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Expert Insight

Critical delays: Cynthia Corby, Deloitte

Cynthia CorbyConstruction plays an important role into GCC countries long-term economic development plans or national visions that point unanimously to diversification of their economies, away from the dependence on income from oil and gas. Population is forecasted to grow significantly in the coming years, increasing the need for spending on social infrastructure and creating job opportunities for the future.

A large and possibly persistent decline in oil prices, and slower-than-projected growth in the euro area, China, Japan, and Russia, have substantially altered the economic context for countries in the Middle East. Most regional governments will run fiscal deficits this current year but they are continuing to invest in social housing, transport, education, and healthcare to meet the needs of their citizens.

Per MEED Projects, the value for projects in the planning and execution stages in the GCC is US$ 2.8 trillion, and the amount of projects to be awarded this year are expected to be the highest on record forecasted at $172 billion. The increasing number of tender opportunities and contract awards – being the UAE, KSA and Qatar the top three countries – and the preparation for the upcoming Expo and World Cup events, seen very much as a catalyst for capital project spend, contribute to the optimism sentiment within construction companies for the next 12 months.

The three major projects that are expected to be awarded in the UAE in 2015 are the Al Maktoum International Airport Expansion budgeted at $32 billion, the Tacaamol Chemicals Industrial City at $20 billion, and the large scale mixed use development MBR City at Dubai Creek Harbour with a budget value of $17.7 billion. Saudi Arabia’s share of the GCC projects market is 44%, with huge mixed-use developments and economic cities planned and under construction which will take several years to be completed. And in Qatar, the focus is mainly on the preparation of the mega event and transport related projects. The two largest projects in pre-execution stage and expected to be awarded in the following months are from QRail.

There is a large amount of work to be awarded and completed in the coming years but projects and contractors who take on these projects are not without risk. Based on a survey that Deloitte has conducted, targeting C-level executives of regional construction companies in the region, the following is a summary of the key issues impacting the industry.

The key priorities for construction company CEOs are winning new contracts, effectively managing projects and strengthening the relationship with key suppliers and subcontractors, whilst the main challenges that they face include cash flow management, delivering work on time and within budget and the availability of skilled and qualified workforce.

The priority for the majority of construction companies is winning new work and while for most of them bidding at an appropriate commercial margin is a focus, there is still a large portion which are willing to accept little or no margins at the tender stage to secure the project, even if running the risk of project losses given unexpected complications or unknown costs which may arise during the life of the project, especially on projects in this region.

The timely management of cash flows is critical for construction companies’ business and collection delays remain a key concern for a majority of them, with contractors indirectly funding these capital programmes. The collection period is around 225 days and that leads to financial difficulties; employees need to be paid and materials need to be procured, putting an immense amount of strain on the working capital of contractors who then resort to back to back arrangements to ensure the main contractors are not exposed. Continued delayed payments affect contractors’ liquidity and make it more difficult for them to take new projects, and interestingly, 62% of the surveyed respondents do not expect a favourable change in regards to this issue in the short term.

Around 82% of contractors questioned agree that project deliveries are delayed, considering financing and the lack of skilled resources the main causes, and state that this will be a priority focus area for their business in the forthcoming twelve months. Delivering projects on time and within budget has been an apparent challenge for several years, but the increase in project activity, owners changed focus on feasible projects with whole life cost of the asset now being considered, is making it more critical to deliver on budget.

The survey, also found that only 34% of respondents state that they have periodic meetings to discuss project status and updated forecasts on projects at an executive level. One of the industry challenges is of course cost control, and it is of utmost importance during the execution of projects, not only budgetary control but also open dialogue and actively discussing project related issues in periodic meetings. This allows executive management to make critical decisions on the financial position of the project and also to deal with commercial risks and mitigate any issues to ensure they are not exposed under the terms of their contract.

Whilst external factors have a strong impact on businesses of all sizes, there is an appreciation for the need to focus on traditional challenges in the construction industry in the GCC market that seem to impact contractors’ profitability and future expectations. Also of critical importance is to get the balance of risk between the contractor and the developer owner right and only pass on risk that a contractor can be reasonably expected to manage.

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