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Analysis

Consolidating the consultancies

Market changes since the global financial crash have led to the consolidation of a number of large consultancies. How has this development affected contractors and the region’s construction industry in general? Alison Luke investigates

The financial crash in late 2008 instigated many significant changes within the construction industry, with differing results. The sudden drop in available work propelled firms operating in the sector to re-evaluate in order to survive and thrive. For some large consultancy firms this meant consolidations and acquisitions, with some firms merging under a single brand, while other names have been retained as sub-brands of larger organisations.

One of the most high-profile examples is that of engineering design firm Aecom, which acquired both URS Corporation and Hunt Construction Group within a matter of weeks in late 2014. But this was only one of many, as the larger firms have sought to broaden their skill-base and expertise quickly in order to win contracts in a reduced market. For some other firms, a reduction in operations was imposed as a solution.

“There have been some consolidations and some consultants that went out of business,” reports Jeff Willis, Associate Director at Arup.

“Due to the cancellation of many projects in design [stage], consultants trimmed their operation and retained only skeleton staff to support their ongoing projects,” adds Fazlur Rahman, Deputy General Manager of MEP contractor ETA M&E.

The aftermath of these changes in the consultancy sector has brought both positive and negative effects to the construction industry.

“On the positive side, consultants are now working more cost-effectively and efficiently towards the clients interests,” reports Khalil Atieh, Vice President of international consultant Jain & Partners. “They are being creative and giving more cost-effective solutions, so clients are getting a better deal from consultants.”

The creation of larger companies by merging those with differing skill-sets has also made it simpler for contractors and clients to reduce the number of firms that they need to deal with on large, complex projects. “[Market changes have] created more opportunities for specialised consultants as present projects are technically demanding,” states Rahman. Employing a large, international firm that includes several specialist in-house departments can mean a one-stop solution for most projects. This can reduce both time and costs on a larger project, as well as ease any integration of design and services.

“Consolidation] can be beneficial for the market because the resources are more available within a large company,” explains Rachid Ghamraoui of Besix. “If the consultant is good and has the right people, then a project can progress properly,” he adds.

Not all consultants’ clients are benefiting from such changes however. Atieh explains: “The main contractors are doing well; the MEP and other sub-contractors are not doing so well. This is because the main contractor is shifting all of the risk onto the subcontractors.”

The overall negative impacts vary for consultants and contractors. Contractors cite a lack of choice between consultants as an issue. Consultants, however, are voicing concern over the competition for projects.

“It is harder to find suitable consultants [that are] experienced in similar projects,” states Rahman. “This affects the contractors from the time of bidding to execution, resulting in delays and/or disputes due to repetitive revision of drawings and design. At times clients have to issue the tender with an incomplete design to avoid further delays in the implementation of a project.”

Such design issues have led to higher project costs as bidders opt to inflate their prices to factor in any unforeseen risks due to less clarity of scope or design.

For some contractors, such issues have led them to reassess and improve their own abilities, with some developing their own design capabilities. As well as ensuring improved design on individual projects, this move is sure to have a positive effect on the entire sector and the region’s future built environment.

With consultants, in addition to expanding their skill-base through consolidations in an effort to gain the competitive advantage for projects, they are seeking other employment options. In some cases, this means entering other markets for work.

“There is big competition in the UAE market; the market is picking up but there are not enough jobs for all consultants,” states Atieh. “UAE-based international consultants are now looking outside of the UAE and taking work in Saudi Arabia, Qatar and Kuwait. These firms are based in Dubai, but are now not 100% dependant on the workload of Dubai,” Atieh explains.

This increased competition is being ceased upon by clients seeking cost-effective solutions for their projects. As well as negotiating on price with their chosen consultant, the type of consultancy firm being used is differing according to project needs.

“Clients and major developers are launching projects, but they are depending on local consultants [for the majority of the workload], not major, international ones,” reports Atieh. “At concept creation clients will go to the international firms, but when it comes to the detailed engineering design and the major amount of work for a project, if no specialist design work is needed they are using local consultants.”

As the market has recovered, the reduced number of consultants available has resulted in changes to both prices and contract terms.

“Due to a sudden increase in the number of projects, most of the consultants have become busy and in effect their prices have increased,” states Rahman.

“Compared to 2008 [after the global crash], prices are higher by 20%; but in 2012-13 the prices picked up and since [this peak] consultants prices have gone down by 30%,” reports Atieh. This change is attributed to the increased competition for contracts throughout the entire supply chain. “Contractors are taking jobs at low cost just to keep running and all the big players are running at cost [price],” Atieh states.

But just as significant as the pricing changes are the contractual changes that past experience and the increased market competition have led to.

“What has changed is what people will sign [in terms of contracts] and how long they will continue without payment. This affects costs indirectly,” stresses Willis. “Many consultants had to weather some pretty bad storms because of non-payment of fees for work already done.”

As the market grows and more work becomes available, consultants are finding themselves in a strong negotiating position. They are thus becoming more selective about the projects that they take on; the clients with whom they will work; and the employment terms to which they will agree.

“Contracts are now [primarily] employer-based, with imposed terms and conditions that consultants and contractors have to follow,” reports Atieh. “These are mainly payment, insurance, liability and performance-based terms.”

Such contractual changes, may affect the operating market for both consultant and contractors in the long-term. And with the construction sector market now seeing an upturn, any positive benefits to be gained by firms operating in the sector should surely be exploited.

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