Tender price inflation for the construction sector in Saudi Arabia is expected to rise to 7 per cent in 2023 from 5 per cent this year, according to construction consultant Currie & Brown’s latest report on the kingdom.
The increase in tender prices has outpaced the general level of inflation due to a combination of high energy prices, rapid economic growth and the scaling up of delivery on Saudi Arabia’s gigaprojects.
Although the kingdom’s contracting market is largely meeting demand, Currie & Brown says inflationary pressures this year have affected specific materials such as rebar and industrial metals, with sizeable increases.
Materials such as concrete, blockwork, gypsum and steel have had more moderate price rises and remain within the parameters of the 2.7 per cent general inflation rate reported by the central bank, the Saudi Arabian Monetary Authority.
While the increases in prices are significant, they are not as significant as many anticipate as upcoming projects may not move into construction as quickly as initially planned.
“There is a significant amount of master planning and business case planning currently underway. While that is in development, there is a speculative fear that these projects are going to come to market at the same time as they have been forecasted,” said Daniel King, director of Currie & Brown.
“In reality, that’s not really prevailing because some master plans experience delay and necessitate an element of redesign. For this reason, we are more conservative with our tender price inflation (TPI) forecast, certainly in the short term.”
For the medium to long term, the challenge will be whether capacity can keep pace with new projects as they move into the construction phase.
One key aspect of meeting this challenge will be attracting more construction companies from overseas to work in Saudi Arabia.
“For international contractors coming to market, there are perception barriers. Contractual terms are one point, cashflow and getting paid on time are another. Going forward, clients will have to be mindful of how they structure contractual terms to entice tier 1 international contractors to the market to facilitate delivery of these projects,” said King.
Projects need to be properly planned so that they are attractive to international contractors.
“Clients need competent advice at the outset of these projects, and then also need to consider how they deliver, perhaps adopting modern methods of construction and innovative procurement strategies, in order to attract the right level of supply chain to the Saudi market and deliver over the long term,” said King.
There are signs that international contractors' interest in the Saudi market is growing.
At the end of last year, a joint venture of France’s Bouygues and the local Al-Mabani was awarded the contract to construct the Six Flags theme park at Qiddiya.
This year, Dubai-based Alec in joint venture with the local El-Seif Engineering Contracting Company secured the contract to construct the water park at Qiddiya.
International contractors have also received construction awards at Neom, where Samsung C&T, Hyundai Engineering & Construction from South Korea, Spain’s FCC and Beijing-based China State Construction Engineering Corporation were among the contractors to win work on the mountain tunnels.
“KSA is gaining more and more interest from the international contracting market,” said King. “It is definitely changing and there are signs of improvement. As long as clients take on board early advice from professional consultancies and are open to alternative procurement strategies and being more innovative in how they structure their procurement and delivery models,” said King.
MEED's latest special report on Saudi Arabia includes:
> COMMENT | Saudi Arabia’s finances and ambition align
> ECONOMY | Saudi economy soars as globe flounders
> GOVERNMENT | Riyadh looks to renew investor appetite
> BANKING | Saudi lenders eye new growth opportunities
> UPSTREAM | Aramco paces ahead with upstream projects
> DOWNSTREAM | Saudi downstream schemes register progress
> CHEMICALS | Saudi Arabia accelerates chemical projects
> POWER: Saudi Arabia needs to ramp up renewables
> WATER | Riyadh to implement over $30bn of water projects
> CONSTRUCTION | Major projects drive Saudi construction
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