Construction companies that operate in the Middle East face a range of challenges that grow more complex every year. Low oil prices and geopolitical issues have caught them by surprise.

To get through this more complex business environment, they must have leaner operations and improve their management capabilities, according to a recent study by management consultancy Strategy& (formerly Booz & Company), part of the PwC network.

In particular, they should take a structured approach to dealing with their two largest spending areas - manpower and procurement - and develop more flexible organisational models, stated the study.

"Local companies have benefited from significant investment by national governments," remarked Alessandro Borgogna, a partner with Strategy& in Dubai, co-author of the study, and a member of the engineered products and services practice in the Middle East.

“Today, that spending has declined, in part due to low oil prices. In addition, companies are required to hire more nationals, which increases labour costs. These factors, along with geopolitical developments, have forced GCC contractors to suddenly cut costs and tighten their operations,” explained Borgogna.

According to Strategy&, companies can take several measures to reduce costs with regard to manpower. These include:
•Effective manpower management: including a clear manpower plan that will help companies accurately forecast their labour needs and identify looming shortfalls in specific areas, so they can recruit accordingly.
•A specialised team should be in place to enforce the manpower plan and ensure co-ordination across the HR (human resources), planning, and operations functions.
•Improving the “span of control” - or the ratio of employees in adjacent levels of the company, such as the number of foremen compared to the number of tradesmen - could will help companies reduce the size of their workforce and have more productive operations

“Collectively, these measures can help companies reduce staff by 10 to 20 per cent, while maintaining the same quality standards and timelines,” said Fadi Majdalani, a partner with Strategy& in Beirut, co-author of the study, and the leader of the engineered products and services practice in the Middle East.

According to him, procurement is another area of potential savings, given that the purchase of materials and services typically takes up 60 per cent of a construction company’s total spending.

Reducing procurement costs starts with a complete analysis of what the company is buying, who it is buying from, where the biggest opportunities lie, and how companies might negotiate better terms from their suppliers, he added.

With a clear picture of procurement in hand, companies can implement several key cost-reduction measures including:
•Planning and aggregating purchases for the entire portfolio of projects, rather than on an individual project basis, can lead to volume discounts and strategic partnerships with key suppliers.
•Co-ordinating purchases with the finance department can lead to better payment terms, more predictable cash flow, and fewer missed payments.
•Technology such as an enterprise resource management system can make procurement faster, more efficient, and more accurate.

All these measures can lead to savings of five to 10 per cent on procurement costs, said the Strategy& report.

Finally, GCC construction companies need to create more flexible organisations. For example, they can centralise their manpower and procurement functions, to maximise the benefits of scale.

Companies can also improve their core project-management capabilities - such as project management; cost control; planning; contracts; quality; and health, safety, security, and the environment - which are consistently below those of international competitors.

Moreover, they can create a performance-based culture in which employees at all levels of the organisation take on a sense of ownership and accountability, rather than simply meeting baseline expectations.

“These are bold measures, but the current construction market in the GCC requires nothing less,” remarked Marwan Bejjani, a principal with Strategy& in Dubai, co-author of the study, and a member of the engineered products and services practice.

“By reducing costs and becoming lean, construction companies in the region can position themselves to win regardless of what the future holds,” he added.-TradeArabia News Service