Middle East faces heaviest delays in construction and infrastructure

Major construction projects in the Middle East run the highest risk of overruns in costs and delivery, with claims on derailed projects now averaging $154 million per project.

Now in its fifth edition, HKA’s annual CRUX Insight Report sheds light into the state of disputes in the major capital project and infrastructure sector. For its analysis, the global consultancy analysed claims and disputes on 1,600 projects in 100 countries for the period up to July 2022.

The analysis paints a worrying picture for project owners, contractors and other stakeholders. Globally, the combined value of claims stood at $80 billion, while cumulative delays added up to a staggering 840 years.

On average, costs claimed in disputes amounted to $98.7 million per project and more than a third of their capital expenditure (35% of CAPEX). From a time perspective, losses faced are even heavier. Claimed time extensions averaged 16.5 months – equivalent to 69% of the original planned project duration.

“Based on first-hand investigations by our expert consultants around the world, the report puts a number on the huge toll of project overruns on the global economy, our industry and project stakeholders,” said Renny Borhan, CEO of HKA.

The Middle East

According to the report, the Middle East is the world’s most challenging region for realising construction projects, with delays averaging 22.5 months or 83% of schedule duration. The average sum in dispute ($154 million) was more than a third of project expenditure (36% of CAPEX).

In the region, HKA’s experts assessed 380 projects in 12 countries, with the majority of projects in three segments: commercial buildings, onshore oil and gas, and transportation infrastructure.

The prime causes of claims and disputes in the Middle East have been relatively steady for years. Since the first edition of HKA’s CRUX Insight Report, change in scope has topped the list.

“This chief cause is one seen in all regions. Projects are tendered and launched when designs are still immature. Change is inevitable in major construction projects and unless managed, inexorably leads to a wave of claims mounting into disputes,” explained Toby Hunt, a partner at HKA.

Scope change is followed by design information that was either issued late or incomplete, contract interpretation issues, and failure in contract management and/or administration.

Hunt: “Many of the dominant causes of claims and disputes in the region are design-centric and stem from lower levels of maturity in the construction and engineering industry.”

“The high-risk, low-margin contracting model rules in most parts of the Middle East. Risk allocation is skewed by heavily amended standard forms of contract with onerous terms on payments and liability. Often poorly drafted, they tend to include additional bespoke clauses that may have been designed to address problems that arose on previous projects, but conflict with other provisions of the current contract. Claims and disputes over contract interpretation ensue.”

Issues more specific to the region include foreign contractors’ reliance on (poorly) translated versions of Arabic contracts, and a relatively high competition for prestige projects – which results in over-ambitious bids.

Meanwhile, the growing skills deficit (exacerbated by the Covid-19 pandemic) is putting pressure on delivery, with builders and contractors struggling to recruit skilled employees. However, across the board, deficient workmanship was a far more significant cause of contention in Europe and the Americas than in the Middle East and other regions.

With construction and capital infrastructure activity buoyant in the region as national economies drive their diversification and investment visions, Haroon Niazi, co-leader of HKA in the Middle East, said that lessons being learnt from overruns should be captured and shared among the construction and engineering community across the region.

“Understanding the multiple reasons for distress on capital projects can help project promoters and the construction and engineering industry better mitigate problems on projects, and ultimately help them achieve better project outcomes.”