Change in contract terms may result in Saudi contractor exiting the project
Jabal Omar Development Company may replace Saudi Binladin Group as the contractor on a large portion of its SR19bn ($5bn) Mecca real-estate project as a result of changes in the terms of the contract.
|Market share 2009|
|Saudi Binladin Group||66|
|Percentage of 30.1bn of construction and infrastructure awards|
|Source: MEED Projects|
The developer of the Mecca scheme is in the process of switching construction contracts from a cost plus deal, which covers the contractor’s expenses plus an agreed profit to a lump sum deal, where the contractor is paid a fixed sum upon delivery.
Jabal Omar is unhappy with the new price submitted by Saudi Binladin as a lump sum for the project, and has begun speaking to other contractors. A consortium of the local ICC and the UAE’s Drake & Scull is understood to be the favourite to replace Binladin, although no new contracts have yet been signed.
|Market share 2010|
|Saudi Binladin Group||39|
|Percentage of 14.5bn of construction and infrastructure awards|
|Source: MEED Projects|
“It seems likely now that Binladin will be replaced as contractor. The discussion with them over the cost of the project have not been going very well and Jabal Omar has been receiving proposals from other contractors,” says a source close to the project.
The renegotiation of the construction contracts with Oger and Binladin is one of the terms of a SR1.35bn bridge loan that a group of five Saudi banks agreed to provide to Jabal Omar in October (MEED 08:10:10).
It seems likely now that Binladin will be replaced…the discussions over the cost of the project have not been going very well
Banker close to the scheme
One Riyadh-based source close to the project says, “They are trying to get a better control over the costs of this project so have to change the contract terms.”
He adds, “Binladin currently has a huge amount of work in Saudi Arabia so they will not be too concerned if they lose this contract.”
Under the terms of the SR1.35bn loan, the final SR750m will be withheld until the new lump sum contracts are signed. The bridge loan is being provided by the local Al-Rajhi, which is also financial adviser to Jabal Omar, Saudi Hollandi, Sabb, National Commercial Bank, and Bank al-Jazeera. Proceeds from the loan will be used to complete the first phase of the project, which includes the construction of nine new towers.
The uncertainty hanging over the construction contracts is also holding up plans to raise additional finance for the project. Al-Rajhi had hoped to replace the bridge loan with a longer term SR5bn loan before the end of the year. Bankers in the kingdom now say that is unlikely.
“We don’t have sufficient information to start doing due diligence on the new contractor yet,” says a local source involved in the financing. “That is holding up any further progress on the financing.”
Construction work, which involves the development of 39 residential and commercial towers, began in September 2008. The project is due to be completed in the third quarter of 2011.
Jabal Omar, Drake & Scull and Binladin did not respond to requests to comment.
The potential change in contractor on the scheme is the latest in issue to have hit the development. In May 2009 Jabal Omar dropped the local Jadwa Investments as financial adviser on the scheme because of its failure to secure financing within agreed deadlines.
In addition to the longer term banks loans, Jabal Omar also hopes to raise further cash for the project through a rights issue and a local sukuk, all of which will be arranged by Al-Rajhi.
The Jabal Omar project is part of Saudi Arabia’s attempts to develop Mecca’s infrastructure to enable it to better handle the more than 13 million people who visit the city each year for religious pilgrimages.
Saudi Oger announced in December 2007 that they had been awarded a SR5.6bn contract for the development of the north part of the project, which included 15 towers plus hotels, timeshare residences and infrastructure.
Binladin was awarded a contract covering the south part of the development in the same month.
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