PART 2 – MEP contractors speak up
With a view to providing a powerful context to socio-economic development and sustainable development efforts, the leadership in the GCC region began introducing a cascade of vision statements and programmes over a nearly 10-year period, with the most recent being the Saudi Vision 2030 and the Kingdom’s National Transformation Programme, in the first half of the year. The documents established the framework for the exertions needed to achieve better health, well-being, productivity, economic growth and a green way of life. They implied a powerful and substantial role for the HVACR industry, be it in ensuring better building performance, food safety and security, energy security or efficient and reliable process cooling systems.
This report specifically looks at building performance, especially the role of the MEP contracting sector in the GCC region in delivering structures that embody reliability, energy efficiency and good indoor environmental quality (IEQ).
For a large part, MEP contractors in the GCC region seem to have a sanguine attitude towards the relevance of the vision statements. They apparently regard them as much-needed boosters to ongoing efforts. For instance, V. Chandrasekhar Reddy, CEO of UAE-based Elemec Electromechanical Contracting, supports the introduction of the vision statements. He feels the region definitely requires them, in order to position itself among the leading parts of the world. “When we are claiming to be one of the leading nations, irrespective of size, we have to keep pace,” Reddy says. “I believe all the GCC countries are better placed, or ahead, in terms of vision, thought process and development. We have seen how in Dubai the technologies and futuristic ideas have benefitted the UAE as a nation and given a thought to other nations. A good example is the Metro. We see good competition between all GCC units to be in the front and do their best.”
Speaking from a Qatari perspective, M. Vasanth Kumar, CEO of Qatar-headquartered Arabian MEP, is pleased the government in 2008 introduced the Qatar National Vision 2030. “QNV is a vision of the country’s leadership to move on from an oil-based economy to a knowledge-based economy, which is an excellent initiative,” he says. “It means more educational institutions, industries and technology-related businesses have to be built.”
The Saudi Vision 2030, says Khalil Issa, Project Development Director at UAE-headquartered ADC Energy Systems, is a welcome development and something he says he is able to appreciate, especially considering the size of the country and its potential to be a dominant force in creating business opportunities for MEP contracting firms in the region.
While they speak of the vision statements and the various government-led programmes, the three contractors feel obliged to take note of the impact of the drop in oil prices on the regional economy and how it perhaps has temporarily caused a realignment of goals. As Vasanth Kumar puts it, in Qatar, the global weakening of the economy and low oil prices are having an impact on the implementation of some of the projects. “It appears that the 2022 FIFA World Cup-related infrastructure requirements are taking precedence over 2030,” he says. The country, he adds, has chosen to align with the World Cup-related projects, such as the stadia and the metro rail.
Issa points out to how in Saudi Arabia, the focus is on addressing financial challenges, as a result of which he does not foresee any Vision-driven major changes in the short term. “We as contractors have already identified that there is shortage of cash in the market and many contractors are already hurrying to fix that,” he says. “To overhaul the economy, you need to inject liquidity. I don’t see the Vision 2030 will have an immediate positive impact in the market unless supported by real economic initiatives.”
Water balancing and air balancing are done properly, but when it comes to ELV, you are stuck
From a broader picture point of view, the general belief among the contractors is that once the dust settles, the vision statements and government programmes will become the more dominant talking points, for in them is the framework for indispensable aspirations like sustainable development, good health, growth and progress. Enumerating the various programmes is easy – they have received plenty of press. Case-in point renewable energy. Another case-in point is smart cities.
A need for specialist contractors
The goals of the programmes can be achieved with the technologies at our disposal. However, though it might sound trite, technology alone is insufficient, as has been discussed ad nauseam by proponents of Green Buildings, say. They speak of an approach where multiple stakeholders ought to work in unison to raise a building. MEP contractors add a layer to this when they say that optimum building performance needs not only an integrated project delivery mechanism but also specialists to take care of numerous imponderables that a smart city programme, a retrofitting initiative or a nearly zero-energy building requires. Reddy, pointing out to the ambitions of the UAE, speaks of how the leaders are trying to bring in the best of thoughts and to convert them into implementable processes in this country. There is a gap, however, between planning and implementation, owing to inherent challenges, he adds. “One is the understanding of the requirement and the will to implement it (the vision of the leaders),” he says. “When new systems are coming to the place, you definitely need expertise and back-up to ensure they are done in the right perspective. When we talk of construction, this is where a major part has to be played by the MEP industry, because that is where you can see major development in terms of systems and technologies and futuristic ideas that are being adopted around the world.”
MEP contracting, Reddy says, is a specialised and relevant function. And in the context of the vision statements and futuristic city programmes, it is indispensable, as much as it is in the context of raising such specialised projects as data centres, malls, nearly zero-energy buildings and airports. “Plus, we have the industrial sector, so there are about 10-12 segments, and each of them needs a specialist,” he says. “And within that, you need a specialist.”
Tawfiq Abu Soud, CEO of ADC Energy Systems, adds District Cooling schemes to the list of specialised projects. He points out to how in some countries general contractors are bidding for District Cooling projects, a trend he finds alarming. “I think that developers – be they utility providers or government entries – by virtue of being the paymasters of any project, need to pre-qualify to ensure they find the right specialist contractor for the job,” he says. “A District Cooling project needs expertise; not everybody can buy a chiller.”
Abu Soud’s words are pivotal in the current sentiment among specialised MEP contractors in the GCC region. They feel that their expertise is not only going unrecognised but also being marginalised, with general contractors ruling the roost. Some of them go to the extent of saying that if the trend continues, it could signal the demise of specialised MEP contracting as a discipline in the GCC region.
Reddy finds the situation disconcerting, especially considering the crucial role MEP plays in any project. MEP, he says by way of going into specific details, is 30-35% of a project’s value and so a major part; the builder’s (general contractor’s) role is 30-40%. In that, fit-outs, cladding and lifts are sub-contracted, he says, so MEP has a bigger role than a builder.
Builders, Reddy says, are trying to have their own MEP units. They are creating havoc by dropping the number and trying to live on the sub-contractor. The ramifications, he says, can be severe. “Though the builder may have the intention to deliver a good project, his constraints in the form of his understanding of the MEP services and his dependency on a sub-unit within his system, and the limitation of properly evaluating the project’s requirement could have a negative impact,” Reddy says. “If a typical multi-storeyed job, it is feasible, but when you go to a specialised job, builders are no closer to MEP requirements. And within specialised systems, when it comes to the electromechanical side, their limitations are exposed. And the client is getting a sub-standard building.”
Even though the value of the MEP subcontract is only 20-25% of the total contract value, the main contractors hold MEP subcontractors 100% responsible for everything
Reddy points out to a typical hotel project, which he says has a multi-specialty requirement and which, he adds, varies from the conceptual stage to the implementation stage. A specialist can better understand the varying requirements during the course of the project than a civil contractor, he says.
Opting for a general contractor to fulfill MEP requirements, he says, is counterproductive. “It’s like going to a multi-cuisine restaurant and trying Chinese,” he says. “I would rather go to a Chinese restaurant to try Chinese.” Taking the analogy further, he says, “You can have the best of ingredients, but you need a good cook. And why do we have so many specialties in the medical world? If you take cardio, in that you have so many subunits. They are given respect.”
Elaborating on the specialness of the tasks at hand, Reddy points out to ELV, which he says has become a major aspect in MEP, owing to the advantages it gives in a project. “An ELV fellow can see it with a certain depth that I cannot,” he says. “Water balancing and air balancing are done properly, but when it comes to ELV, you are stuck. In recent months, we handed 3-4 projects, because we had a specialist ELV person. So we have to respect a specialist.”
Sahul Hameed, Technical Director at Thermo, concurs with Reddy and speaks readily on ELV systems and also on the specialised nature of handling BMS and fire safety equipment. General contractors, he says, can’t go with their own team, because they need ELV and BMS engineers. They may have an MEP coordinator in their ranks, but they need the specialised engineers, he adds. While Hameed is willing to concede that in common residential buildings, the ELV portion is minimised, when it comes to data centres, ELV and SCADA control become crucial factors, which in most cases the main contractors are unable to handle on their own, which is why they approach specialists. “I would say that they have to depend on MEP contracting even in some design-and-build projects,” Hameed says. “They can go ahead with the initial work and the procurement of materials, but for other things they need us.”
Specialised MEP contracting services are essential not only for properly installing ELV systems and BMS, say the players, but also for the overall performance of the building across its lifecycle. As Reddy puts it, working on a building is not only about how well you install your system but also the running costs, which he adds, can kill the client. “The concept design could be from Europe, and the drawing from India or the Philippines,” he says. “And then, it is assembled here. Just imagine the complexity of it all. If the building takes 1.5KW instead of 1KW, the running cost will go up. A builder can copy and paste, but when it comes to real engineering, they are very far away, so they can never fill up MEP expertise.”
Against such a background, Reddy and the others say that every avenue ought to be explored to preserve the specialised discipline of MEP contracting services. Its looming demise that some are foretelling ought to be forestalled.
The double squeeze
Listening to them talk gives a sense that the current situation is crippling. They speak of a lack of transparency among the general contractors, which is severely affecting cash flow and morale. “Cash flow is paramount,” Reddy says. “As an MEP unit, our commitment to projects is consistent more or less, and we have to ensure that the inflow takes care of the outflow. So even a short period of break has a huge impact on the project’s progress and the company’s functionality. And being so-called domestic contractors, they are playing havoc with specialist sub-contractors, not just MEP contractors. If you look into any project, the builder will put a fort. And the biggest guy exposed to extra-precautionary measures is the MEP guy.” The inflow for contractors like Reddy, Abu Soud, Hameed and the others is in the forms of salaries to their labour force and also payments to the vendors, who Reddy says, are no longer accepting LPOs. “So there is no way we can survive if there is a dent to the cash flow, and that has been the most serious problem in the last six months to a year,” he says.
In Qatar, Vasanth Kumar gives a similar narrative. He says the peninsula has been witness to a large number of cases, where companies have been unable to pay suppliers and even their own staff and workers. This, he adds, has become even more worrisome after the implementation of the Wage Protection System, where workers’ monthly salary has to be transferred directly to their bank account within a week. Under the system, failure to comply would see the company being blacklisted by the authorities. “Yes, such labour welfare measures are welcome, as they bring much wanted discipline, but the other area – payment to subcontractors and vendors – has been left untouched,” Vasanth Kumar says. “Already we have seen many small trading and subcontracting companies going bust, and bigger companies coming under immense pressure.”
The current state of affairs, the MEP contractors say, has its roots in the unchallenged power that general contractors wield, aided by market conditions that work to their advantage. Another reason is that developers are awarding turnkey projects to general contractors without giving sufficient thought to the benefits that a structure of directly dealing with MEP contractors can yield. They are opting to go with a general contractor, because they see it as dealing with a single point of contact.
A case of lopsided contracts
Specialised MEP contractors are being sidelined, because several smaller MEP contractors with little or no experience have recently entered the marketplace, and they are willing to work for the general contractors, no matter the one-sided nature of the contracts. Also, several general contractors are incorporating MEP functions within their own organisations. “They have legal teams, so we don’t stand much of a chance,” Reddy says ruefully. “As specialist companies, we are not equipped with contractual and commercial teams, which they have, so they beat us hollow and we are badly bruised.
Those days are gone when people say, ‘AED 300 million job… wow!’ I won’t go with it; I would rather go with an AED 50 million job. The risks are high, and we would only be doing charity
An equally disturbing trend, Reddy says, is the non-availability of labourers at competitive rates, and the manipulation that takes place. “Of late, builders are highjacking good MEP labour sub-contractors,” he says. “As an MEP contractor, I cannot afford 100% all my team. I cannot do it on my own. What the builder does is to hire all these people and pay them AED 18 an hour, as opposed to AED 14. That way, he takes all the labour and, then, creates a situation where the MEP contractor is struggling for time (owing to lack of adequate labourers). He then offers to supply labourers to me and debit my account.”
Reddy says that while the manipulation is disconcerting, equally disturbing is the precedent this practice is setting among MEP labour subcontractors. They now know that the builder will pay them better wages per labourer, which means MEP contractors like Reddy have to match the premium.
Sunil Khadaye, an industry veteran, concurs with Reddy that general contractors have the financial and legal strength, which they unfairly use to their advantage against specialist MEP contractors. “In the entire situation, the MEP contractor doesn’t have the legal background or commercial management,” he says. “The main general contractor has the legal muscle and keeps all the rights with himself. He gives very difficult terms and conditions and thin margins to MEP.” The overwhelming strength, Khadaye says, allows the general contractor to control the strategy of the project and, thus, the payment schedules, and gives no scope for the MEP contractor to reflect or to react to the situation in an aggressive manner. “MEP is always controlled and has never been able to get into the positive side of a deal when it comes to expenses and income,” he says. I have been in the industry for 35-plus years but have never achieved it. Recently, at the age of 63, I withdrew from contracting, owing to the pressure coming from the top management, and am an advisor.”
Giving a Qatar perspective, Vasanth Kumar says the lopsided nature of contracts and the lack of legal backing affect MEP contractors severely. He says that when it comes to mega projects, say, there is a common fear in the minds of contractors that the larger the project, the higher is the risk exposure in terms of contractual obligations and payments. The challenge, Vasanth Kumar says, is in how the winning contractor is going to manage the contract, as contracts are generally lopsided and do not offer the desired protection for a contractor. MEP subcontractors, he says, are in the penultimate end of the contracting chain and subjected to back-to-back contractual risks, meaning the risks of the main contractor are directly passed on to the subcontractors. “Even though the value of the MEP subcontract is only 20-25% of the total contract value, the main contractors hold MEP subcontractors 100% responsible for everything,” Vasanth Kumar says. “Due to the large number of stakeholders involved in a project, and considering everyone will have their own agenda, it is a well-known fact that hardly any project is completed on time and cost. They are several examples of projects finishing two to three years late for several reasons. This leads to contractual disputes, as clients generally impose the penalty clause to offset the extension of time compensation claim by the contractor. It is guaranteed that if the project is delayed, contractors will make loss.”
Reddy expresses the mood succinctly when he says: “We are at the mercy of the main contractor. They are making their in-house firms price for the project in competition with specialised MEP contractors. They are trying to be smart and are trying to beat the price of the specialist. They are using unethical processes in making the specialists submit to their requirements. They are pushing us out. That’s why we see an imminent demise.”
Reddy says that even large MEP contracting firms are no longer being competitive. The upfront investment, in terms of staffing and purchase of equipment, is high, he says. The builder gets 10% advance on the project, Reddy adds, and he does not necessarily share that with sub-contractors, so the total contract is rewritten. “The contract has to be back to back, but it is not,” he says. “It totally changes. I don’t touch with a bargepole if a particular contractor comes with his own contract, even if the project is attractive and the client is good. Those days are gone when people say, ‘AED 300 million job… wow!’ I won’t go with it; I would rather go with an AED 50 million job. The risks are high, and we would only be doing charity.”
Vasanth Kumar says he is facing the same dilemma when it comes to accepting projects, in terms of securing payments – on time. “For us, fancy and trophy projects do not excite us, as we pretty well know what the outcome would be,” he says. “We have already spent almost two decades here and seen the best and worst of times. All we need right now is to earn some decent profits and preserve our hard-earned reputation.”
Vasanth Kumar says that patience is the key to success. He adds that he prefers the route of due diligence and, thereby, come to a realistic conclusion if a particular project is worth taking from a business point of view.
The light at the end of the tunnel
At the same time, contractors like Reddy and Vasanth Kumar say that they cannot keep rejecting proposals, because doing so would limit their business. And it is here they would like to see the government step in with regulation.
While the contractors would benefit from regulation, so, too, would the regional governments, especially considering the sustainable development goals, enshrined in their vision statements. Says Abu Soud: “Sustainability and related issues will cost additional money and additional capex, and developers and contractors cannot do that without compensation, so there has to be a mechanism to enforce this by regulation and enforcement. Dubai made thermal energy storage and the use of treated sewage effluent mandatory for District Cooling plants. The only way profit-making organisations will comply is through regulation.”
As for the nature of the regulations, Reddy points out to the Dubai Electricity and Water Authority (DEWA) and Dubai Civil Defence documents and calls for a similar set up for contracts and commercial purposes. Hand in hand with that, he adds, the government could establish a common tribunal, so the regulation is not misused.
Reddy feels that it is in the interests of the UAE to evolve a regulatory framework, considering that the World Expo 2020 is not too far away. “My gut feeling is that by Q4 2016 or Q1 2017, it is going to be the same situation as 2006, because you will have only 36 months before 2020, and you will have a high shortfall of specialists,” he says, “And if builders do it on their own, they will do half-cooked projects, and at the end of the day, while the buildings will look beautiful, the project, in terms of functionality, is likely to be compromised. So something must be done urgently – because they are trying to construct a city there for the Expo, and there is a huge shortage of expertise.”
We have for workers a system where they get paid a salary every month. It should be the same for us. If a project has progressed 30%, pay us 25%, not 10%
Reddy feels that given the futuristic approach of the leadership and the current state of the industry, the time is ripe to take a hard look to see what can be done to protect the rights of the sub-contractor through the proposed regulation. “One of the requirements of the local market is to classify the contractors as A, A+, etc.,” he says. “It is equally important to classify the specialists, so that they get their due, in the form of a premium, which would help them survive.”
Reddy also advocates a specific system where contractors get paid as per the completion of different phases of the project. As an MEP company, he says he has about 2,000 people to feed, which he adds, places a high commitment on a monthly basis. “We have for workers a system where they get paid a salary every month,” he says. “It should be the same for us. If a project has progressed 30%, pay us 25%, not 10%.”
The other bone of contention has to do with materials on site, which Reddy says is one of the most important payment cycles for him as an MEP contractor. “These days, the general contractors are rejecting that condition,” he says. “And I walked out of a project, because I said I can’t fund the project.”
Another issue with payment, Reddy says, is that cash-flow is projected based on the project programme. It is not necessary that the project will progress as planned. He, thus, advocates a monthly assessment to see if everyone is being paid on time. “And somebody must be there to listen, or we are like a bunch of orphans left to ourselves,” he says. “The client says, ‘Sorry, I can’t talk to you, you go and talk to the main contractor, with whom you have the agreement’.”
The monthly assessment can be part of the regulatory framework. Or, as Reddy has done, it can be an initiative that an MEP contractor undertakes. “We have outsourced some areas, and so from the start of the project, I have someone sending me alerts and keeping me on track,” he says. “It is an additional cost, but it is worth it for me.”
Much like Reddy’s, other initiatives are forthcoming from MEP contractors. Khadaye points out to how after posting huge losses, some of the MEP “big fish” have taken to restructuring their businesses from commercial and legal perspectives, which would give them the freedom to take projects of a large size while functioning as pure MEP contracting companies.
In terms of a broad solution, Vasanth Kumar says an ideal situation would be one in which the client, consultant and the contractor equally share all the project risks. Reddy adds to this by calling for a project partnership approach involving all the stakeholders. In his view, while the builder is the captain of the team, the engineer is the manager. In the current hierarchical approach, the MEP contractor is left out, which makes the team miss out on many things that would safeguard them. “So it is important that everyone is on the same platform,” he says. “Through this approach, even the clients can take the benefit by taking some key items with themselves and negotiating.”
Vasanth Kumar proposes an approach where the client and the project management firm he has appointed, embrace a partnership model with the contractor that they appoint. Through this, they could ensure that all contractual payment terms are honoured and that there is fairness in dealing with additional works, variations and other such aspects. “Changes during project execution bring disruption,” Vasanth Kumar says. “So the project team leader has to be there all the way through until completion and handing over of the project.”
Extending the idea of partnership further, Reddy feels that a strong case can be made to form an association, under which stakeholders, like project managers and consultants, come together to prepare a common document similar to FIDIC. The document, he adds, would lay out guidelines that everyone understands and follows.
Vasanth Kumar seconds the call for a participative approach and for adopting existing global best practices. “It will be good for everyone if project stakeholders emulate and adopt successful models as used in various mature and developed construction markets,” he says.
He would like to see such models being applied in Qatar and is optimistic of the outcome. “The vision of the Qatari leadership is highly ambitious and extremely good, and we have to salute the leaders for taking things forward,” he says. “The real challenge is implementing those visions into reality as quickly as possible.” He points out that developed countries have taken over a century to grow, but Qatar would like to achieve growth in a shorter span of time. “I believe that is the underlying reason for Qatar National Vision, which has set an early target of 2030,” he says. There is a palpable sense of urgency. In that context, the key to achieving the ambitious targets, Vasanth Kumar says, is to have professionally qualified and experienced high-performance project delivery teams with a contractor-friendly approach to deliver the projects in time and within the budgeted cost.