Adapting to the market

12 May 2006

They just keep on coming. On 24 April, Abu Dhabi Tourism Authority launched the $27,000 million Saadiyat island development. A week later, it was the turn of Dubai to unveil the similarly sized Bawadi project in Dubailand. Ten days after that, Emaar Middle East pitched in, announcing the more modest $11,200 million Jeddah Hills project in Saudi Arabia.

The three launches underline the GCC's current obsession with the mega real estate project. They also highlight the unprecedented level of investment going into bricks and mortar throughout the Middle East. And they provide further confirmation that the Gulf construction boom, with already over $1 trillion worth of project work planned or under way, has many more years to run.

The reaction to yet more work coming onto the market is telling, however. 'Don't tell me about any more projects or tenders,' says one Dubai-based contractor. 'We don't need them. We are full to the very top.' Even among rival clients, there is a sense of resignation at the news. 'That's just what we need: yet more competition for contractor resources,' said a regional developer.

The recent flood of project work onto the market - in 2005 alone, the volume of GCC contract awards almost doubled to over $60,000 million, has had a dramatic impact on the entire construction industry. Raw materials have shot up in price and show little sign of stabilising, especially in hot markets such as Dubai and Doha (see pages 40-41). That has contributed to significant rises in the cost of construction: bid prices are frequently coming in at 20-30 per cent over budget and in some extreme cases, by up to 80 per cent. Internal capacity constraints, coupled with risk concerns, have resulted in contractors and consultants adopting selective bidding strategies. The situation has left many clients struggling to attract bidders.

Some clients, especially in the oil, gas and petrochemicals sectors have recognised that the old way of implementing major projects cannot work in the demanding climate of today, and have taken steps to reduce contractor risk. Saudi Aramco and its counterparts in the Saudi Arabian petrochemical sector are increasingly awarding major contracts initially on a unit rate basis before converting them to lump-sum turnkey once the majority of designs is completed. In the Kuwaiti and Qatari energy sectors, new contracting strategies are being introduced, while in Oman, combined basic design and engineering, procurement and construction (EPC) contracts are gaining in prominence.

However, building and civil clients have been slower to adapt to the changing environment, remaining wedded to the traditional contracting model of competitively tendered, fixed-price contracts. While a handful of guaranteed maximum price (GMP) contracts have been awarded over the past year, along with a couple of pre-construction engineering services agreements and a growing number of design and build awards, they still represent the exception rather than norm.

Major building clients are increasingly acknowledging that more will have to be done, especially on reducing contractor risk, if projects are to be implemented on schedule, to specification and to budget.

'A fundamental shift is taking place in risk management,' said Robert Lee, development director at Dubai-based Nakheel, at the Arabian Hotels Investment Conference (AHIC) in Dubai in late April. 'Clients have traditionally pushed the risk element onto the contractor. That way we are covered.

But more and more we have to take the risk on too. We have done several projects where we have shared unknown risk with the contractor.'

The view is shared by Samer Abu Ayash, vice president for design and construction at Riyadh-based Kingdom Hotel Investments (KHI). 'It is now about risk sharing. We are willing to share that risk, if it will help the project,' he says.

Among the bigger developers, partnering is

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