Construction companies in the Gulf Cooperation Council must reduce manpower and procurement costs to cope with the slowing economy, a new report has urged.
The report by consultancy Strategy& said that regional construction firms face a slew of challenges such as low oil prices and geopolitical issues.
Hence they must have leaner operations, improve their management capabilities and develop more flexible organisational models.
“Local companies have benefited from significant investment by national governments,” said partner with Strategy& in Dubai Alessandro Borgogna.
“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.”
The report suggested three measures to reduce manpower costs -
1. Effective manpower management will help companies accurately forecast their labour needs and identify looming shortfalls in specific areas, so they can recruit accordingly.
2. A specialised team should be in place to enforce the manpower plan and ensure coordination across the HR, planning, and operations functions.
3. Improving the ‘span of control’—or the ratio of employees in adjacent levels of the company could 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 partner with Strategy& in Beirut Fadi Majdalani.
Another major strain on company costs is procurement, which typically takes up roughly 60 per cent of a construction company’s total spend. Reducing such costs is also vital, the report stated.
Companies must have a complete analysis of what they are buying, who they are buying from, where the biggest opportunities lie and how they can negotiate better terms from their suppliers.
They can also implement the following cost-reduction measures:
1. Plan and aggregate purchases for the entire portfolio of projects, rather than on an individual project basis, to receive volume discounts and strategic partnerships with key suppliers.
2. Coordinate purchases with the finance department to ensure better payment terms, more predictable cash flow and fewer missed payments.
3. Introduce technologies such as an enterprise resource management system to make procurement faster, more efficient and more accurate.
Such measures can lead to savings of 5 to 10 per cent on procurement costs, the report claimed.
It also urged GCC construction companies to create more flexible organisations.
“These are bold measures, but the current construction market in the GCC requires nothing less,”said principal with Strategy& in Dubai Marwan Bejjani.
“By reducing costs and becoming lean, construction companies in the region can position themselves to win regardless of what the future holds.”
By Aarti Nagraj
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