Riyadh backs contractor compensation

04 July 2008
Royal decree confirms decision to cover additional costs incurred as a result of rising raw materials prices.

Contractors have welcomed plans by Riyadh to compensate them for losses incurred on government contracts as a result of hikes in the cost of raw materials.

A royal decree was issued in late June confirming the decision. According to contractors in the kingdom, it means they will now be covered for rises in the price of steel, copper, wood and cement.

The decree also allows for a doubling in the size of advance payments on government contracts from 10 per cent to 20 per cent.

According to industry figures in the kingdom, the decisions should help to improve confidence among contractors that are considering making bids for public sector work. “It has been raised to reduce the level of risk and encourage contractors to work more with the government,” says Osama Adel, deputy manager of the bidding department at the local Al-Redwan Contracting Company.

With the decree finalised, the onus is now on the Finance Ministry to ascertain how the process will be carried out.

“The decision has been taken,” says Adel. “It is being given now to the Finance Ministry to put the basics in place. It is establishing the rules and how it can do it. It is putting the method of compensation together.”

“We are expecting it very soon,” says Nayef Othman, deputy project manager at the local Shibh al-Jazira Contracting Company. “We need it.”

The pressure on the kingdom to reimburse companies has risen in line with raw material costs.

Contractors say they anticipate steel prices will soon reach SR7,000 a tonne, compared with SR2,400 a tonne at the end of 2007.

Existing government contracts do not have escalation clauses, which would allow for the value of the contract to increase to cover such price rises.

With all the risk placed on contractors, firms are becoming more nervous about getting involved in public sector projects.

Adel says the government is also considering recommendations from contractors to make other significant changes to the standard contract terms used in the kingdom. “The client puts in all the conditions and the con-tractors cannot do anything,” he says. “He is in a weak position. The consultant is the employee of the client.”

The latest move by Riyadh follows similar efforts by other Gulf states to deal with the pressure of high prices.

In Qatar, the Public Works Authority (Ashghal) has agreed to pay creditors after 45 days rather than the previous standard of 90 days, lifted visa restrictions on workers and offered 10 per cent advances to attract more bids from contractors.

An inflation taskforce was recently set up by the Saudi Commerce & Industry Ministry. The taskforce will explore ways to deal with price rises, such as increasing capacity in the local market and eliminating customs duty to encourage greater imports of materials (MEED 25:4:08).

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