By Gerhard Hope
New risks have forced the global construction industry to adapt its business model.
The construction industry is a global economic driver. I was strongly reminded of this truism when the share price of Murray & Roberts (M&R), one of the largest construction groups in South Africa, plummeted by 12% recently. M&R said this was due to public-sector projects in its Middle East area of operations experiencing ‘substantial’ increases in the scope of works, over and above what had originally been designed and contracted for. M&R, of course, was involved in the iconic Burj Al Arab project in Dubai in partnership with Al Habtoor.
A lot of attention has focused on the impact of the global financial crisis on the construction industry in the Middle East, particularly with the slew of high-profile projects that have been put on hold or are being rethought. However, this trend is not unique to the Middle East.
In South Africa, M&R is now building the Medupi coal-fired power station near Lephalale in Limpopo Province. The contractor has stated that the scope of works has changed to the extent that contracts currently being delivered bore hardly any resemblance to the original tender. With only 53% of the Medupi civils completed to date, the original contract sum had already been exceeded, for example.
The very nature of the risk that the construction industry has become exposed to has changed, and contractors have had to adapt or die – a pertinent issue from South Africa to the Middle East. Contractors here have grappled with the dilemma of stopping work on the basis of non-payment. Not only does this mean a costly demobilisation, but the project itself could suffer significant deterioration if the delay is protracted enough, to the extent that restarting such a project may ultimately not even be viable.
In the past, contract variations were the exception. However, the ‘business as usual’ model has been impacted upon by everything from fluctuating raw material prices to political issues affecting investor confidence.
The recent KPMG 2010 Global Construction Survey found that engineering and construction companies are adapting to the new environment by creating more resilient business models averse to risk. Margins have not only been reduced due to the decline in the work available, but because many contractors have had to slash prices in order to remain competitive.
This has been balanced out to a certain extent by cost-cutting measures and efficiency targets, but it does mean that margins on new projects are significantly lower.
M&R may be taking knocks in both its South African and Middle East operations due to the downturn, but it is in a very strong position to capitalise on any upturn, and is uniquely placed to diversify further, as it is doing by entering the power and water infrastructure market.
“The future is far from certain, but continuing to invest in risk management, expanding into new areas and building skilled staff are critical steps that can help weather any change,” said KPMG.
Gerhard Hope, is the editor of Construction Week.