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Sat 17 Mar 2007 12:00 AM

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Procurement should evolve to spread risk

Contractor makes calls for cost-plus approach, saying it would benefit all stakeholders.

Contractors are calling for changes to be made to procurement methods used in the UAE in order to spread risk more evenly between themselves and developers as well as allow for greater transparency.

According to Melvyn Ford, general manager, CSHK Dubai Contracting, the industry should move away from fixed-price contracts and towards a ‘cost-plus' system, which takes into account price fluctuations and other added project costs.

He said that the current system, whereby contractors receive a pre-arranged compensation upon completion of work, puts them under greater pressure to cut costs and has led to an adversarial and untrusting atmosphere in the industry.

"There is a need for a change of attitude in the construction industry. It has taken a long time for Dubai to recognise that there is a better way to build things than through the ‘them and us' contract, involving two parties opposing each other. Procurement processes done on a cost-plus basis would be far more transparent."

Flawed contracts also prompt project delays, added Ford.

"Since the 1980s there has been a belief here that everything must be built by tomorrow. If construction schedules were more realistic there wouldn't be so many problems and projects would be delivered on time. Fast-track construction is often totally unachievable. Things must be more balanced. Contractors must be given sufficient time to deliver. The industry has got to take a good look at its terms and conditions."

Ford said that the abundance of projects has put contractors in a better position to be more selective.

"Previously, all the risk used to be on the contractor, but now contractors can afford to be more selective and different procurement systems are coming into play. There could be an opportunity to share risk at the beginning of the project between contractors, clients and developers."

Ford added that payment schedules for contractors are also gradually improving.

"Traditionally, clients never gave contractors advanced payments. Contractors were commonly paid four to five months behind what was built. Clients are making inordinate amounts of money but are very late in paying contractors and suppliers. Things have now started to change."

According to Mark Prior, managing director, EC Harris International, the issue of payment has improved with the number of quasi-government bodies being set up.

"However, until clients, contractors and consultants sit down and debate about how to build a project, the construction industry will always lag behind."

Prior added that flawed contracts have led to a lack of trust in the industry.

"When contracts effectively disadvantage one party more than the other there will always be trust issues. Until you can break this down the market will struggle. We need to create an environment where people are open with what has gone wrong."

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Mounir Ajam, MS, PMP 13 years ago

I strongly believe that from a client perspective, in the dynamic market in the GCC at this time, it would be a better approach to used cost plus rather than fixed price. However, we must warn, although I am a fan of cost plus contracting clients organizations must be very careful before they go into this route since Cost Plus shifts significant responsibilities to the client organization ... where the clients "owners" do not enough team members to handle the load - nor their people are trained to handle this type of work.

John 13 years ago

I agree with Mr. Ford's comments that cost plus divides risk between the client and the contractor. This, of course, assumes that you are dealing with reputable entities on both sides of the table.