Construction SMEs need fairer contract laws
Right from planning to production, have you ever wondered how many people are involved in the making of a building? They're thousands. And a large majority of them are the construction labourers hired from poorer countries. The same ones we think about when filling food fridges during Ramadan.
So how do property developers manage the liability of so many people? Simply put, they do not. They hire small and medium sized businesses who in turn hire labourers for the construction. Moreover, they also hire consultants, architects, on-ground construction experts, and more, from these SMEs.
The issue at heart
The crux of the problem lies in these third party vendors signing on contracts which are heavily in favour of property developers. Moreover, there are often disputes regarding payment, which needs to be addressed on a larger level.
A recent report by Arcadis, a Dutch design, engineering and management consultancy, revealed the average value and length of construction disputes in the Middle East were higher than other regions in the world. The global average value of disputes was $33 million in 2018, while that in the Middle East was $56.7 million.
In regard to average dispute length, Middle East was also higher, showing 20 months compared to global average of 17 months.
One of the biggest problems that this industry has is a one-sided contract. The risks are always passed on to the contractor and that executing supply chain.Mohammad Khader Al Shouli, managing director and head of contracting finance at Mashreq Bank
Recommendations for change
A new whitepaper published by the UAE Construction Think Tank, comprising of "leading industry stakeholders brought together by Mashreq and MEED", has recommended 15 changes to improve the workings and instil fair processes within the construction industry.
Some of them include:
Standardisation of contracts that allocates risk equally between clients, consultants and contractors.
Include a price adjustment clause to cover risk.
Set clear definitions and promote understanding of vague contract terms.
Introduction of laws that set payment timeframes, adjudication and certification terms.
Provide a transparency regarding future projects, which allow contractors to better plan and manage projects and staff.
Introduce incentive schemes that reward contractors who choose to deploy new technology on projects.
Introduce regulations that enable companies to adopt, test and use technologies such as robotics and artificial intelligence on sites.
... UAE’s architects, engineers, contractors and manufacturers have built a reputation for being able to deliver worldclass projects. But the achievements of the past do not guarantee future success. And many of the challenges ahead will be different from those of the past.H.E. Abdul Aziz al-Ghurair, CEO of Mashreq Bank
The UAE is taking multiple steps to consolidate the property sector, as supply is booming while the prices have been on the fall over the past few years. Recently H.H. Sheikh Mohammed bin Rashid Al Maktoum announced changes in the responsibilities of RERA and DLD, whereby RERA will take on a larger role of boosting the property sector.
Although the average dispute size is higher in the Middle East compared to the global average, Arcadis' report also revealed a 38 percent year-on-year decline from $91 million in 2017.
While reforms are required to enable construction SMEs to work better and ensure contractual protection, these are likely to increase costs for property developers, who are already facing a cash crunch. How will the industry find a balance in this case amidst increasing supply and softening market? Do you have a solution?