Construction in the Middle East: Creating a healthier contracting environment

The Middle East construction industry weathered the COVID pandemic well, but persistent causes of disputes proved troublesome. How can the construction industry create a healthier contracting environment?

Impact of COVID on Middle East construction

In the Middle East, the construction industry showed resilience amidst uncertainty caused by the COVID-19 pandemic. Governments in the key countries quickly put in place processes and controls to allow construction to continue, explains Haroon Niazi, Partner & Head of Middle East, HKA. This included flagship projects such as the Riyadh Metro, the stadium for the World Cup in Qatar this year, and the venue for the recent Dubai Expo. There were, however, numerous projects where work stalled due to huge challenges around uncertainty, with supply chain and contract management issues exacerbated by COVID, adds Haroon.

Change in scope disputes require a change in mindset

HKA’s integrated research programme, CRUX, draws on unprecedented knowledge to provide valuable insights into the most common causes of claims and disputes on engineering and construction projects.

The HKA CRUX Insight report’s ongoing analysis shows change in scope is by far the most common cause of disputes in the Middle East. It is also the No.1 cause of disputes globally. This highlights the need for a change in mindsets towards focusing on resolving issues and not litigation. This is particularly relevant to how employers perceive potential entitlements by the contractors, says Iryna Akulenka, Senior Consultant, HKA. Changes in scope can occur, for example, when tendering processes are rushed or projects are put back, causing designs to become outdated or non-compliant. Other leading causes of disputes in the Middle East include design information issued late, contract interpretation issues, incomplete design, and contract management and/or administration failure. These are also in the top five causes globally, though in a slightly different order. However, cashflow and payment issues are notably more prevalent in the Middle East than in other regions, owing to over-long payment times, the report states.

Blaming COVID and moving on

“While COVID may not have been the root cause of disputes in the Middle East, when settling claims, it has been the biggest scapegoat”, says Slava Kiryushin, Partner and Global Head of Energy, DWF (Middle East). It has allowed parties at the receiving end of a claim to settle, attribute the cause to COVID and move on with the project, explains Slava. Pre-pandemic, for some entities, seeking a third-party ruling was preferable to the onus of signing-off a settlement, particularly among companies with links to public bodies or governments. “Something which hasn't always been understood by contractors or those operating in the Middle East”, says Slava.

A lot more settlements are being reached and there are fewer final hearings, comments Slava. Parties are focusing on the real issues and are cognisant they cannot be too unreasonable in a pandemic-hit world.

Good clienting

Amanda Clack FRICS, Head of Strategic Advisory, Head of Public Sector, CBRE, has seen both greater collaboration across the supply chain and greater client-contractor collaboration over the past two years. She also notes increased willingness among parties to resolve issues without recourse to litigation. Positives that she hopes construction can take forward into the ‘new world’.

Referring to the HKA CRUX Insight report, Amanda spotlights construction’s structural fault line, that of being a high-risk, low-margin industry. Particularly in uncertain times, early involvement of all parties and a unified understanding of requirements and allocation of risk, can help reduce the likelihood of disputes occurring, says Amanda. Intelligent clients, who have realistic expectations about tender periods and pay on time also play an important role in avoiding disputes, believes Amanda. “It's very much about handshakes between client, designer, contractor and the supply chain; and all coming together to collaborate and focus on getting things done,” she says.

A learning curve

Technology is an enabler but a lack of consistency in adoption can present risks. “There is a learning curve, and in the short-term, digitalisation might lead to further disputes rather than helping to reduce them,” says Iryna. “A major challenge is getting everyone to embrace technology when there are numerous stakeholders involved on projects, ranging from consultants, supply chains, subcontractors to smaller entities”, she says. Adoption requires investment and can be a waiting game until the benefits materialise, she explains. Larger companies are more able to bear the costs of technology and be patient than smaller entities, who want to see a quicker return on investment, adds Iryna.

Underlying issues and the four Cs

The underlying causes such as issues with change in scope, design, and contract management will remain post-pandemic, says Haroon. He would like to see a return to back to basics, with greater emphasis on cash flow, collaboration and culture to help reduce the incidence of disputes.

Collaboration leveraged by good data through the use of BIM and digital twins, managing and improving liquidity; managing suppliers proactively and investing in talent, are all components of creating a healthier contracting environment, adds Amanda. Good clienting is also key, she says.

Soon COVID will no longer be able to be cited as a cause for disputes. “Most of the force majeure clauses have been amended, everybody is alive to the issues and those disputes that had a COVID 'flavour' have either been dropped, progressed or settled”, says Slava. “The new normal has just become the normal, it's no longer new. It's what we live in”, concludes Slava.

The latest HKA CRUX Insight report can be downloaded at https://www.hka.com/2021-crux-insight-operating-in-uncertain-times/

An interactive dashboard is also available at CRUX Interactive Dashboard - HKA