Profit margin of MEP projects in the UAE construction industry - Essay Example

3.1 Work in progress

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Cooperate in progress (WIP) reports is important in tracking the progress of projects that are underway. The report is critical when bonding companies as benchmarks of gauging their competence at managing and estimating projects to completion while maintaining profit margins. The reports are majorly profit related and managed prepared by the project manager. The task of a manager is the production of monthly reports that updates on estimated costs of completion of ongoing projects and the forecasts on remaining profits after the completion. The method of tracking projects is important to contractors in managing internal control and appeasing bonding companies (International business publications, 2008).

To produce these reports massive resources are employed, as the main objective of the reports are to maximize the profitability of the enterprise. However, the reports do not influence profitability but are important in gauging the manager competency at foresting company profitability. The reports are relevant for accountability and motivating managers to drive profit maximization in projects. A good manager will, however, work hard to complete a project at a cost active status without dependence on WIP reports. WIP reports are biased to profit realization but not the maximum profit realized (Cleland & Ireland, 2010, p.113).

Graphs from WIP reports depict profit margins relating to time. A properly managed project will end with the estimated profit margin or a small increase from the projected margin. A real scenario, difference between the cost estimates and the closing costs reduces as the project progresses. It is common for projects earning at its late stages to fade faster than anticipated. It makes the analysis of WIP reports time-consuming in the bonding market as all risks and options must get consideration before a contract agreement is signed. A common perception in the industry is that for a contractor to improve the profitability margins they must employ competent projects managers and estimators. The quality of executives and estimators is important, as competency cannot get overlooked (International business publications, 2015).

3.2 Role of the owner in profit margin

Owners that consider performance before giving out a contract are important in improving profit margins. On the other hand, employers who go for the lowest price, while, not taking into account the quality standards are not a profitable lot for contractors in the construction industry. Such owners end up awarding projects whose net profit margins are excessively low for contractors. The owners will not stop looking into bids from companies who aim at getting clients this ends the project at or near its costs for the contractor. For a construction, company to maximize its profits, it should look at factors such as the process of awarding the project and the clients associated with it (Katodrytis, 2014).

The construction industry is constantly fluctuating, and this leaves minimal time to reflect on profits and performance in completed projects. A high number of contractors will take a chance to learn from past mistakes but disregard the profitable projects. It is wise for contractors to analyze all completed projects for profits margins while taking into consideration factors such as estimators, project managers, and ownership, as these factors are important profit determinants. It is common for companies only to analyze projects that missed the profit margins by greater margins, the analysis results on adjustments that will minimize mistakes in future. Contrary crucial information does not depend on such analysis, as a study on completed projects will result in significant findings that will lead to profit maximization. The approach is process geared, unlike the joint project specific approach (Khamis, 2010).

 3.3 Completed Delays

An elite contractor that consistently generates more than 5% returns is a necessary benchmark for a new contractor, as they can analyze the elites projects and clients that are generating their maximum profit margins; the main objective of completed project performance analysis (CPPA). A situation where the contractors contracts are from price based bids leads to minimizing of profits (Madura, 2011).

However if the contractor prioritizes on performance, it is essential to analyze their completed projects clearly to ascertain if the performance-based approach is maximizing the contractors margins of profit. The contractor should shun teams that invest their time in projects that generate little revenue and do not cover the cost are a risk to the contractor. It is important to understand the profile of an owner employing useful format for a contractor. The probability of a clients profile affecting profit margin is high compared to estimators or project managers (Roy, 2011).

Completed project Profit Analysis (CPPA) is a major tool that companies need to use for them to understand the source of income, assess the competency and performance of their personnel, and help in client prioritization, which will lead to maximization of profits. It is clear that there are customers that are more profitable in the construction industry, and companies need to get their projects. Clients cause a clear variation and revenue trends compared to the impact of estimators and project managers. Although employee competency in the construction industry is mandatory due to risks involved, they do not affect increasing profit margins their role minimizes risks. Contractors can only maximize profits through the uses of CPPA findings (Sanchez, 2011).

3.4 Critical Analysis of UAE construction industry

Current models of worlds biggest mall and proposal for Venice like Arabian Canal invalidated the fall of UAEs real estate market six years ago. Ongoing construction projects are estimated close to two third of a trillion dollar. That was before the unveiling of the world biggest mall that is s glass in the city with inbuilt air condition and Oxford Street. Despite the promising growth in the construction industry, the builders are not satisfied. Their profit margins get squeezed, and developers are slow when it comes to paying bills. The situation is not minor as it can affect the schedule of new and glamorous mega projects.The United Arab Emirates is recovering from the 2008-2009 financial crises that negatively affected the real estate market. State-linked firms and local governments recently announced a decline in a significant housing and infrastructure (World Bank, 2010, p. 61).

As developers in Abu Dhabi and Dubai hold back payments, builders have to obtain loans and dig into their cash reserves to get the money needed to complete the projects. Also, the construction boom attracts new contractors and subcontractors who bid for the construction business in the hope getting profits; this pushes margins down the drain. Such factors highlight the risks in Gulf construction market. Although, foreigners flock the market to get a share of the oil gains erratic payments schedules, and the unstable market is common problems (Katoddrytis & Mitchell, 2015, p. 115).

The contracting companies are going through a tougher phase. The late payments affect builders negatively as they face with liquidity issues, which translate to their effectiveness in completing the projects. These challenges are easily seen at companies such as Arabtec largest contractor and brains behind the tallest building in the world. The project backlog is estimated to be AED 26 billion in two years. The amount that is owed to clients escalated from AED1.1 -13824 in June to AED 2.7 billion in the third quarter of 2013. The rise according to sector experts links back to high working capital requirements (Bricault, 2011, p.823).

The progress of a company like Arable in project execution in the next quarters necessities an incremental cash flow of up to AED 500 in each quarter. It means that the company risks bankruptcy, hence the need to raise funds or slow the progress of it projects. Other factors that have since affected the construction sector are a change in management. Hassan Ismail resigned in June as the chief executive officer. The change in management resulted in project delays although the company maintains that all project is of course. However, the company pulled down its plans to launch its real estate company and opted to but for gas and oil projects in the region (Sarte, 2010

).

3.5 Profit Margins of MEP Projects in UAE

When compared with other companies, construction companies have lower profit margins. Industry analysts estimate that nonresidential companies earned 0.78% profit margin in the year 2010. Many factors affect profit margins that characteristics of construction companies, the factors range from unexpected delays to unforeseen disasters. A major challenge that UAEs construction companies face is the lack of coordination amongst the stakeholders in the industry despite the contribution of Central Planning Office (Sarte, 2010

).

The role of planning office is to coordinate major infrastructural development that is road, metro, rail, and other projects. The major challenge in coordinating is the relocation of existing service to pave way for the construction of new projects. Teamwork amongst major stakeholders in the construction industry is paramount for the success of the projects. In addition, the involvement of the public is another crucial aspect in the realization of projects. Challenges in project implementation will always exist; however, the problems in the construction industry if well addressed have solutions. The major problems that the UAE MEP construction industry faces