Small firms need escalation clause

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Construction sites in the region could lay idle if contractors are unable to afford climbing material prices without going bankrupt.

Construction contracts that lack escalation clauses are forcing smaller firms out of business, a Dubai contractor said.

Even though steel prices have fallen over the past month, steel and concrete prices almost doubled overall this year.

Speaking to Construction Week, Simplex Infrastructure country manager Ani Ray said: "The situation has become terrible over the past four or five months."

"I am sure that smaller contractors will go bankrupt without escalation clauses. The only option left for them will be to seek business elsewhere."

Escalation clauses allow contractors to pass on unforeseeable price hikes to developers.

Ray said a fixed-price contract signed a year ago could rise in price by as much as 30% before construction has even begun, threatening smaller firms.

"The bigger companies are in the upper bracket so it's easier for them. But the problem comes at the lower end," said Ray.

The Contractors Association vice chairman Imad Al Jamal agreed.

"The small and medium size contractor will face bankruptcy definitely," he said.

"Developers have no choice but to accept the clauses unless they want to stop development. If the contractor goes bust then the bank will go bust and the entire system will go bust. It's as simple as that."

But the inclusion of an escalation clause can also affect the smaller developer.

"Most of the local developers are paying but some of them are not interested, said Ray. "The smaller developers are struggling to afford the increases, so they will not be willing to pay either."

Developer ACW Holdings general manager Ian Pask said firms should reach a compromise.

"If we negotiate a contract today, and the price increases by 15% or more, we split that cost between us and the contractor. I think we should both take a hit."

"We have worked this into our projects because we saw this coming. Both parties want the job to get done."

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