THE BIG SQUEEZE

Most service providers and in-house Facilities Managers know the feeling of the big squeeze. It usually manifests itself when the market dips be it the price of oil per barrel, real estate yields or market crashes. Asset and contract managers get the request to cut costs on the operations and maintenance of properties in a bid to ensure profitability is maintained. In most cases that should mean tendering of services, reducing of service levels, decreasing operational costs such as electricity & water and transferring risk.

In the Middle East though many organisations don’t take such a holistic approach to reducing operating costs. Instead what occurs usually is that contracts are tendered with the same or higher service levels while KPI mechanisms for penalties and deductions are increased on a shorter contract term. What we are left to witness is the lowest bidder on a 12-month high performing service level contract with penalty clauses exceeding 20%. What could possibly go wrong?

What usually occurs is a vicious cycle of contractors stripping contracts back to the bare mechanics and performing as little as possible to maximise margins. When you consider that many FM providers operate on margins from 5-10% net margins and rely on volume contracts – a penalty clause of 20% is going to be beyond detrimental to the services they provide.

Contractors pricing low also rely on the snagging reports on incoming contracts to generate additional income with many service providers going so far as to now even employ specialist engineers to hunt for latent defects on assets to maximise potential revenue. In 1 year the same exercise happens again though when the next lowest bidder comes in and banks on revenue from snagging works to once again cover the loss of any profit margin.

With the contracts only lasting one year service providers are only interested in short term risk and ensuring that nothing will go wrong during that period. They will also minimise investment in equipment, inventory and services on the contract with only a year to depreciate or amortise costs.

The outcome from such actions is an underperforming asset with no longterm asset strategy nor investment in services to differentiate the property or offer those using it value. Clients of the development immediately see the reduction in service levels and in the case of residential property this only continues to add to a drop in rental revenue. On a strata development this could also have implications for board members on an owners association as the condition of assets leads to increases in the need to access the reserve fund for capital works.

Instead companies should be looking to not only reduce costs but also to reposition their development and even to invest in services that will differentiate their asset and reduce the impact to falling rents. In times of economic downturns many tenants are not willing to sign long term leases for fear of redundancy yet many developers will not offer monthly rental payments even if it means a higher rent. Contracts with service providers could also be increased in length and have mechanisms that allow for investment into services and even in energy and water reduction. Adding a share of savings clause to an FM contract incentivises service providers to innovate and invest in methods that reduces the clients operating costs and rewards them a share of those savings for their investment.

The vision set by leaders across the Middle East requires nothing short of our innovation, investment and a strategic view to continually deliver value to our clients. We cannot do this with the short sightedness and the yearly spiral of asset stripping that is currently being witnessed in some sectors. Economic downturns can be the perfect time for clients to optimise costs, differentiate services and focus in increasing the value of assets.