Compromise is needed on costs

30 May 2008
Risk is likely to be shared more evenly between different parts of the industry in the future.

The pressure for change in the Saudi construction sector is growing by the week. First, the government considered offering compensation to contractors to cover rising costs. Now there is a call to introduce a steel index.

Advocates say that daily access to steel prices would ensure greater transparency and alleviate the pressure of rising costs. At the moment, wary contractors add plenty of margin to their price estimates for contracts, in an effort to cover themselves against future cost hikes.

If there was a clear index of prices, this might no longer be necessary, as contracts could be linked to the index.

But indices are not a panacea. An index will not bring down prices on its own. For it to work, it would require much closer co-operation between clients and contractors than before. It would also involve clients taking on more price risk themselves, with the value of contracts moving in line with price rises and falls.

If the Council of Ministers does consider a steel index viable, there is no reason why the idea could not be extended and similar indices applied to other costs, such as cement and even labour.

It is unlikely that clients would be happy with such a situation, and there is no guarantee that the government will approve the idea. But with contractors complaining ever more loudly about the pressure on their profit margins, clients and developers will have to find room for compromise somewhere.

There are alternatives. In Abu Dhabi, for example, some clients and contractors have decided to join forces to share the risk on projects. Either way, risk is likely to be shared more evenly between different parts of the industry in the future.

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