Construction disputes in the Middle East: Managing the world’s highest risk of overruns

Project overruns in the Middle East add on average more that 83% to schedules. As the region adjusts to more technically advanced projects, our panel of experts examine the key considerations for businesses wishing to avoid overruns and further distress on complex capital projects.

Successful capital projects in progress and planning must navigate on-going disruption associated with the COVID legacy, alongside cost inflation and tighter headwinds stemming from the war in Europe. HKA’s CRUX Insight report finds that the Middle East region is unique in having the world’s most consistent top-ranking causes of distress on capital projects, namely, change in project scope, and design information that is either late or incomplete. How are the causes and solutions to construction project disputes evolving in the region, and what lessons can be learned to avoid further distress on capital projects?

Cost inflation and construction company insolvency

The title of the CRUX report really says it all, states Nicola Caley, Principal, HKA – Battling the headwinds. The current global headwinds are a big challenge for the construction industry globally, with company insolvencies at their highest level for several decades in certain countries. Global headwinds are affecting both project in progress and planning. For projects in delivery that are operating under fixed price contracts, the impact of inflation on profitability has the potential to be significant, particularly for longer contracts. With additional cost pressures on the contractor, there is the risk that a claims culture develops, where the contractor is trying to meet their targets, or in some instances, remain solvent. HKA see all this as likely to lead to an increase in cost-inflation related disputes.

 ‘We also see claims against consultants as an area where disputes are likely to rise. This is where fixed-price bids have been submitted based on the consultant’s estimate, and additional costs incurred can’t be recovered from the employer’, says Nicola. ‘There’s an idea that a lump sum fixed-price model gives project cost certainty. One thing we can take from HKA CRUX Report is that it absolutely doesn’t do that.’ But being more optimistic, she says, cost inflation might result in more sensible negotiating positions, where parties seek to find more pragmatic solutions than strictly enforcing contractual entitlements.

Procurement and contracting should re-balance risk

Over the last two years, fixed-price risk repeatedly comes up as one of the biggest issues in the region, says Chris Seymour FRICS, Regional Director, Middle East, Africa and South Asia, Mott Macdonald. Now is the time to devise creative solutions and to think about who will bear the risk of those cost overruns, says Nicola. There’s clearly a tension between what is the preferred position of the employer–with the fixed cost model, versus what is the preferred position of the contractor–being a variable cost model. A risk sharing approach could be done either through a shared pain and gain mechanism, or through fixed price with a mechanism to adjust for inflation, she advises.

We have seen some collaboration from clients in managing fixed-price contract risk, says, Chris, ‘…even when it’s not written into the contracts, which is a really good thing to see’. The biggest potential for dispute avoidance comes from pre-construction collaboration. ‘The UK recently brought out the construction playbook, which is designed to help solve similar challenges in the UK construction industry’, Chris advises. It looks at five steps of a project and only the last of these is the construction step. ‘A huge amount of pre-planning is involved before a project starts, and sometimes we don’t see that in existing projects in the region’, he explains. British Business Group is looking at this playbook and working to determine if a similar solution can be applied in the Middle East region.

A move towards collaborative contracting

Collaborative contracting, collaborative ways of working, and relational contracts have been a hot topic in many countries around the world recently, says Nicola. Australia, the Netherlands, UK and USA have developed bespoke contract forms to address this. ‘The HKA CRUX Insight report’s findings highlight the levels of problems that have been experienced with transactional approaches to contracting. Certainly for complex projects, the current model isn’t working. I do think there’s an appetite in the region to move towards more collaborative models.’

Project management software, BIM, and document management systems are all helping to improve communication on projects, explains Nicky Dobreanu FRICS, Branch Director, Omnium International Ltd (Dubai Branch). Having these in place and looking at the concepts of integrated project delivery accelerates the need for stakeholders to interact more.

The Middle East is experiencing the withdrawal of some contractors from the region alongside changes in attitudes amongst contractors. Some contractors area not prepared to accept the wholesale risk transfer position anymore, advises Chris, because it doesn’t make commercial sense. The amount of work available in the Middle East is also a factor because it means contractors can afford to take a stronger position, says Nicola.

Taking more time over project initiation is essential, states Nicola Caley. Two-stage tendering processes allow the main contractor to join the conversation a lot earlier. This means the project can achieve greater maturity by the time of delivery. The contractor can contribute to the buildability of the proposed design, the logistics of construction, and the timing and phasing of the project.

Skills shortages - a fundamental project delivery risk

The skills shortage, along with the challenges of importing this talent into the market, is becoming a fundamental project delivery risk in many states, says Nicky Dobreanu. We also have people moving between various territories to work on more challenging projects or maybe get paid more, he says. ‘The shortage of skilled workers, certainly in specialist areas, is leading to increased competition for resources, meaning companies are auctioneering for people, and paying higher costs’. Nationalisation processes are placing restrictions on the importation of labour, making it increasingly difficult for businesses to secure the necessary talent, skills and expertise needed to deliver projects, he explains.

Building a competent project team and making sure they’re sufficiently qualified and onboard sufficiently early is an essential means to avoid disputes, says Nicola Caley. From the RICS point of view, explains Chris Seymour, there has been an acceleration in the application of professional training in the last four to five years. Clients and governments are upskilling their own staff in professional training, and this is helping to reduce the likelihood of disputes arising from improper contract administration.

There are huge opportunities in the Middle East

There’s optimism in the Middle East construction industry, and the future of our sector looks bright, states Nicky Dobreanu. There are many opportunities for growth and development, and these are driven by several factors. The UAE declared this year to be the year of sustainability, and we’ve got COP28 coming up in November 2023. Economic growth is another important factor, alongside government investment and the adoption of digital tools and technologies. Greater integration within the region will also be important – at the social and economic levels.

Chris Seymour agrees: ‘The region’s got a huge opportunity, bearing in mind the type, complexity and scale of the projects that are coming, alongside the economic position of the region, which is far more optimistic than other parts of the world. There’s an opportunity to be the centre of best practice in construction procurement – to be seen as a leader rather than a lagging indicator’.