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Developers hit by cost overruns - Dubai

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  • Developers hit by cost overruns - Dubai

    Developers hit by cost overruns

    By Suzanne Fenton and Nadia Saleem, Staff Reporters
    Published: October 03, 2008, 00:13

    Dubai: Volatile prices of building materials are causing strained relationships between contractors and developers, industry experts say.

    The construction boom has created a huge amount of work in Dubai and while developers struggle with increasing prices, contractors have been the ones calling the shots.

    "The last six months has seen a lot of volatility in the local market, especially with steel and cement. Contractors have been able to negotiate," said Riad Bsaibes, chief operating officer of Amana Contracting.


    The flipside of negotiating is that nerves have become increasingly frayed. Take the example of Schon Properties and their contractor for Dubai Lagoons, Powerline Gulf.

    Schon Properties had originally paid over Dh107 million to Powerline Gulf, but due to the rising construction costs that sprang up over the slow progress of development, they were forced to pay more.

    Nasir Husain, co-chairman of Schon Properties, told Gulf News earlier they are now having to pay a total of just over Dh613 million for phases one and two.

    Bsaibes said it all depends on the type of contract. The most common type of contract here in Dubai is Guaranteed Maximum Price (GMP), where the contractor is given a lump sum price, regardless of potential fluctuations in the pricing of materials.

    Such contracts are built on strong relationships between the contractor and developer.

    "Union Properties' contracts are mostly GMP contracts where the contract price has a maximum cap and the contractor assumes all the price change risk beyond that cap in return of sharing some of the profit if the project is completed at a cost below the agreed contract price. Such an arrangement results from the long term relationship with the contractors," said Zaid Ghoul, chief financial officer of Union Properties PJSC.

    "In a supply and demand market, where demand exceeds supply, contractors are given the upper hand," said said Bsaibes.

    Back in 2000 and 2001, where supply was outpacing demand, the situation was the opposite.

    "Now, contractors can afford to add uncertainty in their price on projects," Bsaibes said.

    Mohammad Nimer, chief executive officer of MAG Property Development Group, agreed.

    "Contractors are becoming more careful as well. They commit but don't take the responsibility of fluctuating prices of materials. They don't take the risk. For us, as developers, we have no choice sometimes. We have to listen to contractors," Nimer said.

    Many contractors have a huge list of projects to see them through the next few years. For example, Arabtec currently has a backlog of projects worth around $10 billion.

    "Finding a contractor to work is not as easy as before. Earlier, there would be about ten contractors to choose from. Now there are one or two. Construction is more costly now, because contractors are taking advantage of the high demand," Nimer said.

    Globally, commodities are due to soften over the next year but whether this will affect the escalating costs of the $160 billion construction boom here in Dubai, remains to be seen.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Is Dubai open to the same sort of crash we have had here, or is there plenty of investment money still sloshing around there ?


    • #3
      Originally posted by Keithw View Post
      Is Dubai open to the same sort of crash we have had here, or is there plenty of investment money still sloshing around there ?
      if there is plenty of cash sloshing round and there is construction going on all around then people will tend to over build until such time as a huge bubble forms and pops

      standard human ratchet progress, 2 steps forward and 1 step back
      have you defeated them?
      your demons