Builders to demand shares in projects

Building firms may soon demand a share in projects on which they are contractors, to give them leverage with developers.

Building firms are demanding a share in projects on which they are contracted to give them leverage with developers at a time when disputes over payments are becoming increasingly common. Some are also beginning to insist on developers setting up a bank account - which would operate in the same way as an escrow account - to ensure the builder gets paid at various stages of work throughout the duration of a project. Financing for property developments is getting harder to attain due to a global shortfall of credit. As a result, projects are being cancelled, slowed down or scaled back, and this has led to delays in payment for ongoing construction work. While payment setbacks are common in the construction sector, the issue will be exacerbated in the coming months, making contractors more demanding when it comes to signing new deals, according to lawyers at Clyde & Co, an international law firm that specialises in construction contracts. Michael Grose, a partner at the firm, said contractors were already stepping in and asking for equity in a project. "Contractors are taking an equity in projects, so instead of payment they may ask to take a floor of a building. It also gives them a revenue stream for the future." Contractors are also asking for clauses to be drawn into contracts that would ensure a credit line for payment of work. That could mean the developer setting up a bank account specifically for payments to the contractor, or providing a bank guarantee to cover periods of serious delays. While an escrow account, which by law all developers must have, holds the money from property buyers and is used to finance a project, it does not guarantee that builders will get paid. "Contractors can't rely on the escrow account as security as the money isn't theirs," said Mark Blanksby, also a partner at Clyde & Co. He added that should developers agree to set up an account for contractors, it would send a positive message of solvency to the market. Still, with sub-contractors and building suppliers to pay, some contractors would be reluctant to take a share in a building instead of payment for work. "It wouldn't help to take property on our books as what we're after is cash to pay our sub-contractors and suppliers," said Riad Kamal, the chairman of Arabtec Construction, the UAE's largest contractor. "If we had a cash bank to help fund the project, then we could consider such a guarantee, but I don't think many contractors at this time have the cash to fund the job." Mr Kamal added that while asking a developer to set up a bank account for payment might send a strong message to the market, it could jeopardise a contractor's chance of winning work. He said it was a mechanism that was more likely to be adopted by smaller developers. "I don't think any of the big developers would accept such pressure from a contractor." Arabtec is among the many contractors with order books that have been hit by the slowdown. The company's Dh550 million (US$149.74 million) contract awarded by Dubai Properties in October to build Mudon General Residences was cancelled last month, as was its Dh900m deal to build Tiara United Towers, a project by Zabeel Investments. Talks on a payment settlement are also continuing with the developer, Meydan, which last week cancelled a Dh4.77bn deal with Arabtec and its partner, WCT Engineering, to build a racecourse in Dubai. The joint venture had completed more than 70 per cent of the work. Clyde & Co said it had seen a 60 per cent surge in disputes between contractors and developers in the past two months, stemming mainly from an inability among developers to pay. Some developers were overcoming this by either agreeing to a slower pace of construction to allow more time to raise finance and avoid having to make more drastic adjustments to their plans, or by revaluing projects to build them for less. "These are the developers who will see the downturn through the best," said Mr Grose. Other developers were raising the potential for litigation by resorting to "default mechanisms" within contracts to terminate deals, he said. By using a default mechanism - such as saying a contractor breached its contract by failing to keep up with the construction schedule or rectify a problem - a developer can shore-up cash through penalties. "These developers aren't being as transparent and are storing up potential problems for themselves in terms of litigation," added Mr Grose. To date, there is little legal protection for contractors against non-payment, which is why some are attempting to draw up their own measures with developers. "If a contractor defaults, then the developer has more security, but if a developer fails to pay, then there's nothing for the contractor," said Mr Grose. [e-mail] Storm engulfs property, b9