When a company gets a letter of intent (LOI) for a local job, nobody bats an eye. Everybody remembers how Indian and Chinese contractors in 2003 saw their letters of intent for the railway double-tracking job come to nought when the government awarded the job to a joint venture (JV) between MMC Corp and Gamuda Bhd instead. Even then, the double-tracking project was shelved until last year.

LOIs for overseas jobs still command a fair bit of respect, although even these do not seem to convince investors these days.

A case in point: The share prices of IJM Corp Bhd and LFE Corp Bhd hardly moved after both companies announced last week that their JV had received an LOI for a construction project worth RM840 million in Abu Dhabi.

Given that LFE's market capitalistion is only RM76 million, the securing of the project— where its portion is 30% — would at normal times give a significant boost to the company's share price. But this was not to be.

In fact, the two companies remain low key on the project at this stage because the details are not finalised and hence there is no certainty that they will eventually go ahead with the project. Note that LFE only filed the announcement to Bursa Malaysia the day after IJM did.

In all probability, it may not have even made the announcement if not for IJM's disclosure to the exchange.

"There is nothing much to talk about the project at this stage. We don't want people to misconstrue that the project is a 100% done deal," says a person familiar with the project.

He says material prices have gone "haywire", which has increased the uncertainty over the viability of undertaking overseas projects, which analysts say normally come with single-digit margins.

"If for some reason or other the JV decides to pull out of the job, it would not give a good impression of the companies," says a source on why the companies are cautious even after having secured the LOI.

IJM and LFE, through a 70:30 joint venture, received a LOI dated April 12 this year from Tamouh Investments LLC for the construction of a hotel project in Phase 1 of the Al Reem Island development in Abu Dhabi. The estimated cost of the project is AED1.0 billion (equivalent to about RM840 million).

The announcements made by IJM and LFE stated that the JV "is required to start mobilisation to the project site and commence the foundation and basement works on April 15, pending agreement on the terms and conditions of the contract".

What this means is that IJM and LFE are required to start working on the project before finalising with Tamouh — the project owner — the terms and conditions, particularly on the contract sum. Only upon the finalisation of the terms will the LOI be converted into a letter of acceptance (LOA).

"The LOI is a bit unusual. Normally, contractors are not required to start work upon getting the LOI. They will only do so after they have secured the LOA," says a construction analyst.

Persons familiar with the project could not say when the LOI would be converted into a LOA, despite the LOI calling for work to start on April 15. Nevertheless, in the event the JV and Tamouh fail to enter into a contract, "all works done shall be valued and reimbursed based on an agreed schedule of rates", according to the announcements made by IJM and LFE.

"Why the LOI was entered into this way could be because the client has a tight schedule and needs construction work to start early. It is a bit unusual but I don't see a big problem here. Tamouh is a repeat client of IJM, and has worked on an early phase of the Al Reem Island project. It is normal that they want IJM to start work on the new phase while the contract is still being negotiated," says a person familiar with IJM.

But viewed from another angle, this could mean the JV not being able to finalise the terms and conditions with Tamouh on time. Hence, both parties have come up with a compromise, which is to start work while deciding on pricing.

LFE, a mechanical and electrical engineering contractor, may be apprehensive about starting work immediately armed with only the LOI, a source says.

It is not difficult to fathom why. Given its smaller balance sheet compared to IJM's, LFE may be hesitant to endure too much a risk.

The time has come when big contracts don't necessarily guarantee big profits.

"We used to be amazed by the value of contracts that ran into billions. But now, even with big projects, your profit could be small or you could even make a loss. Given the rapid increase in costs, construction margins, especially for overseas projects, are getting thinner and the actual profits earned are much lower than what they used to be, if you are lucky to make profits at all," says an analyst.

In this case, a project with a value of RM840 million and an assumed gross margin of 8% would return only RM67.2 million in gross profit over a two to three-year period. And this is provided that the contractors keep a tight control on cost and avoid cost overruns, a problem that seems to have hurt several local constractors and fabricators of steel structures.

According to analysts, while construction work in the Middle East and India normally generates up to 8% gross margins, projects that involve the construction of infrastructure, which requires the extensive mobilisation of cranes and other heavy machinery, tend to have lower margins. The recent escalation in fuel and raw material costs has made matters worse.

"Nowadays, getting an LOI for a big project is not good enough. You have to convince investors that you can make a profit out of it," says an analyst.