The downturn in the region’s construction sector since 2015 has exposed the construction supply chain to increased business risks resulting from delayed payments, disputes with clients and wafer-thin profit margins due to increased competition.
The impact of these issues is a potentially serious loss of investment and skills that could undermine the quality and delivery of projects in the region. Already, leading international players have left the market. And, given the vital role of construction to growth, jobs and infrastructure, the consequences of allowing regression in the development of the construction industry will set the region back against its competitors.
At the heart of these issues are fundamental problems that have been locked into the construction industry for generations, not just in the GCC, but in many construction markets around the world.
Many of these problems have, at their root, the lopsided contractual relationship between clients and contractors that characterises the construction industry.
In this unequal relationship, the client holds all the cards and typically tends to see getting the lowest price for a project as its primary objective. The contractor is generally viewed as an adversary, and project engineers and architects are expected to be on the side of the client.
The contractor, meanwhile, is required to pitch for work against competitors on a lowest-price-wins basis. It is then expected to carry almost all project risk through the construction period. Its only scope for recourse is through claims for design variations made after their contract is signed, thus exacerbating the adversarial approach instilled by the clients.
It is a toxic mixture that has endured because the majority of construction project clients are irregular, or even one-off project sponsors with no long-term interest in the industry. And also because the relatively low barriers to entry for contractors fosters cut-throat tender bids to win work.
In the oil and gas industry, the picture is fundamentally different. There are far fewer project clients, and those that exist generally have an ongoing programme of strategically important and technically complex projects. Additionally, the consequences of cost or time overruns, or of accidents, are potentially devastating.
This strategic view of project delivery changes the approach from that adopted by building developers and provides considerable opportunities for the construction industry to learn.
The introduction of strategic initiatives in construction procurement and project delivery, perhaps through increased regulation of procurement, particularly in the public sector, could enable the greater use of a range of beneficial project management concepts.
From a bidding perspective, these include the replacement of the prevalent dependence on lowest-price-wins tendering with requirement for technical assessment of build, and the closer integration of design and construction through earlier involvement of contractors or design and build contracts.
Increased investment in digital technology would smooth collaboration between parties both at the planning stage and execution stage, and improve safety on the jobsite.
Within the supply chain, there is also significant scope for the further standardisation of components, as well as the greater use of supply chain management in public sector and government-related entities.
Finally, the construction sector could potentially benefit significantly from improved risk sharing through more balanced contracts between client and contractor, for a more amicable project environment.
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This article is extracted from a report produced by MEED and Mashreq entitled Transforming Construction: Lessons from Oil & Gas. Click here to download the report