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Survival tactics

Contractors will be busy tendering for West Rail schemes this year, but winning bids for the two design and build contracts let last

year came in at about 30% below estimates, reflecting the tight market conditions.

Consultants are already busy with infrastructure work, but are frustrated at the low prices their own work has gone for.

Immediate past chairman of the Association of Consulting Engineers of Hong Kong, Kenneth Lau, believes there is too much emphasis on fee competition.

'There is a shortage of work to keep all consulting engineers happy. The easy route is to cut fees to keep staff, and keep work flowing in,' says Lau, who is also managing director of Hyder Consulting's Hong Kong company.

ACEHK has been pressing for change to what it sees as a hostile competitive environment, and in particular has made some progress with the government's housing arm.

'They are trying to place less emphasis on fee competition and more on technical competence,' Lau adds. With 50,000 units a year to be built, best practice in design will be essential to meeting the targets, he says.

But ACEHK's latest membership survey showed that 24 out of the 29 firms responding were pessimistic about their prospects in the year ahead while 21 expected their turnover to fall. Almost all said fees were lower than a year ago (see News).

Fees have declined continually since the introduction of the two envelope bidding system in May 1991. They were driven down further during the economic turmoil, says the ACEHK.

'Of course we can blame ourselves for slashing prices,' says Lau. 'However the present two envelope system with too much emphasis on fee competition encourages the works department to accept low offers from our members without questioning whether the low fees could produce quality work with economical and environmentally sound solutions.'

The government's secretary for works HS Kwong says it is up to the industry to tackle the problem. 'Contractors, consultants, architects have all come in to see me saying that we always award the work to the lowest tender. Of course this is not true, we are always very mindful of awarding the work to the most cost effective tender - not necessarily the lowest,' he maintains.

Tsing Ma Bridge, for example went to the second lowest tenderer, he says, admitting however that most awards do go to the lowest bidder.

'It is important for them to realise that if they want to do cut-throat bidding, there is not much we can do to help. We hope that if people realise there are a lot of jobs ahead, they will stop this psychological chain of actions.'

Hyder's Hong Kong chairman Edmund Leung acknowledges times are lean. With reduced margins, staff are working harder than ever and while engineering staff numbers have risen, companies are keeping a firm grip on overheads. Nevertheless profits have not increased at the same rate as staff numbers. 'We are coping, but we don't want this to be a long term solution,' he says.

Staff numbers at Arup's HK office are at a record high, buoyed by the fact that the firm is heavily involved in the rail and road bonanza. But Arup has been cautious about taking on extra staff, says chairman Andrew Chan.

'It could have expanded more when working on airport related projects, but instead we drew on other offices including the UK to meet peak demand.'

Leung predicts that there will be mergers and liquidations. Already some contractors have gone under, not only because of quality but also shortage of operating capital. 'We are squeezing our programmes and our costs, abilities and resources so much that we have to ask ourselves whether we have pushed it to the limit.'

As the economy stabilises 'people are getting used to the new rules of the game', says Hyder's Kenneth Lau. A period of consolidation lies ahead, he believes.

Hopewell's contracting arm has traditionally concentrated on its own developments, but its building company is actively looking for work outside as in-house projects have dried up in HK. Hopewell director Colin Weir points out that as long as there is a shortage of work, people are bidding for all jobs and prices will remain much tighter.

'We consistently get the right ball park price, always in the first three bids, but getting the lowest is another matter,' says Weir.

'If there was more work coming on the market, prices might become a little bit better. If there is enough work for everyone then you haven't got to bid for every job.'

As a developer Hopewell is looking for new projects, but Weir sees no sign in the short term because the cost of funding is high. 'We are looking to see where future opportunities will be,' he says. This includes looking to the northern parts of Asia - India

and Pakistan for example.

Hopewell has suffered in other Asian countries. Work in Indonesia has stopped because of the unrest and lack of confidence by bankers, and it is fighting what it sees as the unlawful termination of its concession for the Bangkok BERTS road and rail project.

This has also put the group off acting as sole investor in such huge infrastructure. 'People have seen now that the growth of Asia is - contrary to previous expectations - stoppable, and that the whole world has felt the impact,' says Weir.

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