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 the new buzzword. The concept has been around for years and takes on many different forms. For example, in the US, it generally involves all the key players on a project being brought together at the outset to get to know each other and draw up a charter over a three-six month period for the project’s development. The idea is to build trust between the various parties and avoid adversarial relationships, which so frequently blight projects.
Time constraints – most Gulf projects are classed as fast-track – means that the majority of developers cannot afford to adopt the US model. As a result, they tend to see partnering as bringing on board a contractor early on and during the design phase, so that it can fully appreciate the project and develop a relationship with the client.
Says KHI’s Ayash: ‘The idea of partnering is getting into the mindset that the contractor is not the enemy, but a partner: he is here to help us. If he feels secure about the client, the consultant, and the risk sharing, he is better able to perform. As for the contract, putting provisional sums in for speciality packages, rather than making it lump sum with all the unknowns, helps.’
KHI has about five new hotel building projects across the region. In some markets, such as Libya where construction activity is modest, it is planning to use the traditional contracting approach, competitively tendering its Moevenpick Tripoli scheme on a fixed price, lump sum basis. However, in booming markets such as Dubai, partnering is very much on the agenda.
Some other Dubai-based clients are modifying their contracting strategies. For instance, Emaar Properties is negotiating directly with some of its existing contractors to carry out future tower contracts. The idea is not only to lock in contractor resources, but also to secure a fair price. And although such innovation is hard to find elsewhere in the Gulf, it is expected to be only a matter of time before others adopt similar tactics. For as has been proven time and again over the past three years in the construction industry, what starts off in Dubai is normally followed in the rest of the Gulf.