Speaking on a panel addressing late payments in the industry at the Excellence in Construction Summit at the Big 5 trade show on Sunday, Sachin Kerur, Middle East head of Pinsent Masons, said that some cash flow challenges faced by contractors were as a result of specific issues within the industry, while others were unique to the Middle East.
"I think there is a late payment culture here in the region - that is very specific," Kerur said.
"A number of countries have taken the issue of late payment and have decided it was such a problem that government would need to step in and laws would need to be established to help the health of the construction industry," he said, adding that the United Kingdom, Singapore, Australia, New Zealand governments had all addressed this issue.
"I think Dubai, in particular, could do with a range of laws to help the industry to moderate some of the practices," he said.
"Arguably, some practices should practices should just come from good behaviour. It's never always good to be just smacked on the head with a stick and just told what to do. But, ultimately, if these things don't improve.... you would have to look at some changes that would be prescribed by law."
Payment clauses
One of the main problems for subcontractors are 'back-to-back' payment clauses, meaning that main contractors are only obliged to pay suppliers and subcontractors once they have been paid by a client.
Mark Andrews, the Middle East managing director for UK contractor Laing O'Rourke, said his firm tries to pay suppliers in line with agreed terms, but added that "I'm not going to sit here and say that means I don't exercise back-to-back payment clauses, because I do".
"Sometimes I have to - I simply don't have the money," said Andrews.
"One of the real problems that we've seen over the last few years is that one of our competitors can get themselves into a major payment problem and then what we see is suppliers and subcontractors falling over because somebody else isn't paying them," Andrews added. "So I do realise this is a significant and epidemic problem that we have to work together to try and tackle the best we can."
Andrews argued that main contractors are often the cause of problems because they accept unfavourable terms in order to win work.
"To me, until we, collectively, as contractors, start saying 'No, I'm not taking that', then things aren't going to change. The problem here is I see contractors cropping up around different areas of Dubai who, basically, you have never heard of. They come out of nowhere. You've got some guy with a pick-up truck and a toolbox who calls himself a contractor and then somebody gives him a 1 billion dirham [$272 million] job."
Andrews said that a further challenge affecting contractors' cash flow in the region is that firms have to put forward up to 20 percent of a project's cost in bonds.
"So if we're talking about a 1 billion (UAE) dirham project, we will be bonding it for about 200 million (UAE dirhams) - 100 million for the advanced payment and 100 million for the performance bond."
He said this can make life difficult for contractors, especially towards the end of a project where there can be disputes over extra payments a contractor may feel they are owed but may not exercise their rights to if they feel a client will recall project bonds.
"The effect of that can mean that a main contractor has virtually completed a project but has actually only been paid maybe 80 percent, 70 percent and then there is this huge cash hole that is then pushed on down the supply chain," he added.
SMEs suffer
Sameer Daoud, the group chief development officer and managing director of Dubai-based Drake & Scull International, said that late payment is often a bigger problem for smaller subcontractors and suppliers.
"Large companies can actually shovel between different regions, between diversified businesses and massive projects but when it comes to smaller contracting companies or businesses, they will suffer a lot," said Daoud.
"The key for us in the construction market - and in the contracting business in particular - is cash. Whenever there's a lack of cash, it means a lack of our ability to pay off our dues - whether it is actually paying our supply chain or covering our payroll on a monthly basis."
(Reporting by Michael Fahy; Editing by Shane McGinley)
(michael.fahy@thomsonreuters.com)
© ZAWYA 2017
