Construction rise in Middle East and Africa will present opportunities and challenges alike
Market Insight 24 January 2024 24 January 2024
Predictions 2024 - Economic Risk
Fluctuating costs and shortages of skilled labour could undermine contractual commitments
Contractors operating in the Middle East and Africa will see a considerable range of business opportunities in 2024 – but some could prove problematic. Economic conditions are priming the market for a construction boom but are also creating challenges including fluctuating costs and shortages of skilled labour.
In the United Arab Emirates, the number of construction projects being released for tender continues to rise steadily. This is in part driven by a planned 34% increase in government spending on construction for 2024, and specifically, a shift towards greater investment in energy and public infrastructure projects, such as Al Maktoum Airport, Dubai Metro Blue Line, Hessa Street improvement, and Etihad Rail. Construction growth will boom in KSA too, with the implementation of the Saudi Arabia Giga Project program.
In Sub-Saharan Africa, private sector-led infrastructure projects are needed to close the gap between what the region needs to spend on infrastructure versus the reality of its expenditure. According to the World Bank, 7.1% of the region’s GDP is the investment required but the actual figure has been around half that. The region’s expenditure will need to increase to 8% of GDP annually until 2030 to bridge the gap.
The challenge facing contractors is that inflation and construction costs are set to remain high, resulting in continued cash flow pressures. Currently one-in-four construction projects in the UAE are embroiled in cash flow and payment issues. Contractors typically take the risk of price fluctuation and are often on the back foot in relation to negotiation of payment terms and remedies for late payment. For those in the UAE, this is coupled with a higher turnover of skilled staff moving to Saudi Arabia or leaving the country due to a spike in living costs.
Contractors need to thoroughly understand, at the outset of a project, the contractual risk allocation and procedures they are signing up to and identify ways in which they can mitigate or manage risk during the project’s lifecycle. Implementing robust contract administration, preparing and submitting good quality claims and effective supply chain management will be critical to success. Contractual early warning and dispute avoidance mechanisms will also have an important role to play.