Pressure on UAE Contractors to Re-Price Projects: Hostages to Fortune?
It has been reported that UAE contractors will have to go through the price negotiation process again, as project promoters insist on re-pricing contracts because of the changed circumstances (Gulf News: ‘UAE construction sector told to re-price projects’, 11 April 2020).
The current lockdown and coronavirus-related health and safety requirements on construction projects are certainly contributing to general anxiety over the bottom lines of contractors and developers. Among other things, there is additional time spent complying with on-site precautions, such as distancing and increased frequency of cleaning and the off-site transportation of workers. All the while, ordinary running expenses of maintaining the workforce and other mandatory expenses are still being incurred.
Employers are also increasingly nervous about the post-coronavirus world; in Dubai alone, the 2020 growth forecast (Fitch Ratings) has been revised down to -2.3%, from 3.8%, and Expo 2020 has been delayed until 2021.
While it has been suggested that employers will be looking to contractors to ‘sharpen their pencils’ and reflect the so-called ‘new reality’ post-coronavirus, there is a significant cause for concern that this is a short-sighted approach. There is good reason to argue that the current imperative to reduce prices is unsustainable in the medium term:
- Despite the ‘double-shock’ of enormous drops in global fuel demand during the outbreak, together with excess supply, oil prices are on the road to recovery. While some analysts are of the view that the recent deal for production cuts are too little, too late for an immediate-to-short term recovery, others claim that the storm clouds for oil prices will dissipate once lockdowns are lifted. The lag effect could prove positive for world economies, helping to fuel a faster rebound after the virus subsides.
- Commercial and industrial activity appears to be picking up, as suggested by the recent increase in refinery utilisation in China, and their copper and steel inventories are beginning to fall. While it is right to approach such reports with some scepticism, if the pandemic is brought under control relatively soon, trade and output will inevitably rebound, even though a return to the pre-virus trajectory is not likely to be immediate.
- The UAE Central Bank has announced an AED 100 billion stimulus announcement, with virtually all other GCC countries adopting similar measures. This stands to affect individuals and SMEs, and ought to cushion the fall in activity. The boost on morale and confidence has been immediate, however, the wider growth benefits are unlikely to be seen until the health crisis subsides.
- On the infrastructure side, while the effects of the stimulus on public spending are unlikely to be seen until the pandemic subsides, a spike in government infrastructure spending packages may be utilised as a part of the economic response. For example, if countries in the MENA region were to adopt a similar approach to the US, which has announced (with apparently bi-partisan support) a USD 2 trillion package only one week after the USD 2 trillion public stimulus relief package.
Additionally, demands for price reductions based on reduced materials costs, are questionable. According to sources reported by Gulf News, UAE contractors say they are seeing no shortages of key building materials, even those coming in from China, and the prices of key materials too – cement, steel products – are as steady as they have been for some time.
Naturally, much depends on the duration of the protective measures. According to analysts, on the assumption that the pandemic eases in the second half of 2020, there should be a marked rebound in growth, albeit a return to pre-virus levels is not expected until late 2021, but the uncertainties surrounding these forecasts are extremely high. If a longer lockdown period is required, that prediction must be pushed back.
There is a significant risk to contractors agreeing on any price reduction that is fixed during this period of uncertainty. As we have seen in the past, undue focus on the (temporary) burden of un-utilised overheads and a so-called imperative to ‘keep busy at all costs’ may result in increased future losses and business failure.
Should you need help with the terms of any renegotiation, advice on how to approach a contractor for a price reduction, or if you are a contractor faced with such a demand, please contact Josh Kemp on firstname.lastname@example.org.
Written by Josh Kemp