance-based culture. Every employee should feel accountable for reducing costs while meeting quality standards and project timelines. The right culture creates an environment in which workers are empowered to find creative solutions to problems around them – not because they’re ordered to but because they want to their organisation to succeed. In creating this culture, companies can use incentives to ensure that they align the company’s interests with those of blue-collar and white-collar workers alike. Such organisational elements can lead to a reduction in project costs of 2 per cent or more.
The days of easy growth are over. In today’s tougher, more competitive market, filled with economic and regional shocks, construction companies need to be lean and have a culture of performance so that they can succeed irrespective of what the future holds.
Alessandro Borgogna and Fadi Majdalani are partners and Marwan Bejjani is a principal with Strategy& (formerly Booz & Company).
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Updated: February 14, 2016 04:00 AM