By Ben Millington
How piling and foundations contractors have suffered a reversal of fortunes since the financial crisis struck.
Piling and foundations contractors have suffered a complete reversal of fortunes since the financial crisis struck the region late last year. CW talks to several industry insiders to see how they are weathering the storm, when things might pick up and how the industry might evolve.
A year ago you would have been lucky to get hold of a piling rig in the Gulf, with the giant machines in huge demand across the region amidst a bonanza of new construction projects.
It was a time that is now nostalgically referred to as "the golden years" by many in the piling and foundation industry, including Shad Asif Khan, the general manager of Keller's Gulf operation.
We now have to carefully study the financial capability of any client we’re contracting with.
"At that time in Dubai the prices of contracts were hardly negotiated; you got the job just because you were available and you could finish it in time," he says.
"But now it's totally the other way around."
Since the onset of the global financial crisis and the subsequent demise of the property market late last year, new projects have been few and far between.
Piling and foundation contractors, many of whom built up enormous human and equipment capital during the boom times, are now scratching around for contracts in an extremely competitive market.
"There are so many companies out there that grew so quickly and now all that equipment is standing idle," says Khan.
"I was speaking to some people recently who said they don't even discuss profit, they just want their rigs to move. They have reached that level of desperation."
Keller, a firm with a global presence and one of the big players in the Dubai market, is faring better than many of the smaller outfits, says Khan.
They made a small number of redundancies to streamline operations, have shifted some rigs from Dubai to work in Bahrain and India, and are surviving on the cash flow from several large projects last year.
Khan says the real test will come towards the end of the year when it's expected that a few big contracts, some in the hundreds of millions of dollars, will be awarded.
"There are inquires in the market, but nobody wants you to come next month, it's all at the end of the year," he says.
"Everybody [in the piling industry] is eyeing those projects and whoever loses the contracts is going to have it really tough in 2010."
As for the price of contracts, Khan says it's difficult to tell where prices have really settled because few contracts are being awarded. In addition, he says Keller has slashed its bids by 20% to 25%, based largely on falling material costs and reduced margins, and says it could get worse.
"When it comes close to the final negotiations I believe the client will be clever enough to make us fight and expose the competition and it will probably come down even further," he says.
"With those kinds of delays it also means that there probably won't be any substantial contracts awarded until next year."
Mark Newton, operations manager for Dubai's Dutch Foundations, says it too has cut prices by around 20%, although he believes that's pretty much rock bottom.
"Nobody in the market is talking about margins at the moment, they're just talking about securing a certain level of turnover in order to cover their overheads and pay their salaries," he says.
Dutch Foundations hasn't had a fantastic 2009 having cut its staff from a peak of 1300 to around 580 and reduced its operational piling rigs from 40 to 24.
The company has also initiated a voluntary resignation scheme and a rotating long leave system for key people that they don't want to lose permanently.
Now sufficiently streamlined, Newton says the firm is capable of being sustainable in a highly competitive market, but it is being hindered by late payment from previous clients.
"This is one of the most difficult aspects of being able to continue successfully, obviously you need that cash flow to keep the cogs turning," he says.
"Especially when you consider that on most standard piling contracts 50% to 60% of your direct cost are permanent materials.
"When you're financing this in advance to keep your projects going then it makes things very difficult. We're contractors and not banks at the end of the day."
Newton says that some outstanding payments have started to trickle in but there are at least two "rouge clients" where it's clear that litigation or arbitration are the only options left, both being expensive and time consuming exercises with no guarantees.
"It's something that we try to avoid but when you're talking about the tens-of-millions and in some cases hundreds-of-millions overall, you really don't have a choice," he says.
"We now have to carefully study the financial capability of any client that we're contracting with."
Looking forward Newton says Dutch Foundations is eyeing potential business in Saudi Arabia, Kuwait and India as well as bolstering support for its sister operations in Abu Dhabi and Bahrain.
In Dubai he says an emphasis will be placed on value engineering as both developer and contractor become more cost conscious and less time stressed. One of the biggest potential areas to save will come through optimising the foundation design.
"Things have tended to be overdesigned to allow for lapses in quality control, just in case something is not right," says Newton.
"But if you design more to the optimums and minimums, then it forces contractors to improve their quality control because there are no overestimated factors of safety.
"There's a lot of money to save here and it'll be good for the industry."
Newton adds that he expects the practice of preliminary test piling will become more commonplace in order to verify designs and potentially shorten the foundation lengths.
"That's pretty normal in the rest of the world, but in this region time has been prohibitive and overdesigns have gone ahead just to get the project moving," he says.
"Now the onus has changed from time to cost."
Similarly Keller is also looking to focus on value engineering as a means of undercutting its competition with a particular emphasis placed on using their stone columns machine, or Vibrocat, as an alternative to piles in some instances.
"Before it was very easy for a consultant to just go for piling and save a lot of headaches when it came to precise details about economising," he says.
"We are trying to say look, here you need piles, but here you don't, let's go with stone columns or other improvements. This is how we're trying to position ourselves in the market."
Khan says techniques such as vibro-replacement (stone columns), vibro-compaction, grouted columns or deep soil mixing can be more economical solutions and less labour intensive, although limited to structures under 10 storeys.
"The consultants have more time now to research these different options and are more willing to do trials," says Khan.
"It doesn't cost the client anything and it's a good opportunity for us to show off what we can do and how we could save them money."