Is it time for clients to ditch the ‘lump sum’ approach?

The rise in construction costs has got contractors and clients at each others’ throats across the region. But, as EC Harris regional managing director, Mark Prior, points out, there may be another way to avoid disputes.

  • E-Mail
By  Sean Cronin Published  June 17, 2006

|~|126int200.gif|~|Prior says that consultancies can do a lot to remove unnecessary risks for contractors as well as being more innovative when drawing up agreements.|~|Who would you see as your main competition in this market?

It is interesting when people ask who your competitors are, because it is very difficult to say who they are — it could be
KPMG on the consultancy side, or it could be Davis Langdon on the QS side.

Where do you get most of your business?

The revenue we get is directly linked to our mix of staff. We probably have 40 quantity surveyors, 25 or 30 project managers, three planners, five FM consultants and a further five disputes avoidance people — and that reflects the income.

We are not interested in getting bums on seats. It’s not about getting a guy on site, and off we go. We spend a lot of time looking after our staff here and trying to build a sustainable business. I think our attrition rate is less than 10%, which is very good for this part of the world.

What has driven you business here?

In Dubai, and also in Abu Dhabi, it has been the sustained growth in the residential sector. But the difference is that the Abu Dhabi residential boom is demand-driven, whereas in Dubai it is more about developing the product and the people will come —which has worked.

A lot of corporate clients that we have in the UK are now coming here either to the financial centres or just to set up business hubs here.

What is the biggest risk for a company like yours operating in
a market like this?

You are only as good as your last job, and I think the biggest business worry is not getting the work in the first place, or recruitment issues — it is about keeping the plates spinning. Bad news travels faster than good and I have seen the consequences of this affecting competitors of ours, which I take no joy in.

How important is the disputes avoidance side of your business?

There are obviously issues of conflict that you sometimes encounter. When the vast majority of our business is working for the major clients in the region, we do not want to be put in a situation where we have a conflict of interest. A lot of disputes are avoidable and often we find that projects aren’t necessarily set up properly.

If we go in and do a forensic audit at scheme design stage or when it goes out to tender, we can go through everything and highlight all the risks to a client.

A lot of projects are procured in a rush and so often, people are not necessarily aware of what they are signing up to — not just clients but contractors as well.

Do you also operate in the FM market?

On the FM side we are managing all of the HSBC portfolio in the Middle East. But we are not looking at the ‘soft’ end of FM; it’s more about setting up strategies and getting all of the service level agreements in place.

FM in this market is generally not measured, but the market is becoming aware that if you have a long-term asset,
the capital cost is probably only 40% of running the building. I think there is an increasing awareness of the importance
of FM in this region though.

Do you think the contractor-client relationship could work more efficiently here?

It seems to be about passing the risk rather than managing the risk. If you have a major development and you know you have 50,000m2 of curtain walling going up, and I was advising a client, I would say buy it now and take that risk on board and then hand it over as a package to the contractor.

It is interesting now that you must sell projects out to the market to attract interest. From a contractors’ point of view, if he has six project proposals landing on his desk, he is going to look for one that’s well considered and well put together, and is not going to give him a headache.

Is there a better way to procure projects than the typical lump sum approach?

Our view is that the lump sum is the wrong way to go at the moment. I would say ‘fine’, it’s still right to have a main contractor — but how you package up and procure that work can be different.

We need to look not just at first tier suppliers, but second and third tier suppliers, and buying key plant early on.
It is about being a bit more innovative and taking any
unnecessary risks out of the equation.

The key thing is the contractor’s margin. The costs of materials will be what they will be; the key thing is the margin that the contractors are allowing for risk. They are being signed up to lump sum contracts so they are asking themselves: ‘Is it 10% I need to factor into this contract or 20%?’||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code