Construction In Saudi Arabia: Trends And Opportunities

Executive Summary

Describe about the Construction in Saudi Arabia of key Trends and opportunity?

The below write up contain the specific analysis of Saudi Arabia’s construction industries nature, growth , typical procedures  and the potential risk  to the industry. We have analyzed different project of the government and shared the potential risk attached there to.  Also in the construction industry getting instant drawing, proper working site, labor detainment and managing changing raw material price are very difficult. Unavailability of above resource on time can turn projects into loss. All challenges, working environment and its evaluation has ben carried out below on the basis of experience.

Saudi Arabia has gone through a success regarding construction since the beginning of the five-year plans of national development in 1970. A major part of the national income of Saudi Arabia has been spent on setting up the infrastructure facility of the country. For instance, in the first and second five year plans the construction industry got allocation of 49.6% and 32% from total expenditure budget. were received respectively by the sector of construction (Bajaber and Taha 2012-11-20). The contraction industry has  10.06 % compounded annual growth  between 2009 to 2013(Timetric, N.d.). However, at the industry sector, the construction industry faces several risks like inadequate qualified contractors and unqualified contractors participate; besides there are other risks as well in the project level like, delay in delivery and breakdowns of equipment. Each one of the participants involved in the project has a particular responsibility for facing these risks. However, in most of the cases, the contractor is the first one encountering these risks; there are construction projects numbering more than 60% that are stumbling or have slowed down causing conditions of high uncertainty and risk. Almost 40 billion will be wasted by the government every year, as reported by the National Anti-corruption Commission in Saudi Arabia, and this can cause a great risk on the sector of construction. In this assignment, personal experience of working as a project manager (consultant) in many government construction projects located in Tabuk, Hafr Al Batin and Abha in Saudi Arabia from the time period 2002 to 2013 will be reflected. During this work, it was observed how the problems come out suddenly and these can have negative influence on both the owners and the contractors respectively on quality and time scheduled for the project. The Financial Management and Risk Management Methods will be adopted on potential risks in construction projects in Saudi Arabia.

Before we analysis the potential risk of the Arabian Construction industry, I am briefing the working conditions and environment to have more idea on specific key drivers of the industry.

Consultant: It is the government ministry owning in its organizational structure design and consultant section, it has been represented respectively by design department in Riyadh and consultant office in every region.

Military city administration for operation and maintenance: The said department gets project from consultant department and liable to support in the operation and maintenance of the project which are given to military for end use purpose.

Analysis of project environment

End-users: The infrastructure under this project will be created specifically for the use of military people. The same is represented by city administration which has responsibility for maintenance of the project.

Location: All the projects are located in military cities which evident that all the manpower, equipment and materials resources  must be approved by relevant authority for being used in execution of the project

Contractor: It is the person by whom the project will be implemented according to the legal documents created for the purpose of creating contractual relationship and they will deal with the consultant at the time of project period.

Contract documents: Contract documents are the documents containing the contract, specification, contract drawing, and the bill of quantities and criteria of design which are made by the consultant.

Type of contract: Specifically government projects, two types of contracts are generally executed (1) the lump sum and (2) quantity contract. The lump sum contracts are used only when there is urgency of the projects and ministry has no time for designing it. After that contractor will design the project at the time of working according to the design criteria to project which will be given to him by the consultant.

For execution of any work integration of all resources are very necessary , However in construction industry at the time of construction , the relationship between contractor and consultant, between military city and consultants are very suspicious in nature. Sometimes there improper drafting of working terms lead such situation too complex. These relationships are like the accused and the investigator; they were based on lack of confidence between each other as shown in figure 1.

Figure 1

It is noticed that the release of payment by contract required too much approval points, which are tedious or too lengthy in nature. Delay in payments to suppliers can result in non supply of material, which results in delay of project. Also delay in payment of contractor also result in unnecessary penalties and extra cost. In below table I have tried to give you how long time process of payment can delay the disbursement as shown in figure 2.

Figure 2

Generally each site is headed by one resident construction manager or can say site manager who is responsible and accountant to the project manager. Further each department like planning, safety, HR and many more department are headed by respective head which in turn responsible to the Site manager and so on. The whole model structure is posted below:

When the contracts cost cannot be determined perfectly, it is very necessary to identify all risk and mitigate them to make contract profitable. There are many proven and efficient method. Common methods like checklist and brainstorming are used for the identification of risks (Wanner, 2013… please provide URL for the same to cite in last reference).  The factors like locality and its culture, legal and political factors, technology factor are the major driver of the contract cost. Availability of improper working condition and environment can lead the contract for huge unexpected cost. Before starting work one due diligence report must be carried out just to outline the working condition of particular site and potential problems that could be arose.

Relationships in project management

 The project needs to be rolled out according to specification and requirement of the consultant. Now contract can be of two types 1. Contract with material 2. Contract without material. It has little concern to the company when contract has been given with material as all responsibility in such case bear by contractor including delays but when contract entered is without material and company need to provide martial.  There are possibility material specification demanded by contractor are misunderstood by consulted and provide some other material. In such case re approval process for material purchase become cause of delays. Sometimes it is found that unavailability of funds does not allow purchase of material which results in postponement of the project.  .

The payment undergoes eight stages for release of the payments, because the approval process for the payment starts from engineers and ends to financial authority which takes too much time. Unavailability of one department head result in delays in payment. Also multi stage authorization creates duplication of the work. Sometimes there are difference in claim of payment of contractor and management, and hence for small part of disputed payment full amount is withholder Contractors who are in fund constrain stopping the work in such condition. And also suppliers stop making supply until release of past payment, which again result in undue delays. 

The lack of efficiency and experience of the project manager creates a tremendous negative effect on the project. For example, when I worked in Tabuk as supervisor of the project in which manager was not bothered about the critical path of the project because he did not qualify to work as project manager. In addition, he was not comfortable in interpreting legal terms cited in the contract. Also the discussion in meeting was taking place almost in English which was not understood properly by the Manager. As a result the project got delayed and he caused high risk on his company. Also he got failed in finding proper manpower and employees who could take responsibility of the work. Lack of proper guidance and training by the project manager had made project into lose due to heavy penalty imposed for delays in project and too much reworks 

During the execution of the contract it is possible that the consultant want some change in the planed contract. The new drawing in place of old drawings are given in such case  it is consider as change in order. A written order that consultant signs and issues to the contractor are known as change order. It authorizes work changes or adjustments in the contract time or sum. Sometimes the client need presentation in middle of work form consultant and if they feel the design need to be changed the consequent extension of the contract takes place. Due to this revision the deadline, document and quotation of the budget gets changed. The major risk in contract is preparation of correct drawing, it is very important that drawing is prepared according to client’s requirement. Lack of support from drawing department lead to faulty execution of the work which in turns increase cost due to non – fulfillment of client’s requirement and delays for the same. Contractual disputes increase with such changes. Normally, changes create problems for all those involved in the process of construction.

Organizational structure payment

A condition in the contract mentions that a contractor cannot allot work more than 30% of the total project to sub-contractors. Such situations sometimes becomes very risky for the contractor as sometimes  he or she get confused because the main contractor has to allot technical work outsource . Situation like when the contract has already exhausted its 30% limit and they are unable to execute the remaining work   than it will be result in delay of the project. This type of fixed condition can lead the project to greater risk. Apart from this, the contractor must get a written and signed document for approval of employing a sub-contractor. If the approval is not received, the government has the power to cancel the contract of the contractor and seek compensation for the poor quality of work done by the sub – contractor.  The laws of Saudi Arabian government however give the contractor a choice to allot work to sub-contractors by their rights and duties assignment law (Husein, 2013).

In Saudi Arabia, the general term used to indicate natural calamities is sandstorm and dust. It hinders work process and flows because in such time availability of the manpower is major issue  which can affect the progress of the work .Moreover, communication is disrupted then the project manager does not able to deal with his the uncontrolled situations which need to t be handled for proper smoothening of the work. In addition, the people’s health is affected and in extreme situations the work too, has to be stopped for a period of time. These risks can due to lack intimation provided by forecast department which have to be provided by presidency of meteorology and environment. This situation is common in projects which are located in Hafr Al Batin.

The government projects face problems that arise from lower price bidding war in Saudi Arabia.  Sometimes consultant gives contracts to contractor who bids lowest and it result in low performance in execution the high cost of maintenance, the quality of work deteriorates; work is delayed and same leads to suspension of the work and sometimes abandoning the projects lead to economic losses. The problems with such nature arise because the contracts are not given to bid committee which must be appointed and consulted before allotment of any contract or work. This legislation can lead to low quality in project because the contractor who submits the lowest price was lowest efficient of the other contractors. 

The maximum penalty for work delay is only 10% of contract price irrespective of the number of days. Hence some contractors shift their laborers to another project site to carry on that work when they are penalized with maximum penalty and continue working with few workers only. This risk comes because the contractor knows not more than 10% penalty for work delay will b imposed on him. As a result the project might be at risk for timely completion.

When materials are not delivered on time, it creates serious problems in the fulfilling the project objectives, because there are some critical material required to proceed with the contract,  unavailability for the same can cause to the postmen of the whole work which result again in huge cost. This is especially hindering to remote projects where transportation facilities are limited due to geographical reasons. Sometimes holding of payments of the supplies can cause non delivery of material which again result in delay of the project and cost hugly. Also the delay comes from procedures of ministry of Saudi customs because it takes long time to allow for materials enter Saudi Arabia. Thus it will be risky on contractor and end-users for such types of delay.

Organizational structure for Particular Site

In Saudi Arabia, most of the construction firms employee’s foreign laborers and due to that this becomes more risky. For instance, providing food for different nationalities at the work place is costly because that requires the company to provide cookers for every country. Moreover, if the workers belong to the same country, it is easy for them to take decision as like strike against their company, if they feel dissatisfaction of employer. Thus can affect work productivity.

It has been found that in developing countries that wages of government run projects is very low which results in inefficiency and poor quality work. Low salary lead to dissatisfaction of their job, as a result. Quality of the project s compromised   it further gives way to misuse the public funds and promote corruption.

Due to change in government regulations in the construction sector, the companies face great risks due. For an example the labor ministry of Saudi Arabia increased the Iqama fees from Rs.100 to Rs.2500 in 2012. This effectively became risky for the firms, because companies which have huge number of employees have to pay 2500 to every employee. This policy comes suddenly from the labor ministry. 

According to the contract, when the consultant hands over the project, a one-year guarantee is given  which  bounds the contractor to rework on the dissatisfied and low quality work areas. It is seen that many projects that are of low quality, take many years to complete the work. This is risky because the contractor will spend a lot of money during period of warranty, moreover, he cannot take the ultimate guarantee which amount 5% of budget that can impact on his reputation with the bank which gives him guarantee of this delay.

The contractor has to submit built drawings of the project and a manual consisting of the operations and maintenance of the project beforehand. Otherwise the consultant will not get the project if the contractor cannot finish them and that will lead to financial risk of delay in work and penalty will be imposed. Such type of problem is common in small project because the project managers are not qualified generally qualify to be deal with this requirement.

All the equipment, materials and labor must get an authorization permit or can say get pass to enter the project site. This often takes nearly 3 weeks to get ready. Some projector managers face difficulties for getting permission for enrolment of workers for rejection of the get pass and unnecessary delays. The contract states that all laborers of the particular site must follow the sub-contractor. But often the projector manager finds that the laborers belong to another firm delay the work. This can cause risk to the firm because the work will be stopped until the required labors are given permit for entrance.

Requests for change in order follows when there are inadequate detailed drawings of the project are not available. Some omissions and drawing errors lead to delay in work and allows to long procedure to get the necessary information of design department in Riyadh to begin the work in the site. During the period of procedure the contractor will waste time and money, it may be lead to delay in project that mean the contractor will be given penalty 10% of budget.

There are some serious causes that hinder the work of construction and labor productivity. It has been proved that when there are disputes among the laborers and they disobey to do their work for much reason. One of them, a delayed salary that can lead to disobey of labors, especially when the delay more two months. Consequently, the work will be stopped and could be a significant effect on the work and the project gets delayed.

It sometimes happens that the sub-contractor cannot finish his work within the scheduled time given by the main contractor. This shows on the original contractor as he has the contract. And so he suffers and has to pay penalties for the delay in completion of project work. This risk comes because there is a favoritism of project manager to give subcontractor who does not qualify some work. Sometime because a delay in payment which will pay to subcontractor.  

I am going to use the following scale to assess the potential risks in terms of their likelihood and impacts in government projects in Saudi Arabia.

Likelihood	Impact
1-Very low.	1-Very low
2- Low.	2-Low
3-Medium likelihood.	3-Medium impact.
4-High.	4-High.
5-Very high	5-Very high.

Table 1.Risk analysis scale.

RISK NO.	Risks  Category	Expected risks events	Likelihood   LOW	Impact        HIGH	Risk Score	Priority
1	2	3	4	5
1	Technological	Deficiency of information to project specification.	3	2	6	14
2	Legal	Payment delays from consultant to contractor.	4	5	20	2
3	Cultural	Lack of proper relationship between the contractor and the project consultant.	4	4	16	6
4	Technological	Project managers are inefficient.	2	5	10	10
5	Technological	Change in order.	4	4	16	4
6	Legal	Rules that limit appointment of sub-contractors.	5	1	5	16
7	Environmental	Impact of dust and sandstorm during work at the project site.	3	2	6	15
8	Legal	Lowest price bidder.	5	4	20	3
9	Legal	Delayed penalties are ineffective.	5	5	25	1
10	Technological	Materials are delivered late.	3	5	15	7
11	Cultural	Manpower consists of labour from different cultures.	4	2	8	13
12	economic	The salaries of consultant engineers are very poor.	4	4	16	5
13	Legal	Changes in the government rules.	1	5	5	17
14	Legal	Period of warranty.	2	2	4	18
15	Technological	Operating and maintenance manuals as well as drawings to be submitted.	2	2	4	19
16	Legal	Approval of labour permits is delayed.	3	4	12	8
17	Technological	Contract drawings are unavailable in details.	2	4	8	11
18	Cultural	Labour disobedience and disputes.	2	4	8	12
19	Technological	The sub-contractor’s delay in execution of the work.	2	5	10	9

 

There are number of risk attached to particular contract however, in below line I am posting some list of risk

COOMMON GENERIC RISK
Main Area of Risk	Sub – Area
Finance	–          Difficulty in accessing the Borrowers fund –          Negative cash flows
Risk attached to politics	–          Statutory approval –          Fund access approval –          Sate specific approval
Residence and Accommodation	–          Poor Facilities of residence –          Scarcity of residence on remote sites
Over running the cost	–          Increase in cost due to inflation –          Increase in cost due to poor estimates
Contractual Risk	–          Resigning for contract –          Low quality work from contractor

 

 The proper analysis has to be made for each risk and the quantification of the same must be measured. Also adequate provision to mitigate the risk has to be there. The risk assessment committee should initiate the procedure to find out the possible area of risk and should, suggest the adequate provision for the same.

Conclusion:

After discussing the above points I can say that construction industry is very much uncertain at the inception of the contract. And hence proper assessment of the Cost structure, availability of the resources, proper understanding client’s requirements are very necessary. If the contracts are well defined on contract paper there can be little possibility for any issue regarding time and quality. However if the contracts are taken or given after due assessment of the order. Overall the contract can be executed successfully and less spending will be there for this works.

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