Gulf construction sector rethinks contract terms as costs rise

Alamy

• Shortages of labour and resources
• Contractors and clients working together
• Joint procurement increasingly popular

The Gulf’s construction industry is rethinking the developer-contractor relationship, and procurement and supply chain management, to stay ahead of rising prices of materials and transport bottlenecks as a result of geopolitical volatility.

“We are in a part of the world that is very conducive to finding alternatives,” Imad Itani, head of innovation at the Dubai company Alec Engineering & Contracting, told AGBI at the Construction Technology ConFex in Dubai this week. 

“It’s not easy, but working with clients and stakeholders helps reduce the impact. But still, prices are going up.” 

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Construction costs are expected to rise between 2 and 3 percent in the United Arab Emirates this year, and 5 to 7 percent in Saudi Arabia, because of continued growth and shortages of labour and resources, the UK-based construction management consultancy Currie & Brown predicted in February. 

Attacks on shipping in the Red Sea by the Houthi militia in Yemen amid the Israel-Hamas war have drastically curtailed the number of vessels passing through the Suez Canal. This has lead to significant increases in average shipping and insurance pricing, and also in shipping times, with journeys up to 55 percent longer in the case of Asia-to-Germany routes, the software supplier Infor found. 

• Saudi cement prices under pressure as competition mounts

• Mena steel demand to rise over next two years
• ‘Unrealistic’ deadlines spark construction disputes in Gulf

With Russia’s war in Ukraine dragging on for a third year and tensions mounting between China and Taiwan, industry professionals in the Gulf told AGBI they are taking the hard lessons learned during the pandemic-induced shutdowns and applying them to an ever-more complicated world.

Harm Peters, the Dubai-based managing director at Henkel Polybit, a waterproofing solutions subsidiary of a German conglomerate, said: “We had quite stressful times during Covid to get all the raw materials.”

We make sure that we have multiple suppliers for all of our key raw materials and ideally in different continents, or at least different countries

Harm Peters, Henkel Polybit

“That’s where we really learned, together with the purchasing team and supply chain team, to build that resilience, so we see that now we’re in a very strong situation,” Peters said.

Peters said he had seen the prices of some of his firm’s key raw materials, including bitumen and organic and inorganic chemicals, increase significantly in the past months. He expects prices to continue to rise for the remainder of the year, though more gradually. 

“We make sure that we have multiple suppliers for all of our key raw materials and ideally in different continents, or at least different countries, because you see how volatile the world is these days,” Peters said.

Other local or regional firms said they are taking the opposite tack by localising their supply chain wherever they can, for example for concrete production or plant cultivation. They acknowledged, however, that this approach alone cannot shore-up procurement as a whole, since many materials necessarily come from overseas.

We run our tenders into the supply chain jointly with the contractor, and this leverages on our power as a real estate developer

Feda Tahboub, Deyaar Development

Steel rebar, timber and materials for finishes have all had supply chains hit and costs rise, and even concrete has experienced ups and downs, though the Gulf has plenty of domestic production capacity. 

Feda Tahboub, head of projects at Deyaar Development in Dubai, said: “We have come up with ways that we can mitigate these challenges through exploring joint procurement. We run our tenders into the supply chain jointly with the contractor, and this leverages on our power as a real estate developer and helps the contractor in getting the best value for money and delivering the quality that we’re looking for.”

Alec’s Itani said joint procurement is increasingly popular in the Gulf and the wider Middle East. While it can slow down the contracting process, it also spreads out risks more evenly across the various stakeholders.

“Now you have an invested client, with the contractor, choosing all the solutions,” he said.

Framework agreements are another approach that industry professionals are deploying to get the best value for their money. Instead of procuring materials project-by-project, in a framework agreement, specifications and prices are worked out before orders are placed, reducing the need for tenders and the time taken to deliver.

A framework agreement reduces risk, according to Theofanis Fanourakis, a digital delivery and innovation expert in Saudi Arabia.

“If you want to buy elevators, instead of letting every contractor buy their own, we’ll just standardise a framework agreement with one of the big companies, knowing that they will be able to supply the specific number that we want ahead of time and with a specific price agreed, so that we minimise the risk to the stakeholders of the project,” Fanourakis said.