Contract variation is the scourge of business life for contractors in the region, and many would like to see a greater shift towards contract models that reduce the risk of change requests and create models that are simpler to manage and run.
Among international contractors, there is a desire for more design-and-build contracts, where more responsibility and risk is placed on the main contractor. But with that extra risk comes more financial reward.
Design-and-build contracts create a simpler relationship between contractor and client as there is a single point of contact. If there is a problem, only one organisation is responsible because the client has transferred the risk to the contractor. It can streamline the construction process, giving the main contractor greater control over the parties involved in the project.
|Selected design-and-build contracts yet to be awarded|
|Project||Country||Industry||Net value ($m)|
|Kuwait City metro||Kuwait||Transport||7,000|
|Kuwait National Rail Road||Kuwait||Transport||2,000|
|Abu Dhabi Metro: package 1||UAE||Transport||1,900|
|Oman National Railway: Al-Buraymi-Sohar line||Oman||Transport||1,075|
|Abu Dhabi Light Rail||UAE||Transport||700|
|Source: MEED Projects|
The contractor [takes] on a lot of risk, says Chris Seymour, partner at EC Harris, which is part of Dutch firm Arcadis. Provided they see they can manage that risk they have a less crowded market. Fewer firms can take on design-and-build, so theres less competition.
Another benefit is it can speed up the whole process from tendering to completion. If a client has a basic design, the contractor can take this on and complete it, and do so to a final look and standard they know can be achieved technically and within the given budget.
This adds, says Seymour, buildability into a project, reducing although not eliminating the risk of variation because when contractors see aspects of a design that cannot be built, they can ensure it is designed in such a way that it can be. The contractor makes sure the design can be achieved, he says.
Typically in the region, a client commissions a completed design and the contractor builds what is presented, with the design team remaining employed by the client throughout the build period. In design-and-build, the client commissions a design to an early stage, including any elements that are must-haves. But the final version of the design brief is left to the contractor.
Both the capable contractor and the client can benefit from the design-and-build model, says Yu Tao, president and CEO of China State Construction Middle East. If the contractor is doing well, [clients] will have most of the benefit. If the contractor is messing up, [they] must be responsible. So its much simpler.
He describes a design-and-build contract as a more practical option than a public-private partnership (which are better suited to megaprojects), because it can be difficult to align the many parties working on a job. For clients, it can also be tough to manage the many different parties working on a major development. If the market becomes more mature, the clients understand the benefit of this business model and if the contractor is capable, I believe this could become the future of the GCC market, he says.
But if it is the future of the GCC market, it has been a long time coming and the model still has its disadvantages. Such deals can be more costly to bid on and while they can reduce contract variation, design-and-build models do not necessarily stop it.
Additionally, it is not a model that suits smaller contractors that do not have the financial reserves to take on the responsibility of keeping all parties in a positive cash flow. Also, with a smaller pool of firms able to take on major design-and-build contracts, it reduces the amount of competitive choice for a client.
During the [financial crisis], no one wanted to try anything new because the initial recovery was fragile and if it went wrong, the [contractors] would be carrying the can, says Seymour. But now there is more acceptance around trying different approaches and a desire to move away from some of the in-built inefficiencies, the lack of cost certainties and innovation that there has been in the Middle East.
There are some major examples of design-and-build contracts in the region. Several rail schemes have either been awarded or are planned as design-and-build projects, such as the Riyadh Metro and elements of the Haramain High Speed Railway in Saudi Arabia, along with the metro extensions in Dubai.
Also in Dubai, the UKs Laing ORourke was contracted to build the Hilton Garden Inn as a design-and-build deal. Mark Andrews, Laing ORourkes Middle East managing director, thinks the approach will attract more interest among clients. Its a model not used very much in the UAE at the moment, he says. We believe its the way forward.
There is appetite among international contractors for design-and-build; they are promoting it and clients are more open to the increased sophistication. While there needs to be clarity on what the model can offer, the number of design-and-build awards in the region is expected to grow. The increase will be noticeable, says Seymour. Design-and-build within five years will be used more often than not.