In a volatile environment, GCC construction companies need to reduce manpower and procurement costs and build flexible organizations

February 21, 2016

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. In particular, they should take a structured approach to dealing with their two largest spending areas—manpower and procurement—and develop more flexible organizational models, according to a recent study by management consultancy Strategy& (formerly Booz & Company), part of the PwC network.

“Local companies have benefited from significant investment by national governments,” says 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 labor costs. These factors, along with geopolitical developments, have forced GCC contractors to suddenly cut costs and tighten their operations.”

Regarding manpower, companies can take several measures to reduce costs, according to the report:

  • Effective manpower management—including a clear manpower plan—will help companies accurately forecast their labor needs and identify looming shortfalls in specific areas, so they can recruit accordingly.
  • A specialized team should be in place to enforce the manpower plan and ensure coordination across the HR, 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 tradesman—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 percent, while maintaining the same quality standards and timelines,” according to 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.

Procurement is another area of potential savings, given that the purchase of materials and services typically takes up 60 percent 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. With a clear picture of procurement in hand, companies can implement several cost-reduction measures:

  • 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.
  • Coordinating 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.
  • In all these measures can lead to savings of 5 to 10 percent on procurement costs.

Finally, GCC construction companies need to create more flexible organizations. For example, they can centralize their manpower and procurement functions, to maximize 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 organization 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,” says 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.”

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