GCC's construction industry reeling from Covid-19 economic impact

11 September 2020 Consultancy-me.com

In the GCC region, a construction sector already grappling with low margins, delays and contract awards has been dealt a devastating setback by the Covid-19 crisis and all its repercussions. Deloitte’s latest study lays out the challenges facing the industry. 

According to the Big Four accounting and advisory firm, no crisis in recent decades has been equal to Covid-19 in its impact on construction in GCC. This includes the subdued climate in the wake of 9/11, the global financial crisis (GFC) of 2008 and the plunge in oil prices back in 2014.

Covid-19 hit supply chains across the world in the gut for one, while also putting a freeze on spending and making social interaction a top tier barrier. For construction, this has meant delays in raw material, much fewer projects, and new restrictions on how labourers can operate on a construction site.

All in all, now is a bad time to be engaged with a construction project, and investors have realised the same. For starters, new projects are drying up. Deloitte uses April – the “first full month” of the global crisis – as an indication of trends in the sector.

In April 2019, new contracts in the GCC amounted to well over $6 billion in value. This April, the value had fallen 40% to just over $4 billion in the GCC, against the backdrop of a 42% dip for the broader Middle East North Africa region.

Total MENA contract awards 2015-2020

And this was just the first month. Forecasts for the whole year have fallen dramatically as well. New contracts worth nearly $130 billion were expected in GCC for the whole of 2020, a figure that has now been revised to just over $80 million. This new figure is accounting for a relatively open remainder of the year, where contracts will presumably pick up in pace.

Provided that this uptick fails to arrive and things stay as they are, the total value of contracts awarded this year could add up to around $60 billion – a fall of more than 50% from original forecasts. New projects have been on the drop, while many of the projects that were already up and running before or during the crisis have been put on hold, or even cancelled. Since March 1st this year, Deloitte reports that well over 500 projects worth more than $60 billion have been either suspended or delayed in the GCC region.

The oil connection

What makes matters worse, according to Deloitte, is that oil prices collapsed at the start of the year as well, which dealt a double blow to many sectors. Across the oil-reliant GCC economies, most clients have been busy preserving their own finances, and few have the room to invest in construction projects.

GCC projects delayed, suspended or cancelled due to Covid-19

No doubt, this is a time of unprecedented challenges for construction in the Middle East, which has already been plagued with issues in recent years. Cynthia Corby, partner and Regional Construction Industry Leader at Deloitte Middle East pointed out that many problems boil down to a lack of liquidity.

“Already, pre-Covid-19, the construction industry in the region was facing several challenges including low margins, increased competition, significant delays in projects as well as a significant volume of change orders and lower awards in projects despite significant plans in the GCC to invest in infrastructure and capital projects, all leading to significant pressure on liquidity,” she said.

Navigating the change

Under Covid-19, liquidity has become a matter of urgency, pushing many construction companies in GCC into cash conserving strategies. Corby breaks the sector’s reaction to the crisis down into three distinct phases: Response, Recover and Thrive.

GCC projects delayed suspended or cancelled by sector

The first phase has been all about taking one project at a time, keeping costs under control and minimising social and economic damage. The Recover phase is underway now, and Corby calls for a strategic approach where projects are taken on within capacity and payments are made on time so as to ensure continuity.

The Thrive phase remains some way in the distance, but involves a reevaluation of operations in the construction sector. For one, the contracts system needs an overhaul to ensure that all stakeholders are protected.

“High on the agenda will be creating enhancements to construction contracts, with the goal of attaining standardised construction contracts that fairly balance the risk and reward between the employer and the contractor, and, as a result, reduce the extent of cost overruns which benefits the developers and the contractors and eliminates unnecessary overspend which is otherwise called waste,” said Corby.

Another strategy to consider is digitalisation. The Covid-19 crisis has opened many eyes to the importance of digitalisation, and Corby suggests that tech has myriad applications in construction. “Not only does tech – such as drones, robotic construction processes and AI – deliver advantages in terms of driving cost optimization, but it can also help to minimise other risks associated with any second wave of Covid-19 or future pandemics,” she said.