The difficult times in the UAE look set to continue in the short- to medium-term with 2009 likely to deliver the lowest volume of new contract awards for nearly five years. One potential source of good news for contractors could be the easing rate of inflation. A fall in the prices of basic construction materials must be positive for contractors and they might be able to use this downward inflationary pressure to their advantage.

WHAT CAN CONTRACTORS DO?

So are contractors able to benefit from these lower prices? Much has been made recently of employers seeking to renegotiate contract prices after tenders have been accepted. This forces contractors either to accept lower prices than originally tendered or face the prospect of projects being cancelled and write-off their bid costs.

If contractors are able to use similar tactics and renegotiate prices for materials with their suppliers, then contractors may be able to minimise the impact on their margin. The key to this is to ensure that, when the contractor enters into his supply agreements, he maintains the flexibility in those documents to call for revised prices or, if need be, to terminate those agreements and request further tenders from the market which, if they meet the contractor's requirements, could result in certain packages being let to different suppliers.

Now is the time for contractors to revisit their supply agreements and consider longer-term arrangements and alliances with their key suppliers. While suppliers will probably be unwilling to commit to long-term agreements on the basis of today's prices, at least without some fluctuation or rise and fall mechanism allowing suppliers to increase prices periodically when necessary, given today's shortage of demand, new alliances or supply contracts with the region's leading contractors would surely appeal to suppliers who, at the very least, would secure themselves customers in readiness for an eventual upturn in the construction market.

TERMINATION OF CONTRACT

What happens when supply chain agreements break down will depend on the wording of the contract. Assuming that one party wishes to terminate the agreement, most long-term supply contracts permit either party to terminate the agreement after a certain period of time [for example, two years] and on giving the other party a substantial period of notice. In other circumstances, one party is usually entitled to terminate the contract if the other party is in default, say for example, the supplier fails to deliver the materials on time or to the correct specification. The position regarding payments will also need to be considered and, at the very least, the contractor will normally have to pay for those materials, which have been delivered to the site and the contractor may, depending on the wording of the contract have to pay for those materials, which have not yet been delivered to the site, provided ownership of them will pass to the contractor on payment.

The contractor will, of course, also be left without a reliable source for its materials. If the contractor is then unable to procure materials when needed, the contractor could fall behind the programme. This could potentially expose the contractor to a liability for liquidated damages or the contractor could be required to accelerate to make up time lost.

From the contractor's perspective, a longer-term supply arrangement could enable the contractor to take advantage of discounted rates and would ensure the contractor would be able to obtain materials should a shortage arise again in the future.

DEVELOPERS TAKE INTEREST

In respect of projects currently underway, the low price of materials should mean contractors are able to make potential savings that they could, depending on the terms of their contracts, either use to increase their margins on these projects or which they could offer to share with their clients in return for the award of other contracts in the future.

In addition, it was not uncommon, before the downturn hit Dubai, for developers to take an interest in the contractor's supply chain. One reason for this was because, in the mega projects to which Dubai was accustomed, developers were taking an increasingly active role in all aspects of the project to ensure they obtained value for money.

A second reason was that as new contracting methods were used in the Gulf involving two-stage contracting [whereby contractors were appointed initially during the preconstruction phase to contribute to the design and buildability of the project and to ensure it could be built for an agreed price falling with the developer's budget] it became incumbent on contractors to ensure the supply chain was working as efficiently as possible to ensure the contractor was appointed to proceed with the construction of the project.

There is no reason to doubt that, when liquidity returns to the market and developers are able to recommence those projects that have been suspended and to initiate those projects that have been put on hold, the contractor's supply chain will again be placed under similar scrutiny. On this basis, contractors who are able to demonstrate proper arrangements with the supply chain will be better placed that those that are not. While there is no quick fix for the Dubai construction market, the recent downward trend seen in the prices of certain key construction materials may prove to be the silver lining of the cloud that is the credit crunch. There is no doubt contractors are currently facing difficult times.

However, if contractors are able to take advantage of falling materials prices, for example, by showing added value to clients or by using the current situation to renegotiate their supply chain agreements, this will benefit them in the longer term.



- Andrew Greaves is a partner and James Williams an associate in the Dubai construction team at law firm Trowers & Hamlins