Can We Increase The Bidding Price Now?

Global oil prices hit 11-year low on Jan 2016 with around $30 per barrel dropping form $115 on June 2014. Last month May 2018, it rose to $80 per barrel for the first time since 2014. The year to date average price for Brent oil is close to $70 per barrel. Historically, over the duration of 2002 to 2008, the price of oil rose from $20 to $100+ which helped the construction industry to boom to historical record.

Consequently, can we increase the bidding price now?

There are three important questions we need to answer before we decide the answer for the above question.

The first is, are we going to see such jumps on oil prices like the cycle between 2002 and 2008?

The second is, what’s the best bidding prices strategy considering bidding and awarding time is a about 6 months to a year?

The Third is, what are the other internal and external factors involving on bidding strategy?

Let’s analyse the situation be starting that the increase in oil prices in GCC market is taken as good news for construction companies because it means more government spending, fast construction contracts award and minimum payment delay. However, oil prices increasement is a sing of cost inflation. In UAE, the inflation rate of Dubai during May 2018 edged up to 2.01% down from 2.33% in February 2018. That’s also taken positively considering the worries on negative impact of applying the 5% VAT on Jan 2018.

Between 2002 and 2008, the inflation increased from 2.9% to 12.3%. However, the difference between bidding and award dates never extend more than 6 months. Actually, it was fast track bidding and award to fast track execution which limits the impact of the rapid inflation increase.

The inflation is forecasted to be around 3.6% to 2.9% in 2018 and 2019 up from 1.62% and 1.97% for 2016 and 2017 respectively. The forecasted inflation is still reasonable for the next two years. However, if you bid for a project on Aug 2018, expecting two months tendering period and three months to award, it means you will start your project by Jan or Feb 2019. For a construction project of a duration of two to three years, you are expected to lock your major material orders by first quarter of 2019. Therefore, an increase of average 2% to current prices might be logical.

Most quotations are valid for 3 months maximum. Your strategy needs to have back to back contracts and more quotation validity or to have good store area. Some suppliers and logistic companies are already reflecting the new oil prices on their quotations. It is a matter of confirming the orders as soon as contracts awarded.

The bidding decision-making process should accurately predict the oil prices for the next three years and the challenges of skills shortages inside UAE. It needs to consider brining people from overseas. This means extra costs for visas and mobilisation.

Campines who had their data for the duration of 2002 to 2008, they will have the pattern of the impact of oil prices on their bidding prices. The experience we had push us to reflect our resource forecast to recruit early. On 2003, we had minimum three years recruitment plans considering the current projects loads and future demands.

Moreover, while we see this oil price increase and inflation, we see government cost reduction for businesses which might reduce some of the cost. However, in any project over USD10 million, the cost reduction is minimum comparing to the expected inflation.

Finally, we might see 2% to 5% increase on the coming bidding prices. Although, some companies are expected to maintain their current prices. Definitely, we will not see any more cost reduction for the next year projects.

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