The explosion of construction activity has not been without its difficulties. Rapid hikes in the cost of key construction materials, such as steel reinforcement bar (rebar) and cement, over the past two years have left many contractors struggling to carry the extra costs.
Contractors in Dubai, who were also facing materials shortages, were particularly hard hit in 2004. The problems have continued this year, although this time it is the turn of firms in Doha and Saudi Arabia’s western region and Eastern Province to feel the pressure. As well as materials price rises, contractors in Qatar have been hit with a sharp increase in staff and labour costs – the result of rapidly escalating property prices. In Saudi Arabia, the region’s largest market, increased construction activity combined with shortages in key materials has threatened to bring some projects to a halt.
Although contractors experienced a slight slowdown in the rate of increase in most materials prices in July and August (see table 2), the majority believe this represents little more than a temporary hiatus and that the hikes are set to return. ‘Materials prices have not gone up as much as we expected over the summer,’ says Steve Coates, resident partner in the Gulf of international cost consultant Davis Langdon. ‘But I do not expect that to be the case in the coming two-three months. I expect prices to continue rising in the next quarter.’
Coates believes the rises will continue for the foreseeable future. ‘I do not expect the rises to be as high over 2005 as they were in 2004. Perhaps 6-8 per cent this, compared to 12-15 per cent last year,’ he says. ‘It will level out at some point but I do not foresee that happening formaybe 12-18 months.’
With materials shortages and price hikes likely to remain a feature of the region’s construction market for some time to come, many say it is time for contractors and clients to rethink the way they operate.
An increasing number of contractors are entering into long-term agreements with key suppliers to ensure continuity of supply. Many would like to see construction clients adopt a similar approach by entering into long-term partnering agreements with preferred contractors in order to avoid having to tender every new project. However, this would be a significant culture shift and could take some time to establish.
‘An increasing number of clients are worried about where they will get resources and some are getting contractors in early,’ says one leading Dubai-based contractor. ‘That is beginning to happen. People are becoming more aware of partnering and as soon as one or two clients adopt a partnering approach we will see many others follow.’
As contractors around the world wake up to the long-term potential of the Gulf, not to mention the wider Middle East region, many are taking the decision to invest in the region. At the same time, low technical barriers to entry into the general construction sector have resulted in the creation of growing numbers of indigenous companies. The influx is having a significant impact on firms already established in the region.
Increasingly, newcomers are poaching staff from existing players, driving up salaries and exacerbating fears of a shortage in experienced project management and engineering capacity.
‘New entrants poaching our people is the biggest issue we face at the moment,’ says one senior Dubai-based contractor. ‘It is not so much a matter of shortages as one of people moving about all the time.’