Finding ways of beating the rising cost crisis

As rising construction costs hit crisis point, Conrad Egbert explores ways in which business could be done better.

The current construction cost situation has propelled three major issues into the spotlight.

The first is the reluctance of developers to move from fixed-price to cost-plus contracts; the second is the need for the UAE government to lift the price cap on cement, while the third is the need for an industry watchdog.

While fixed-price contracts remain the norm for developers, material suppliers are raising their prices almost on a weekly basis.

The black market economy is also on the up, with cement being readily available to the highest bidder at prices reaching US $109 (AED400) per tonne.

The UAE Ministry of Economy set a price cap of $80 per tonne on cement last June. But, unfortunately, because of the absence of a government body, the cap is largely being ignored.

Last week, circulars were sent out by a couple of readymix companies to various contractors informing them of the raised prices of concrete, which contractors have said they have to agree with through fear of being cut off the supply chain.

"Cement and aggregate prices are going up so obviously ready mix suppliers are going to raise their prices as well," said Julian James, regional aggregates and concrete director, Tarmac Middle East.

"If you go to any of the cement suppliers and ask them for a quotation they'll give you one at the capped rate and say there's nothing available; and then when you go along with your money, you'll actually get some cement.

"The supply chain for imports of cement needs to change, and change quickly, because at the end of the day all imports are available. Pakistan has a load of excess cement and so does China. And if that situation changes quickly then the price will come down back to the cap, or close, but that supply chain will take a while to gear up.

"In the meantime, the only other thing that can be done is to remove the cap and make grinding feasible."

James added that removing the cement price cap would promote parity in the market.

"Then you'll have supply and demand on an even keel because people can afford to buy clinker and make grinding profitable. So supply will match demand, which will then find an equilibrium price-wise."

Thomas Barry, general manager, Arabtec Construction said that the capped price would inevitably have to be removed and a new price set.