Contractors want cost-plus contracts

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In the face of rising costs, contractors no longer want to sign fixed-price contracts.

Contractors in the UAE have said that they're ‘fed up' of being forced into signing fixed-price contracts as the construction cost crisis worsens.

Rising materials costs have crippled the industry since the turn of the year, leading to several projects either grinding to a halt or being totally abandoned.

"We're quite fed up with the situation as our hands are tied," said Philippe Dessoy, general manager, Besix.

"We sign fixed-price contracts with developers yet suppliers keep raising their prices and eating into our budgets. Suppliers can't be blamed as the price of cement and aggregates are going up.

But to correct the situation, cost-plus contracts need to be implemented now as contractors have already begun turning down jobs.

Developers and civil authorities have also struggled to attract bidders for their projects because of the cost situation. The RTA's initial tender for the challenging ‘6th crossing' project met with no response.

"Contractors definitely want cost-plus contracts, especially given the current circumstances," said Thomas Barry, general manager, Arabtec Construction.

"More and more attempts are being made by contractors to include the price escalation clause in contracts with developers. Fixed-price contracts are no longer safe and the risk factor is too high to make business sense any more," he added.

But developers still prefer to execute projects through fixed-price contracts.

Imran Shaikh, CEO of Shaikh Holdings, whose development arm Shaikh Development recently signed a lump-sum contract with Arabtec said: "We prefer to sign a fixed-price contract so that we know what the end price is.

We give the contractor the leeway to include the risk costs into their quoted price. It just makes everything much simpler in the long run.

Last week, a further increase in cement prices hit the market and OPC is going for around US $94 (AED345) per m³. Chris Lobel, general manger, Conmix, said cement is currently selling at $109 per tonne, while a bag could be procured for about $9.25.

Contractors are definitely having a tough time with material costs going up and cost-plus contracts would certainly help," he said.

"As suppliers, there is nothing we can do. If the price of cement is constantly going up, we have to put our prices up as well or we'll begin to run into losses."

Julian James, regional aggregates and concrete manager, Tarmac Middle East agreed with Lobel. "With the price of cement and aggregates going up, it's only obvious that suppliers are going to raise their prices as well," he said.

"In order to change the situation, the price [cap] on cement needs to be lifted. There won't be an immediate correction and it could take a while before any results are seen so the cap needs to be lifted as soon as possible."

RELATED LINKS: Finding ways of beating the rising cost crisis

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