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Sat 9 Feb 2008 04:00 AM

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Fixed-price contracts ‘should be scrapped’

An Abu Dhabi developer is calling for fixed-price contracts to be scrapped to protect construction firms from inflation.

An Abu Dhabi developer is calling for fixed-price contracts to be scrapped to protect construction firms from inflation.

Denis O'Connor, CEO of Abu Dhabi Commercial Properties, said that projects are at risk of losing contractors unless a more favourable system to mitigate price risk is agreed on before contracts are signed.

"Fixed-price contracts are a major issue," said O'Connor.

"With this type of contract the contractor takes on all the risk. We'd like to work with our contractors to manage inflation risk.

"We're not advocating that contractors be allowed to change what they like - we're just mindful of the fact that in the construction market fixed-price contracts don't work.

According to recent research by Rakaa Properties, 40% or US $160 billion (AED587 billion) of the current $400 billion worth of projects in Dubai have been ‘temporarily suspended' because of soaring construction costs.

O'Connor added that projects in the region are at risk of being totally abandoned unless price variation agreements are made between developers and contractors.

"A project fails because of costs. We'd like to create a contract that allows for an agreed ‘cost ceiling' - so that contractors are protected against price rises for buildings materials to an agreed base level.

Contractors have also been hit by a rise in the cost of recruiting and housing labourers.

The GCC common market is also expected to have an impact on labour costs.

"There'll be increased labour costs within the GCC market but we believe this will flatten out over time - like in the EU - where you have free-flowing, cheap labour," said Victor Orth, CEO & GM, Al Qudra Real Estate. "I don't think inflation will necessarily stop projects altogether, but it will hopefully bring an end to contracts that aren't well written.

"Better contracts need to be drawn up to take costs into account. The market value of a project also has to be examined very carefully indeed - if there's a fair enough margin, then you go ahead with it.

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