Gulf contractors face tough market conditions amid cashflow constraints

Contractors across the Gulf are facing a tough set of market conditions, with cash flow constraints and greater competition for fewer contracts placing a squeeze on margins, according to Deloitte.

The accountancy firm’s 2016 Powers of Construction report states that contract awards are likely to drop to US$140 billion this year, a reduction of 17 per cent on the amount of awards last year.

Despite this, Deloitte argued that the pipeline of future projects due for delivery in future years means the region still offers decent long-term fundamentals for companies prepared to ride out the current slowdown in the market.

Speaking at the launch of its report, Deloitte’s Middle East construction industry leader, Cynthia Corby, said: “We see a tough year ahead still for contractors. There is still a lot of pressure on cash on legacy projects and trying to close those out, and be paid for projects delivered back in 2008-10.”

Saudi Arabia is the market that has been hit hardest, with contract awards set to decline by 20 per cent to $40bn, but it remains the region’s single biggest projects market, followed by the UAE.

The report states that there is more than $2.6 trillion worth of projects either at pre-execution or execution stage in the Gulf. However, just $657bn of this is currently under construction, and $2tn remains on the drawing board.

More than 90 per cent of contractors who were surveyed at the event stated that market conditions were tougher than in the previous year and 64 per cent said that they had witnessed an increase in construction disputes.

“There are clearly delays in payments, and that affects the cash flow cycle,” said Ben Hughes, a director in Deloitte’s Middle East capital projects team. “Cash collection days are going from typically 45-90 days up to 180 days.

“We have clients who are just not being paid at all, and yet they still are obligated to pay their subcontractors because they still need to finish a project.

“Supply chain disputes is clearly a major issue as well. Where a number of contractors aren’t being paid by the client, they have just stopped paying their supply chain. But clearly, they need the materials and they need the labour. That, again, gives rise to disputes.”

Speaking at a panel debate at a Meed conference yesterday, Gary Adams, the Mena president of US-based building consultancy Parsons, said: “There’s largely a perception that cash issues are largely a fallout from low oil prices and pressure on revenues to government, but I really think this is a systemic issue in the market, which has been exacerbated by low oil prices.”

Mark Andrews, the Middle East managing director of UK-based contractor Laing O’Rourke, said: “Life is difficult generally for contractors in a market which, certainly for the last few years, has been very competitive. We’re all bidding at relatively low margins, and I think the reality is that contractual terms here are pretty onerous.”

He said that problems with projects are often compounded for contractors by the fact that they often receive drawings late, and that there are often variations to original contract scopes, which then means payment for contracts takes even longer.

“I also feel that cash retentions [by clients, in the form of performance bonds] are extremely unfair. We’re operating at margins of single-digit percentages and virtually every client is holding 10 per cent cash retentions.”

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