Al-Zour retender may fail to produce a lower price

10 May 2015

Contractors warn of rocketing construction costs in Kuwait

  • Package was last tendered in April 2014
  • Since April 2014 steel prices have collapsed
  • Materials costs should be reduced
  • Increased demand means labour costs have increased
  • The higher labour costs may match materials savings

Increasing construction prices mean that the fast-track retender of package 4 of the Al-Zour New Refinery Project may fail to produce a lower price, according to contractors familiar with the project.

“Although materials costs have declined since the project was tendered, construction costs are rocketing,” said one source. “As things stand, Kuwait won’t be able to properly process the influx of workers that is necessary for the project.”

The retender of package 4 was officially announced on 10 May with the same project scope and a bid deadline of 23 June.

The previous tender was issued on 13 April 2014 with a bid submission deadline of 9 September, which was later pushed back to 7 December.

The low bid of $1.4bn was submitted by a consortium of Italy’s Saipem and India’s Essar and came in $263m over budget.

Since April last year, steel prices have collapsed across all grades of steel.

According to the ratings agency Moody’s, in April 2015 hot rolled coil prices averaged $494 a short tonne, 24.8 per cent less than the average in April 2014.

Kuwait may have been hoping that this dramatic drop in steel prices would lead to a similarly dramatic fall in the prices submitted by engineering, procurement and construction (EPC) contractors.

However, over the same period construction costs have increased significantly in Kuwait, mainly driven by restrictions on imported labour.

In late April, Kuwait’s cabinet decided to freeze the number of expatriates living in the country – ruling that the number of foreign workers entering Kuwait should not be permitted to exceed the number of foreign workers leaving the country.

Whether or not the decision will be implemented remains to be seen, but it has sparked concerns that Kuwait’s already restrictive rules for imported labour could become even more onerous.

“Kuwait’s entire system is nowhere near ready for the influx of workers needed to complete the big capital projects that are in the pipeline,” said one source.

“Whoever wins the contract for package 4 will have to fly imported workers in and out of the country on a temporary basis entailing huge costs. Temporary accommodation will also have to be constructed for all of the workers.”

Contractors tracking the New Refinery Project say that, over the past six months, increased demand has seen labour costs increase dramatically and these costs could match the savings from cheaper materials.

It is thought that between 100,000 and 200,000 extra imported labourers are needed to execute all of Kuwait’s construction projects that are planned to be executed over the next five years.

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