Laying the foundations for success
The construction industry in the GCC1 has grown rapidly over the past decade driven by such factors as high oil prices and a growing population. Construction companies expanded quickly with limited control of their costs, workforce skills, and capabilities. However, the recent economic and geopolitical shocks caught them by surprise, and are forcing them to cut costs abruptly and tighten their operations. Based on our experience, we believe contractors can navigate a dynamic business environment more efficiently by achieving lean operations and improving their management capabilities. Specifically, they should apply a structured approach to managing their two biggest costs: manpower and procurement. Companies need to develop a more flexible organizational model, with centralized functions, the right incentive structure, a culture based on performance, and strong project management capabilities.
Construction companies that operate in the Middle East face a range of challenges that grow more complex every year. Volatile oil prices and the rapidly changing geopolitical dynamics in the region have a direct impact on the construction industry. On the labor front, manpower costs are increasing due to the need to hire nationals, new regulations, and the growing cost of foreign worker permits.
Competition is growing more intense as well, particularly from foreign players. These competitors are bringing management expertise to their projects in the region, enabling them to operate more efficiently — and thus increasing the price pressure on local contractors. Relatedly, customers are now able to exert greater control over project management, frequently pushing contractors to assume higher levels of risk. For example, lump-sum contracts are becoming the norm, rather than the traditional cost-plus structure. This shift requires construction companies to manage costs more closely and to minimize the possibility of project overruns.
To meet these challenges, we believe that GCC contractors need to focus on three specific areas:
Customers are now able to exert greater control over project management, frequently pushing contractors to assume higher levels of risk.
In the past, construction companies in the GCC have been able to thrive with limited emphasis on operations and management, due to a relatively stable local economy and limited competition. This no longer applies. With a far more dynamic geopolitical and economic environment, and global competitors increasingly doing business in the region, local players must take action if they are to compete. We believe that success requires addressing their two biggest cost elements — manpower and procurement — along with establishing the right organizational structure and project management capabilities. By taking these steps, GCC construction companies can reduce their costs, operate in a far more flexible and lean fashion, and position themselves to win regardless of what the future holds.
1 The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.