Regional cost index a must

21 November 2013

As the GCC enters a new projects boom, an independent cost index will help manage price escalations

As the GCC construction sector enters a new boom period, concerns over cost inflation and labour shortages are already emerging. 

The UAE has seen construction costs rise by about 7 per cent in the first nine months of this year, and in Qatar, the increase has been about 9 per cent. Should Dubai prove successful in its bid to host the Expo 2020, prices for materials and labour are expected to soar in the country.

The labour constraints are related to a series of rail projects moving ahead simultaneously. This year alone, more than $30bn in construction contracts have been awarded on metro schemes in Riyadh and Doha, with several others to follow. It is estimated that more than 100,000 staff will be needed over the next five years to work on the region’s rail networks.

With two major metro projects moving ahead at the same time, pressure is expected along the whole supply chain. Qatar Primary Materials Company is said to be already stockpiling key construction materials.

The boom of 2005-08 was characterised by severe cost escalations and budget overruns. That proved a major problem for contractors that had won work on slim margins and some clients and firms were forced to team up to share the risk on schemes to ensure their completion. As construction costs edge higher, companies will become vulnerable again.

A regional independent cost index is therefore a must. Tracking actual costs from both the contractor’s and client’s perspective is the only way escalation can be effectively managed. However, an index will not bring down prices on its own. Clients will have to take on more price risk themselves, with the value of contracts moving in line with price rises and falls.

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