Introduction: Soaring costs

23 December 2005
In 2005, construction prices across the GCC went up faster than in any other market in the world, with Qatar experiencing the greatest rises of all. Research carried out for MEED by international cost consultant Davis Langdon shows that, while building materials costs continue to present contractors with problems, rising labour costs are giving more cause for concern.

In Qatar, a shortage of local human resources combined with rapidly rising property prices led to a sharp increase in the cost of project management and engineering resources in 2005. Construction workers in Doha enjoyed the biggest wage rises in the region, with local project managers seeing a 44 per cent hike in salary to about $7,124 a month in November 2005, compared with about $4,932 a month in December 2004. Expatriate project manager salaries rose by about 30 per cent over the same period. Foreman salaries in Qatar rose about 40 per cent in 2005 to nearly $77 a day (table 3).

The UAE also saw significant increases in project management costs in 2005, with local project managers seeing a 38 per cent pay rise over the year to about $6,800 a month, up from $4,932. Engineers in the UAE saw their salaries rise by about 34 per cent in 2005.

Underpinning the cost hikes is the biggest construction boom ever seen in the Middle East. According to data gathered by MEED Projects, construction projects valued at an estimated $633,278 million were either planned or under way in the GCC by the end of 2005 (table 2). The huge figure is expected to rise further in 2006 as investors continue to pump large proportions of their oil windfalls into tourism, retail, office and residential projects. GCC governments are also driving construction activity, ploughing record budget surpluses into power, water, transport and housing schemes to meet the needs of their growing populations.

The MEED Projects data shows that, with about $240,000 million worth of projects either planned or under way in mid-December, the UAE continues to be the region’s largest construction market, with Dubai representing by far the greatest proportion. It also shows that private real estate developers are the market’s principal drivers.

The region’s second largest construction market, Saudi Arabia, is also enjoying a boom in construction activity driven by the private sector. By the end of 2005, projects valued at about $157,000 million were under way in the kingdom. But it is Qatar, the GCC’s third largest construction market, that is witnessing the fastest growth. The Qatari capital has been swamped by a wave of investments in residential and office block projects from investors who believe the country’s vast gas reserves and relatively underdeveloped economy will provide spectacular economic growth for many years to come. Barely a week passes without a major tender being issued. Such is the surge in activity that many contractors are declining invitations to bid for work in order to concentrate on the jobs in hand. According to MEED Projects, schemes worth an estimated $111,159 million were under way in Qatar by the end of 2005.

As well as labour rates, the boom in activity in Qatar is also driving up materials costs - with steel reinforcing bar (rebar) rising by 16 per cent, despite a slowdown in global steel prices. The country also saw a 95 per cent rise in aggregate prices in 2005. But although Qatar is the worst affected, it is not the only economy feeling the pressure.

"Each country has its own particular challenges and suffers from different problems at different times," says Wassim Merhebi, Gulf director of Lebanon’s Arabian Construction Company (ACC). "In Qatar today it is cement and rebar, similar to the situation in the UAE two years ago. In Saudi Arabia, it is finding local staff who have an interest in working in the private sector and in the construction industry. Procuring employment visas is also difficult."

A steep rise in foreman rates across the GCC reflected the shortage of experienced construction managers able to command the large workforces and complex project programmes required by the region’s booming major projects market. In Saudi Arabia, the wages for foremen shot up by nearly 75 per cent in 2005, while 40 per cent and 20 per cent rises were seen respectively in the Qatar and UAE (table 4).

Wages for site workers rose everywhere in 2005, reflecting a regional shortage of capable tradesmen and labourers. Again, Qatar saw the largest increases, with labourers’ wages rising by nearly 50 per cent to $38.36 a day in November 2005, against $26.30 a year earlier. The only other construction market in the world to experience anything like these increases was India, where labour rates rose by 20-28 per cent in 2005 (table 3).

"Resources are getting scarcer by the day, particularly human resources," says Merhebi. "The Gulf construction market is very particular in respect to the rest of the world and lacks the critical mass. So employers have to recruit from abroad. It is difficult to find the right people, who have experience in this working environment, while training has become a luxury no one can afford due to the aggressive schedules demanded by the clients."

Retaining staff is also becoming a challenge, with contractors reporting an upswing in poaching in 2005. "The cost of living is spiralling, forcing employees to switch jobs frequently," says Merhebi. "Salaries have gone up by at least 50 per cent recently, making retention of good people very difficult. This is mostly being felt by the leaders in the industry since they would be the primary headhunting ground for up-and-coming contractors.

"In the UAE, there is a growing risk of oversupply. As contractors try to keep up with the size of the market, some may be risking over-investing in plant and equipment, which is a very dangerous phenomenon and may entail a shortage of working capital."

It is not just contractors who are feeling the pressure from a lack of resources. Clients too are coming under threat. The shortage of competent contractors is creating a cashflow crisis for developers, who are locked into opening dates with future tenants but cannot get contractors on board to build their schemes.

"A number of private developers are in trouble with their tenants because they haven’t managed to start construction of their projects. It’s happening in Dubai and Qatar," says a Dubai-based contractor. "It started off with the small independent developers but is now affecting some of the region’s biggest developers. It’s not a question of experience here, it’s a matter of resources."

The problem for clients is exacerbated by the increase in costs, as well as problems meeting time and quality targets. From the contractors’ perspective, however, this is no bad thing. Throughout 2004 and 2005, many of the region’s biggest contractors have been calling for clients to reform their procurement processes, to move away from the cut-throat, low-bid culture, which, in a time of escalating costs, puts severe pressure on a contractor’s profit margins.

"The sheer volume of work is overwhelming and is practically eliminating competitive bidding," says the Dubai contractor. "Some clients have come to terms with the fact that good contractors are in higher demand than ever, so competitive bidding has become a thing of the past. The major contractors have been directly negotiating contracts, which was unheard of in the past. This comes at a price though, as construction programmes are becoming more and more unrealistic. It is true that margins are higher than ever but risk has also increased dramatically."


Despite the many and varied challenges of the boom, contractors are revelling in the good times and are extremely optimistic about the coming year. "With new construction markets coming online, such as Abu Dhabi and Saudi Arabia, 2006 will be just as good as, if not better than, 2005," says Merhebi.

An indication of what lies ahead was offered on 13 December when Saudi Arabia announced its budget for 2006. Dealing with the needs of the world’s fastest growing population remains the principal challenge for Riyadh, which is steering a huge budget surplus into transport, power and water, healthcare, education and housing projects. The budget contains a 19.6 per cent increase in public spending. Total capital expenditure for the year is forecast to jump to $33,600 million, of which $23,280 million is slated for education and $8,267 million for health and social affairs. Construction in Jeddah will continue to expand in 2006, along with oil and gas and petrochemicals projects in both the Eastern Province and western region, as Saudi Aramco and Saudi Basic Industries Corporation (Sabic) push ahead with huge capacity expansion programmes.

Abu Dhabi is also emerging as one of the likely construction hotspots in 2006, with numerous mega-projects - such as the expansion of Abu Dhabi International Airport and the various developments on Al-Reem island - due to come to the market in the coming 12 months.

The major issues should be seen in context therefore, and the bottom line is that contractors in the Gulf have never had it so good. Revenues and profit margins are up and with oil prices expected to remain high for the next five years at least, and economists forecasting a cumulative GCC budget surplus of more than $500,000 million from 2005-10, the good times will roll for some years to come.

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