10th Edition A new normal for a new decade - Deloitte GCC Powers of Construction 2020
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10th Edition A new normal for a new decade Deloitte GCC Powers of Construction 2020
10th Edition| Deloitte GCC Powers of Construction 2020 We have become accustomed to living in a time of constant change, with the Fourth Industrial Revolution having completely transformed the way business is being done across countries. Yet no one could have predicted the impact that the coronavirus (COVID-19) could have had in such a short amount of time. In a matter of a few short months, entire countries have been on full or partial lockdowns, closed off borders, stopped all non-essential businesses, entire industries have been severely impacted, including air travel, tourism, trade, and food and beverage with some stating that recovery would take years to reach pre-coronavirus times. Yet as many businesses deal with the “respond” phase of the COVID-19 crisis, others have reached the “recover” phase, and some are even looking to enter the “thrive” phase. It will be interesting to see the impact of COVID-19 in the next few weeks, months and years on these sectors. This thought leadership publication has been written to reflect the situation at the time of publishing, with the caveat that times are fast-changing and unprecedented, which could render the information provided in this report inaccurate or no longer applicable. 02
10th Edition| Deloitte GCC Powers of Construction 2020
Foreword
We are pleased to present our 10th annual establish mechanisms and procedures contracts, with the goal of attaining
edition of the Deloitte GCC Powers of to prioritise cash disbursements and standardized Construction contracts that
Construction publication, and what changes understand the contractual implications. fairly balance the risk and reward between
we have witnessed in these 10 years. Our the employer and the contractor, and, as a
publication aims to analyze current trends As the regional Construction industry moves result, reduce the extent of cost overruns
and provides insights into the marketplace. into the Recover phase, it is essential to adopt which benefits the developers and the
This edition draws on data and opinions a strategic view. Here, the focus should be contractors and eliminates unnecessary
from external sources, as well as leveraging on the effective execution of projects and overspend which is otherwise called waste.
Deloitte Middle East expertise. payments to contractors being made in a
timely manner to ensure the much-needed Going forward, the importance of tech to the
Like all sectors across the world, liquidity to complete the projects under sector has never been greater. Not only does
Construction has not been immune to the execution. An equal focus should be placed tech – such as drones, robotic Construction
impact of the global COVID-19 pandemic. on resolving any long-overdue unapproved processes and AI - deliver advantages in
Already, pre-COVID-19, the Construction claims and variations, which continue to terms of driving cost optimization, but it can
industry in the region was facing several disrupt cash flow and project progress which also help to minimize other risks associated
challenges including low margins, increased ultimately impacts the overall cost of the with any second wave of COVID-19 or future
competition, significant delays in projects asset being built. pandemics.
as well as a significant volume of change
orders and lower awards in projects despite Amid the pandemic, future projections have Longer term, in addition to working towards
significant plans in the GCC to invest in been revised, with recent industry forecasts building long-term enhancements to cash
infrastructure and capital projects, all leading indicating that approximately US$83 billion flow management and contractual terms and
to significant pressure on liquidity. With the worth of contracts could potentially be conditions, Construction companies should
additional challenges posed by COVID-19, awarded this year across the region, a be seeking to establish a better foundation
contractors’ liquidity circumstances have reduction from the original project award for the future through creating a new level
been exacerbated as most organizations forecast of US$127bn. However, if the current of engagement and collaboration with
turned to cash preservation measures, which rate of project awards were to continue to employers for the overall benefit of the wider
resulted in further delays of payments to the end of the year, then estimates indicate economy.
contractors and their supply chain. that approximately US$61 billion worth of
contracts could be signed, representing a fall We hope that this 2020 edition of the Deloitte
The Construction industry’s response to of 52% on the original forecast project award GCC Powers of Construction provides you
COVID-19 went through the three distinct prediction1. Such a scenario would continue with in depth insights on how the industry
phases of Respond, Recover and Thrive. to add pressure across the industry, with can come together in this ‘new normal’ to
In the early Respond phase, the industry’s further potential repercussions felt across create a future in which everyone thrives and
natural focus turned to ways to effectively the supply chain. waste is eliminated and capital projects are
and safely execute projects at the pace built at a cost that is both reasonable and
and scale required to minimize social and As stakeholders grapple with the ‘new economically viable.
economic damage and to contain costs while normal’ that COVID-19 has presented, they
focusing on cash preservation. This called for also face an opportunity to rethink the Cynthia Corby – Partner and Regional
an emphasis on cash flow visibility by project way they used to work and discover new Construction Industry Leader, Deloitte
and at an organisational level and scenario opportunities to change the status quo Middle East
planning, quantifying the impact of COVID-19 collectively. This should be addressed in
on project costs and cash flows, and applying the Thrive phase. High on the agenda will
short-term measures to reduce costs and be creating enhancements to Construction
1. MEED (Middle East business intelligence) Coronavirus Executive Brief (17 June 2020)
03
10th Edition| Deloitte GCC Powers of Construction 2020
Contents
06 10 13 17
The GCC Projects Middle East Real Estate Construction industry Financing contractors
market outlook performance survey: the Chief through crisis and beyond
Executives’ view in the pre
& post COVID-19 business
environment
19 22 25 28
Renegotiating Unlocking Shaping the future Digital Capital Projects:
Construction Contracts Project liquidity reducing the risk of
for COVID-19 cost overruns by taking
back control of data and
transforming project
reporting
31 33 37 40
Waste is suffocating the Reducing the cost of capital How to be clever about Constructing the future
Construction industry projects smart design of Saudi Arabia
04
10th Edition| Deloitte GCC Powers of Construction 2020
43 46 49 52
China’s Belt and Road Adaptability: the key The next steps for VAT and the Construction
Initiative and the to truly sustainable, the Kingdom of Industry: Deconstructing
Middle East: aspiring future-proof cities Saudi Arabia and the key VAT issues
towards a win-win impact of the Public
partnership Investment Fund
05
10th Edition| Deloitte GCC Powers of Construction 2020 The GCC projects market outlook 06
10th Edition| Deloitte GCC Powers of Construction 2020
The GCC Construction industry has Total MENA Contract Awards, April 2015-20 ($m)
weathered a number of storms through the
years. The events and aftermath of 9/11, the 18,000
real estate crash of 2008/09, and the halving 16,000
of oil prices in 2014 all had a dramatic 14,000
impact on the market and its fundamental 12,000
dynamics. 10,000
8,000
Yet, arguably nothing has come close to the 6,000
recent double whammy of the COVID-19 4,000
pandemic and collapsing oil prices.
2,000
Combined, the two sudden events threaten
0
to completely alter the market’s outlook and
2015 2016 2017 2018 2019 2020
create a whole set of new challenges for
Source: MEED Projects
project companies to overcome.
The latest data speaks for itself. In April,
the first full month of the coronavirus
impact, just $4.1bn worth of contracts
were awarded in the GCC, close to 40% Known GCC projects delayed, suspended or cancelled due to COVID-19
lower than the $6.2bn worth of contracts
in the same month last year, according to 350 45,000
the MEED Projects tracking service (www. 300 40,000
meedprojects.com). The wider MENA region 250 35,000
as a whole, recorded a slightly steeper 25,000
200
decline of 42% year-on-year as clients held 20,000
off on awarding new deals in the face of 150
15,000
such uncertainty. 100
10,000
50 5,000
Similarly, there has been a sharp rise in
0 0
projects either under execution or planned
that are being put on hold or even cancelled Bahrain Kuwait Oman Qatar Saudi Arabia UAE
as a result of deteriorating conditions. More Number of projects impacted Value of projects impacted ($m)
than 550 projects, worth over $60bn, are Source: MEED Projects
known to have been suspended or delayed
since 1 March in the GCC alone as clients
take stock of the situation.
These figures include close to 15% of all Known GCC projects delayed, suspended or cancelled due to COVID-19 by sector
active water projects, totaling $9bn, and
more than 11% of all transport projects, 250 30,000
5.0
worth more than $23bn. Conversely, some 11.7
25,000
200
sectors appear more immune to short-term
delays and postponements; only 2.5% of oil 20,000
150 7.4
schemes have been impacted, for instance. 15,000
100 14.4
10,000
Saudi Arabia has been the worst hit GCC 2.5 4.5
state with just under 300 projects put on 50 4.5
5,000
3.8
hold, followed by the UAE with 115 pending
0 0
projects. However, it should be noted
that both countries have proportionally a Chemical Industrial Oil Gas Power Water Transport Construction
much larger number of projects than their Number of projects impacted Value of projects impacted ($m) = % of active projects
neighbours. Source: MEED Projects
07
10th Edition| Deloitte GCC Powers of Construction 2020
As the market slows, project companies The result of these cutbacks is likely to be adjust their spending habits. For instance,
now face two distinct challenges. In the a sharp fall in the expected value of work when announcing Emirates Airline results
immediate short term, they have to adhere awarded in 2020. MEED Projects at the on 10 May, Group Chairman Sheikh Ahmed
to contracts and maintain Construction start of the year forecasted the total value bin Saeed al-Maktoum said that he did not
output while at the same time meeting the of projects to be awarded in 2020 at about see air travel returning to normal for at least
requirements for social distancing among $127bn. This was about $22bn up on the another 18 months.
staff and transporting them to and from site. 2019 total of $105bn1.
The economic slump that follows the
In parallel, there is anecdotal evidence However, COVID-19 has necessitated a pandemic is set to compound the situation.
of payments slowing and cashflow revision of the original forecast. MEED The UAE, for example, with its majority
deteriorating, while falling building material Projects now predicts that if the pandemic expatriate population, may actually
production also threatens to disrupt project results in a three-month lockdown of experience depopulation as people
schedules as the availability of key supplies economic activity, forecast spending for the lose their jobs and return to their home
like mortar, brick and plasterboard becomes year will instead reach $107bn, about 15% countries. In this scenario, it is hard to
more limited. down on the initial $127bn forecast. If the see anything but a further contraction in
virus were to have a longer lasting six-month property prices and consumer spending in
Beyond these immediate operational economic impact, then the forecast is for the region.
issues, firms have to face up to the potential just $87bn work of contracts awarded.
of a shrinking market as plummeting This would mark the worst projects market Equally uncertain is the future of crude oil.
crude prices and declining output compel performance for the GCC in at least a As with other sectors, the oil industry could
authorities to pare down expenditure. For generation. potentially emerge from its current crisis
example, Dubai’s Department of Finance in a very different guise. It will undoubtedly
in early April told all government agencies While this year’s spending outlook is now recover some of its recent price falls as
to cut capital spending by 50%, delay bleak, it may only be the start of a prolonged demand recovers. But no one can claim with
new projects, and reduce spending on downturn. any certainty that it will definitely reach $50
ongoing construction projects, according to a barrel anytime soon let alone the $70-plus
Bloomberg. Beyond the immediate issue of cutting back most economies in MENA require to balance
on capital expenditure, all of the six GCC their books. Some have already acted. On
The same month in neighbouring Abu nations are revising their long-term visions 10 May, Saudi Arabia took the dramatic step
Dhabi, MEED reported that Adnoc asked its to reflect what may be a very different world of tripling VAT to 15% while simultaneously
suppliers and contractors for “cost savings”, once the pandemic has passed. removing a cost of living allowance for public
and canceled $1.6bn worth of contracts on sector employees. The move was made to
its Dalma field development project just For a start, it is becoming apparent that help cover a potential budget deficit of more
three weeks after their signing. some sectors and industries, such as than SR200bn as crude revenues slump.
aviation, retail and tourism, may inexorably
Oman’s state-run companies were told change or at the very least take years to Others have acted less overtly but with the
to cut expenditure by 10% and to stop return to their pre-virus norm as people same intent. The UAE’s Prime Minister and
the implementation of all new projects,
according to Reuters, while Bahrain went
further and insisted on a 30% cut in costs. Forecast projects spending 2020, GCC ($m)
Qatar said it was going to postpone some
$8.2bn of un-awarded capital projects in its 140,000
7 April bond prospectus. 120,000
100,000
In Saudi Arabia, the region’s largest projects
80,000
market, Finance Minister Mohammed
Al-Jadaan warned in an interview with 60,000
Bloomberg in early May that some projects 40,000
under the Kingdom’s Vision 2030 will be 20,000
“postponed and extended to next year and
0
to the year after”. Media reports on 12 May
Bahrain Kuwait Oman Qatar Saudi Arabia UAE Total
suggested Riyadh was planning some $8bn
in cuts to projects in 2020. 2019 Actual Original 2020 forecast Revised 2020 forecast (3 month lockdown)
Revised 2020 forecast (6 month lockdown) Source: MEED Projects
1. It is worth noting that this 17% increase was based in part on approximately $20bn of exceptional contract awards on the Qatar LNG expansion program. Without
this one-off item, spending would have been more or less flat year-on-year.
08
10th Edition| Deloitte GCC Powers of Construction 2020
Dubai Ruler Sheikh Mohammed bin Rashed
al-Maktoum in May challenged his cabinet
From a new market perspective, Sub-
Saharan Africa states represent a growing
Saudi Arabia has
in a three-day meeting titled “Preparations
for the post-coronavirus, COVID-19, period,”
opportunity, given their infrastructure
requirements and high economic growth.
been the worst hit
urging it to adopt new ideas and stating “our
national priorities need to be reviewed to
But targeting new countries is both
costly and risky, and rewards are not
GCC state with just
cope with the post-COVID-19 world.” guaranteed. A case in point is Egypt. While under 300 projects
the construction market in the country
Faced with lower client expenditure is booming thanks to high population put on hold, followed
by the UAE with
and a radically changing economy, firms growth, it is difficult to access because local
dependent on projects spending cannot firms are so well entrenched and highly
afford to stand still. competitive. International companies
wishing to enter the market would need to
with 115 pending
For an industry that was already struggling
under declining project activity, cashflow and
have a compelling proposition in order to
be successful.
projects. However,
payment issues, decreasing margins and
increased competition, many companies Finally, it is always worth remembering that
it should be noted
now face an existential challenge. Those the future pipeline of projects in the region that both countries
that embrace innovation and technology will remains considerable. At more than $2.5
be better equipped to prosper in this new trillion, even if the pipeline were to halve, it have proportionally a
much larger number
environment. would still represent a very sizeable market
opportunity.
Many have already adapted by trimming
workforces and adopting more efficient And what COVID-19 and the oil price fall
of projects than their
processes. Investments in new and
emerging construction technologies, such as
have done is served to focus minds on the
need to accelerate economic diversification
neighbours.
BIM, 3D printing, Big Data, digital twinning, and movements toward each country’s
and the Internet of Things (IoT), can help national vision. From that at least many
speed up development and reduce costs. major new opportunities will emerge. The
companies which can pre-empt and grasp
In parallel, companies have also followed these changes will be those that will be
more traditional approaches, such as best-positioned to face the challenges
diversifying into more resilient sectors of ahead.
the market and entering new geographies.
Solar power, water and wastewater by Ed James – Director of Content & Analysis
infrastructure, and offsite modular at MEED Projects
construction are good examples of sectors
to have bucked the trend and witnessed
strong growth in the past half-decade.
Value of planned and un-awarded GCC projects ($m)
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Bahrain Kuwait Oman Qatar Saudi Arabia United Arab
Emirates
Source: MEED Projects
09
10th Edition| Deloitte GCC Powers of Construction 2020 Middle East Real Estate performance 10
10th Edition| Deloitte GCC Powers of Construction 2020
Dubai Residential sales price index for Dubai, Jan 2003 to Jan 2020
350
Real Estate sector performance in Dubai
300
continued to be impacted by oversupply in
2019, which resulted in falling capital and 250
rental values, particularly in the residential
sector of the city. Meanwhile, COVID-19 has 200
caused significant disruption across all Real
150
Estate sectors and the magnitude of the
impact due to travel restrictions and lockdown 100
measures will depend on the shape and pace
of recovery. 50
0
The average sales price for residential
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
property across Dubai declined by
approximately 7 percent between Q3 2018
Source: Reidin
and Q3 20191. Meanwhile, increasing supply
also impacted rents, which declined by
approximately 9 percent over the same
period.
Q. Which asset class in Dubai has the most potential in 2020?
Notably, the UAE government put in place
certain initiatives, such as the Higher Industrial
75%
Committee for Real Estate which was formed /Logistic
in September 2019 and aimed at mitigating
Hospitality 15%
the imbalance in supply and demand in the
medium term. Meanwhile, Dubai has become
Residential 4%
more affordable to a wider audience and
the key to success will be translating this into
sales and lettings and permanent residence Office 4%
opportunities.
Retail 1%
In 2019, Dubai continued to retain its position
as one of the most attractive tourism 0% 20% 40% 60% 80% 100%
destinations in the world, in terms of the total Percentage respondents
number of international overnight visitors. Source: Deloitte 2020 Real Estate Predictions Survey
However, average daily rates (ADRs) and
occupancy rates experienced downward
pressure from increasing supply and minimal Real Estate sector performance in Dubai
demand growth.
continued to be impacted by oversupply in
For commercial assets, oversupply in select
locations and a limited number of new
2019, which resulted in falling capital and
occupiers were among the key factors for
sluggish activity in 2019. The primary demand
rental values, particularly in the residential
was for Grade A properties, such as DIFC. sector. Meanwhile, COVID-19 has caused
Looking forward, the outlook for the Real significant disruption across all Real Estate
Estate sector is tied to macro-economic
factors and to related recovery measures for sectors and the magnitude of the impact
businesses from COVID-19, including actions
from the Central Bank and policy makers. It due to travel restrictions and lockdown
remains to be seen whether the pandemic
will result in structural shifts in the real estate
measures will depend on the shape and
sector2.
pace of recovery.
1110th Edition| Deloitte GCC Powers of Construction 2020
Kingdom of Saudi Arabia (KSA)
Diversification efforts, social reforms This additional supply is expected to Approximately 7,600 keys are expected
and government-led investments in exert further downward pressure on to be completed by 2021, representing
Infrastructure, Entertainment and the both occupancy rates and ADR as supply a 60 percent increase to existing supply,
Tourism sector will be key to the Real Estate continues to outstrip demand, which has although some projects may face delays or
sector’s recovery and growth in the long been severely impacted by the COVID-19 suspensions.
term. outbreak and counteracting measures.
Makkah
Market performance3 The announced infrastructure developments Occupancy rates in Makkah increased by 10
and the dramatic transformation in the percent year-on-year to reach 68 percent in
Riyadh Entertainment and Leisure sectors are the first half of 2019. However, the supply
Average occupancy levels in Riyadh rose by expected to help diversify the city’s tourist increase continued to exert pressure on
5 percent in the first half of 2019 compared base and increase demand within these ADR, which declined by 8 percent over the
to the same period in 2018. However, sectors in the long term. same period. This resulted in an increase of
increasing supply and competition led to 1 percent in RevPAR.
declines in average daily rates (ADR) by 10 Jeddah
percent over the same period. This resulted Occupancy levels remained stable in Jeddah Approximately 1,489 keys were delivered
in an overall decline in revenue per available during 2019, but increasing supply and during the first half of 2019, including
room (RevPAR) by 6 percent. competition continued to drive reductions Millennium Makkah Al Naseem and the
in ADR and consequently RevPAR. The latter Doubletree By Hilton Makkah Jabal Omar. An
Approximately 850 new keys were handed declined by approximately 11 percent in additional 20,100 keys are expected to be
over in Riyadh during the first half of 2019, the first half of 2019, compared to the same delivered until 2021, mainly located in
bringing existing stock to 14,874 keys. This period last year. proximity to Al Masjid Al Haram.
included key offerings such as the Marriott
Hotel and Marriott Executive Apartments During the first half of 2019 approximately by Oliver Morgan – Director, Head of Real
Riyadh Diplomatic Quarter. 556 keys were handed over in Jeddah, which Estate Development, Deloitte Middle East,
included Adagio Aparthotel Jeddah Malik Dunia Joulani – Head of Travel, Hospitality
Approximately 4,500 additional keys Road and Ibis Jeddah Malik Road. and Leisure, Deloitte Middle East, Manika
are scheduled to be completed by 2021, Dhama – Assistant Director, Real Estate
assuming there are no project delays or Development, Deloitte Middle East
suspensions.
International overnight visitor spending, global top five
destinations, 2018
Diversification
30.02 19.82 19.84 18.28 18.62
efforts, social
reforms and
Visitor spend (US$bn)
government-led
investments in
Infrastructure,
Entertainment and
the Tourism sector Dubai Makkah London Singapore Bangkok
will be key to the
Real Estate sector’s Source: Mastercard Global Destination Cities Index
recovery and growth
1. Reidin, Q3 2018 vs 2019 YOY average sales prices.
2. Deloitte Dubai Real Estate Predictions 2020, a survey of 100 leading investors and developers
in the long term. 3. Data from STR
1210th Edition| Deloitte GCC Powers of Construction 2020
Construction industry survey:
the Chief Executives’ view in the
pre & post COVID-19 business
environment
1310th Edition| Deloitte GCC Powers of Construction 2020
Deloitte conducted two surveys of Chief disruption to global supply chains and work sector has continued to be cautious
Executives from the GCC Construction delays, all amounting to an increased cost with new Construction awards, in light
industry. The initial survey, conducted in on these projects, and further deterioration of economic and geopolitical pressures.
early 2020, was to gain insight into market of liquidity and cash flow. Almost half of the Consequently, there was a downturn in
sentiments on a range of topical issues respondents have experienced a delay or optimism among respondents about future
impacting the construction industry across termination of works, or have had to notify awards.
the GCC region. We then conducted a employers under the force majeure/change
follow-up survey in June 2020, to reflect on of law clause in their contracts in an attempt Prior to the pandemic, 33% of the
how these sentiments have changed as a to recover these additional costs and respondents were optimistic about their
result of the COVID-19 pandemic. protect themselves from potential liquidated future financial prospects relative to the
damages. preceding 12 months. This compares with
Even prior to the pandemic, respondents 56% of respondents in 2018 who were more
had a grim outlook on their businesses’ To counter these challenges and alleviate optimistic about the future. It comes as no
future financial prospects relative to some of the liquidity pressures, businesses surprise that the pandemic has eroded this
the preceding 12 months. The added in the sector are implementing self-help already declining optimism with oil prices at
uncertainty of the pandemic world has measures. All respondents confirmed the level they are.
further impacted sentiment among the that their business took some action in
respondents. a bid to ensure business continuity and Cash deprivation
cash preservation, with some businesses Consistent with prior years, the majority
The outlook on future financial prospects implementing more than one measure; 31% (2019/2020: 87%, 2018: 72%) of respondents
was driven primarily by external market of respondents implemented temporary or believe that there is greater pressure on
drivers, such as the global and local permanent salary reductions, 31% reduced contractors to help fund projects due to
economy, increased competition, and headcount, and 38% implemented a delays in payments. During 2019/2020, 28%
increased pressure on liquidity. reduction in both salary and headcount. of respondents have seen increases in their
bank borrowings to fund the Construction
The following is a summary of the key of ongoing projects.
findings.
The need for additional funding can be
The impact of the pandemic on GCC attributed to the growing cash conversion
construction cycle for contractors, i.e. the time taken
31%
The pandemic has drastically impacted from when work is performed on site to
the future outlook on financial metrics of being certified and then being paid the cash.
companies around the globe, and the GCC To determine the average cash conversion
38%
construction sector is no exception. The cycle of contractors in the region, we asked
respondents expect that their key financial respondents about the average time for
metrics will perform negatively in the conversion of ‘work done (uncertified WIP) to
coming 12 months, as would be expected receivables’ and the average ‘collection time
in such unprecedented times. Decreases of receivables’ once certified. On average in
are expected in revenue, operating margins, 2019 it took 35 days longer than in 2018 to
31%
operating cash flow and hiring, along receive payments for work done, with this
with increases in average receivable days, increasing substantially in 2020 by a further
uncertified work in progress (WIP) days, and 73 days as result of the pandemic. This has
bank borrowings. Salary reductions left contractors having to fund a further
Headcount reduction 108 days of working capital compared to 18
In addition to the impact on financial Both months ago, with the cash conversion cycle
metrics, the sector has also encountered Figure 1: Self-help measures implemented by business in the
now averaging at approximately 1 year for
significant operational issues in its battle construction sector in-progress contractual cashflows.
against the pandemic. The industry Optimism downturn
was deemed ‘key’ in many jurisdictions The Construction market was challenging It should be noted that the above collection
and largely continued to operate during for many contractors even prior to the timeframe assumes there were no legal/
the various lockdowns enforced by pandemic. During 2019, oil prices remained contractual disputes. Respondents
governments to contain the spread of the at a standstill with no clear signs of recovery, indicated that when there is a dispute
pandemic. However, many businesses have thus weakening economic growth in the with the employer, the collection period
faced operational challenges including GCC. This continued to have an impact on is substantially longer, and this further
labor productivity, surplus labor, health the timing of the award of Government increases the financing requirements of the
& safety challenges for onsite personnel, construction projects. Similarly, the private business.
1410th Edition| Deloitte GCC Powers of Construction 2020
Contractual disputes 80%
When asked if the level of contractual 70%
dispute activity had increased over the 60%
past 18 months, either in terms of number 50%
of disputes or the value of those disputes, 40%
40% (2018: 61%) of respondents agreed. 30%
20%
Given the dispute activity, contractors still 10%
0
feel they have little choice but to enter into
dispute resolution proceedings to recover 2015 2016 2018 2019 2020
their costs. Approximately 80% (2018:
83%) of respondents are currently involved Optimism Average oil prices
in some form of contractual dispute,
whether due to unapproved variations, Figure 2: % of respondents optimistic about future financial prospects correlated to average oil prices (in US dollars
per barrel)
contractual claims, project cancellation or
Average oil price source: https://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/
other reasons, with 60% of respondents
not recognizing any revenue associated
with these disputes until they are resolved.
This therefore negatively impacts their
performance for their financial year as all 2016 83 days 85 days 168 days
the contract costs need to be recognized
against no revenue, given the uncertainty 2018 114 days 129 days 243 days
of the revenue.
2019 179 days 99 days 278 days
Dispute resolution
Based on the survey results, the average
2020 216 days 135 days 351 days
dispute resolution time appears to
have increased by almost four months
(2019: 35 months, 2018: 31 months). 0 50 100 150 200 250 300 350 400
These are significant timeframes when
considering that the contractor (and the WIP to receivables Receivables to cash
employer) will be incurring additional
Figure 3: Average time taken to receive payments for work done
legal and professional advisor fees during
the dispute resolution process, further
impacting margins and cash flows and
putting further pressure on funding 2016 748 days
requirements.
2018 923 days
The majority of respondents believe that
the pandemic has caused further unknown
2019 1056 days
delays to the current dispute resolution
process. It is too early to able to estimate
Figure 4: Average time to resolve contractual disputes
the extent to which the dispute resolution
time will increase, but any additional delays
to this already protracted process are likely
to strain contractor resources even further.
Financing availability
There is increasing pressure on contractors
to help fund projects during construction,
which is primarily due to the increasing
cash conversion cycle (currently averaging
at approximately one year) and dispute
resolution time (currently averaging at
approximately three years). As a result,
similar to prior years, the majority (2019:
1510th Edition| Deloitte GCC Powers of Construction 2020
87%, 2018: 76%) of respondents are ways, including but not limited to delayed When respondents were asked when
experiencing greater pressure to fund repayments on loans and an increase in activity is expected to rebound for the
projects relative to 12 months ago. the availability of credit facilities. When construction sector, 76% believe this will
respondents were asked if they have not be earlier than Q1 2021, with half of
Given the increased need to fund projects, been able to access any of the stimulus these expecting it to take even longer.
respondents were asked about their measures introduced by their respective
experiences regarding availability of Central Bank, only 15% said yes, while the However, with a future rebound, 70% of
finance. Based on the survey results of remainder were either not able to access respondents believe that the pandemic will
2019/2020, there was an improvement in or not aware of how they could access the give the sector the much-needed push to
the availability of finance to contractors, relief announced. reshape the GCC Construction industry.
with only 20% of respondents finding it
hard to get financing for their business, Future outlook Note to reader: This was a “pulse survey”
compared to 33% in 2018. Given the continuing challenging conducted to ascertain the views of C-Suite
environment for the construction sector industry leaders. It is not, nor is it intended
In these unprecedented times and and the unprecedented challenges that to be, scientific in its number of
challenging business environments, the contractors are experiencing as we respondents, selection of respondents, or
GCC governments have taken rapid and emerge into a new post-pandemic world, response
significant actions to support businesses it becomes even more important for rate.
which are impacted by the pandemic contractors to efficiently manage cash flow.
through the introduction of stimulus by Jaimi Raikundalia – Audit Partner,
packages. These packages were designed Deloitte Middle East, Pavan Kumar – Audit
to offer relief to businesses in a variety of Manager, Deloitte Middle East
Even prior to the pandemic, respondents had a grim outlook
on their businesses’ future financial prospects relative to the
preceding 12 months. The added uncertainty in the new pandemic
world has further decreased optimism among the respondents.
1610th Edition| Deloitte GCC Powers of Construction 2020
Financing contractors
through crisis and beyond
1710th Edition| Deloitte GCC Powers of Construction 2020
The social and economic disruption caused negatively affected the viability of so many Under this model, banks will make sure to
by the coronavirus (COVID-19) outbreak will contractors during these difficult cycles. extend all possible support to allow the
shape the UAE construction industry for project to complete, which will result in the
years to come. There are segments that are While the industry has a lot to address, one return of the performance guarantees and
stressed simply because of their dependency observation lenders focused on during the rundown of exposure. Banks will support
on either labor or imports at a time where financial crises of 2008 and the existing project financing if the source of repayment
movement is an issue! Everyone is still figuring pandemic is, “Contractors who ring-fence the is secure and identified; they will support
out what the real medium term impact of cashflows of their projects are likely to fare more if payment is assigned to the bank
COVID-19 is, and how to approach it. The better and raise finance for those projects and paid into the project ring-fenced bank
extent of its impact can be mitigated by faster”. That’s where the “contracting finance account.
accelerating long-overdue reforms to the way model”, a term used by lending banks, comes
the Construction industry operates. into the picture. This arrangement also helps contractors
and their finance teams to maintain the
It is imperative for the region’s Construction The model is dependent on the “What”: discipline of ring-fencing projects cashflows
industry to lead the world in terms of quality, and avoiding the malaise of using a specific
productivity and safety. In the UAE alone, • Initial project cashflow project’s funds to shore up other struggling
there are major projects planned, so there is projects, which ultimately leads to failure.
clearly a lot at stake here. Then, there is the • Project execution plan When the cashflows reduce these projects
heightened scrutiny of the value of public suffer tremendously due to a shortage of
sector spending, where every Dirham spent • Legal contract defining scope, time, cost and new inflows to cover the earlier withdrawals
now needs to deliver value. This is increasingly responsibilities outside the project cashflow.
apparent in the region’s Projects sector, where
late delivery and greater-than-expected costs Once the “What” is analyzed, “the How” Therefore, it is an ecosystem that needs
are draining large sums of money. Technology is assessed for the required financing to exist if we are to protect and enhance
would be one area that can provide a instruments and these will be structured the performance of this crucial industry.
solution for the many challenges faced by around: All parties need to realize that no one
the Construction industry in the region. In can operate in isolation, and a failure by
essence, UAE’s Construction companies need • Contractual warranties that need to be any party to uphold their contractual
to better plan their long-term investments to provided by the contractor (performance, responsibility will result in a failure of the
sustain the transition towards a technology- advance payment and retention bank project.
driven Construction landscape, however, first guarantees)
there needs to be a change in mindset! Where do we go from here…?
• Procurement requirements, be it materials
However, first there or equipment (documentary credit) Now is the time to set this discipline to ring-
fence each projects cashflows and work
needs to be a change • Temporary cashflow deficits, which arise with the industry to facilitate, and maybe
due to the timing of incurring cost and the mandate, the assignment of project proceeds
in mindset! receipt of payment from the project owner to the bank that is issuing the performance
as per the terms of the contract (short term guarantees. It is also time for us to reconsider
This change in mindset goes down to the loans or overdrafts) what burdens we place on the contractor;
core issue of the culture in the industry, unbalanced risk and reward contracts,
where clients look to complete projects as For the ring-fencing project finance to work, delayed certifications and the size and tenure
quickly and cheaply as possible. Tenders are all payments made or received should be of project bank guarantees all need to be
still awarded to the lowest bidder and there within a specific bank account that is only used addressed.
is very little thought given to the long-term for the purpose of completing this project.
sustainability of the project stakeholders. This Upon completion of the project, the account This is an easy, conscientious decision we
undermines sustainability and is damaging in will cease to operate. Such arrangement will need to make, which will allow us to start
the long-term- an evident example of mindset require the contractor to assign the proceeds addressing the real issues constraining the
that needs to change. to that account held with the lender, and evolution of this industry; writing fair
the project owner to recognize and accept contracts, promoting the use of technology,
To add to industry’s multiple issues, a lack the same and make sure the payments are building sustainably… Now is always the best
of financing and accounting discipline by only made to the project-specific account. time to change!
contractors in general compounds their The rejection of some project owners to
struggle to secure financing during the accept project proceeds makes it difficult by Mohammad Al Shouli – Executive Vice
difficult times. The infamous “need to for contractors to source the right cashflow President Global Head of Contracting Finance,
borrow” generally with no clear structure has financing from their banks. Mashreq
1810th Edition| Deloitte GCC Powers of Construction 2020
Renegotiating Construction
Contracts for COVID-19
1910th Edition| Deloitte GCC Powers of Construction 2020
The Construction landscape before some commodity prices, such as steel, something in return that may ease its
COVID-19 was one where inequitable may have reduced in price, the broad financial difficulties, the most obvious
risk allocation had eroded industry profit expectation is that COVID-19 related events consideration is cash flow. This could be
margins, late payment had created a cash will have increased the contractor’s cost of considered in terms of the below:
flow crisis, and an unparalleled level of delivering a project as a result of delay and
scope changes by employers resulted in a disruption, meaning that the most likely A request to increase the frequency
culture of chronic cost and time overruns, outcome would be the contractor raising of interim applications, payments two
disputes, and mounting financial losses. claims for additional payments under this weeks in advance and two weeks in
and other contractual provisions to recover arrears, and/or a shorter payment period.
COVID-19 has brought with it a few more its losses. Whilst there is a cost to it, consider a
challenges: social distancing requirements project bank account to protect against
and safety measures on site and in delayed payments. This also has the
labor camps, a shortage of labor, plants With no contractual justification to require advantage to the employer of ensuring the
and materials, travel restrictions and a reduction in the contract price, does the subcontractors get paid and the money is
quarantine rules, all causing delay and contractor have to reduce its price? No. The spent on its project.
disruption to projects. contractor is entitled to rely on the agreed
contract price. But is it desirable for the Ceasing the withholding of retention.
But perhaps most significantly, COVID-19 contractor to reduce the contract price?
has resulted in uncertain demand for Possibly. A reduction in performance security (and
projects already underway. thus cost of maintenance): performance
The contractor may be at risk of bonds are usually linked to the contract
termination or finding itself with no further price so it would follow that the bond is
In an environment work on the project. Where turnover reduced proportionately as a minimum.
is crucial to survival, this risk may be
of inequitable risk unacceptable for the contractor. Against Settlement of any existing claims for time
this alternative a price reduction may be
allocation, it was more desirable.
and cost.
inevitable that the Is it a real risk? It may be. If either party
An amendment to the contract will need to
be drawn up in writing and consideration
response of some gave notice of force majeure and the
execution of substantially all of the works
will need to be given as to how the other
terms will operate to avoid any unintended
employers has been is prevented for a prolonged period of
time (84 days in the 1999 FIDIC contracts),
consequences, in particular:
to tell contractors to it is likely that either party will have a • What is the revised time for completion?
right to terminate. Employers, in any
reduce their prices. event, typically have a contractual right to • Are the provisions for extension of time
terminate for convenience. Even without and additional cost still appropriate?
Contractors are asking if legally they must that right, employers could fall back on the
comply and employers are asking how they approach favored in the global financial • Does the provision for delay damages
can use the contract terms to justify such a crisis to “de-scope” the remainder of need amending if intended to be a
demand. project works in order to remove the percentage of the contract price?
contractor. It should be noted that while
Assuming that the contract price is a the unamended forms of FIDIC prevent • Are programs and BoQs still reliable/
traditional lump sum, there is unlikely to be these actions where the intention is to relevant for the purposes of assessing
any contractual mechanism entitling the award the works to another contractor, in interim payments?
employer to require the reduction of the this region that clause is usually removed.
contract price without also decreasing or • Does insurance need extending in time
changing the contractor’s scope (such as In these circumstances the contract usually or coverage to meet the new conditions?
omitting works or changing the types of entitles the contractor to payment for
installations). the works carried out to date (and costs • Who is to cover the cost of any plant or
incurred in contemplation of completing material which has suffered deterioration
The only exception is where the contract the rest) but not loss of profit. during any slow-down or suspension?
contains a provision for adjustments The cost of expired manufacturers
by which there is a reduction to the Faced with this possibility a contractor warranties? Re-mobilization?
contractor’s costs (eg, GC-13.8 of FIDIC might be minded to consider reducing the
Red Book, if utilized). However, whilst contract price. If so, and if able to negotiate
2010th Edition| Deloitte GCC Powers of Construction 2020
• How will a second wave of COVID-19 (or margin could be agreed and the employer
other coronavirus) be dealt with? would benefit from any gains arising from
lower commodity prices.
• Are the suspension and termination
provisions still appropriate? Again, any changes will need to
appropriately documented in an
• Do the subcontract and supplier amendment to the contract and
contracts need to be amended to reflect consideration will need to be given to
changes in the main contract (eg. in impact on the other contract clauses.
relation to pricing or the provision of
information/forecasts to feed into the
main contract applications for payment)? It is in everyone’s
The contract amendment must be signed interest that our
by someone with the express authority to
bind the company to new contracts and
industry survives.
to enter into settlement agreements on
behalf of the company.
Renegotiating
contracts will be a
However, the existing key part of that
tight margins call for survival. If there was
a more sophisticated ever a time to turn to
solution than simply a fair, collaborative
reducing prices. approach to
Before the COVID-19 pandemic occurred, construction
the industry said it was almost at breaking
point. The GCC had a reputation for being contracts to drive
a notoriously difficult market in which to
make a profit. International companies success, it is now.
were leaving the market, main contractors
were experiencing the insolvency of four by Suzannah Newboult – Partner, DLA
or five suppliers and subcontractors on Piper
each major project, and developers were
complaining of delivery risk with main
contractors on the edge of insolvency.
A simple reduction in contract price will
intensify these issues.
Resilience will come in the form of a more
collaborative approach to the project
post-COVID-19. Consider for example,
value engineering on certain aspects
of the scope in order to bring the price
down whilst still more or less respecting
the originally intended overall scope
and quality of the project. Project bank
accounts would offer security for all.
Switching to a cost reimbursable contract
would give the employer more confidence
in the contractor’s ability to deliver and
promote transparency. A modest profit
2110th Edition| Deloitte GCC Powers of Construction 2020 Unlocking project liquidity 22
10th Edition| Deloitte GCC Powers of Construction 2020
Unlocking project liquidity Profits, however small, may still appear on and the early procurement of long-lead
It’s no secret that Middle East contractors paper. Therefore it’s understandable that items through the contractor supply
are feeling the squeeze in a highly the greatest daily challenge for contractors chain, advance funds are regularly being
competitive environment fueled by a in the current market is liquidity utilized against costs and delays of other
decreasing supply of new projects in the management. Cash is not only a product projects – potentially starving the intended
construction market. As bid teams battle of the business but the “blood” that drives recipient project of cash from the outset.
it out over a lower volume of project it – and projects. Over the last year we have This leads to cash challenges on one
awards, developers are naturally pressing seen a number of contractors seeking to project contaminating the rest of the
contractors harder on project commercial raise new debt or negotiate new terms projects and business, potentially giving
terms. with not just banks but sub-contractors rise to a host of stakeholder challenges (i.e.
and suppliers. Contractors therefore have multiple customers and creditors) as the
The “new normal” is an awakening for a lot more to consider when bidding and whole contracting business rather than a
contractors forced to accept not only lower entering into new contracts. particular project is put at risk, including
project margins but a decreased volume performing projects.
of projects - a compounding reduction Plan and negotiate your project cash
on gross profits. Project contract risks profile not just your margin An understanding and monitoring of the
are inherent and omnipresent, but in When bidding, aligning project receipts actual cash profile of each project on
an unfavorable market environment of to cash outflows is key; so too is a standalone basis in addition to their
reduced supply and tighter margins, it management of advance payments. The combined outcome is therefore critical.
becomes more important than ever for Middle East construction sector has Only then can robust cases be put to
contractors to remain operationally and historically benefited from significant clients for further cash advances or to
financially diligent to manage these risks advance payment terms of typically speed up the collection of receipts, or can a
and achieve the forecast margins. 10 to 25 percent of the contract value. case be demonstrated for further equity or
Whilst intended to support mobilization debt funding.
An understanding and monitoring of the actual cash profile of each
project on a standalone basis in addition to their combined outcome
is therefore critical.
Liquidity management best-practice - tactics to employ
Cash receipts – debtor management
Tactic
Align receipts to project cash needs (or sooner) This may include agreeing earlier payments for contractors’ committed spend and
not just costs materials off-site.
Rapid submission and vigilant follow-up of Too much emphasis on delivering the project can detract from important efforts to
certifications, claims and variations substantiate robustly the value or works and cash entitlement, as well as potentially
accelerate spending.
Client/project credit worthiness and sources of Understanding clearly how a client expects to fund contractors and the clients’ sources
funding and quantum of financing made available for doing so, can influence whether to bid.
2310th Edition| Deloitte GCC Powers of Construction 2020
Cash payments – cost reduction and trade creditor management
Outsourcing of works to reduced fixed cost If decreased project volumes lead to decreased utilization of fixed cost employees, aligning
base to the new normal and employing variable costs allows greater flexibility to adapt to a
volatile volume of projects.
Strategic procurement to drive enhanced Centralization of procurement and advance procurement planning can enable
pricing and terms procurement divisions to manage fewer orders of higher volumes with pricing
reductions and rebates. Similarly, fine-tuning the timing of procurement can smooth
the cash flow profile.
Capital governance and project control
Selective bidding and enhanced focus on risk Enhance the bid process for tender approval, focusing on risk allocation and suitability
allocation based on the working capital profile.
Project-wise and enterprise cash planning and Bottom-up, ring-fenced, cash flow planning gives visibility over the drivers of cash flow
analysis and the pinch points where careful management is required to inform decision-making.
Avoid gaps in data sharing and client Claims knowledge and data can be lost during times of high staff turnover, making it
management challenging for others to pursue. Ensure documentation is robust, updated and secure at
all times.
Establish a cash mind-set in commercial and A cash focus should be cascaded down to project teams, to ensure they remain vigilant in
project managers regard to receipts and payments and their net cash position.
When does a project need bank support? is critical for regional contractors. From Contractor bonding in favor of clients has
The bank’s view: a bank perspective this only heightens been a mainstay of the industry, in particular
A tough message for many to acknowledge their risk allocation of the Construction performance bonds. Contractors should
is that with the appropriate cash planning, sector, pushing up interest rates, and bond seek to price the cost of these into their
bank financing of contractor operations collateral requirements, making debt not tenders, as well as any other finance costs.
is typically low and restricted to projects only harder to attain but also less attractive Demonstrating a focus on liquidity
with significant time between milestone as a significant source of cash. management can also reduce the cash
payments. Furthermore, where cash collateral required to secure these.
requirements may be temporary over the Despite this, overall banking sector liquidity
profile of a project, contractor bank support is at comfortable levels, with a desire to by David Stark – Partner, Restructuring,
may not even be necessary at all times. deploy. However, demonstration of the Deloitte Middle East, Thomas Bullock –
following is key: Director, Restructuring, Deloitte Middle East
However, the story on-the-ground
appears different. Regionally, and based • A clear purpose and requirement for debt -
on a sample of listed peers, contractors not to fund project losses or overheads
with debt to equity ratios in excess of
1x are not uncommon. By comparison, • First-ranking repayment security in the
global counterparts typically have debt form of pledged receivables or fixed assets
to equity ratios of less than 0.3x. These in excess of borrowings
highly leveraged positions erode long-term
shareholder value and dividends. This To raise debt at a corporate level (as
is further demonstrated by interest to opposed to a specific project) in addition
EBITDA ratios of close to 1x, against a 0.2x to the above the contractor would typically
global benchmark. To unlock any long-term require a much larger portfolio to absorb the
value from this position, reducing debt risk of any loss-making contracts.
2410th Edition| Deloitte GCC Powers of Construction 2020
Shaping the future
2510th Edition| Deloitte GCC Powers of Construction 2020
Deloitte Middle East talks to Mr Ahmad Al Matrooshi, Managing Director, Emaar Properties PJSC, about Emaar’s strategic
plans and the digital transformation journey.
What defines Emaar and its culture as Real Estate market? through a robust execution and delivery
a key regional Real Estate developer Sheikh Mohammed bin Rashid Al Maktoum, strategy of digital solutions. From building
and what would you ascribe Emaar’s Prime Minister and Ruler of Dubai, outlined our first 3-D printed home to the recent
success to? an optimistic view of our shared future and partnership with Xiaomi for Emaar Smart
Emaar was founded on the vision to shape one we share here at Emaar. Home, Emaar is leveraging the potential of
the future through integrated master- innovative digital technologies across all
planned communities. Over 22 years later, The United Arab Emirates is advancing aspects of operations, with a digital-first
we have set an impressive track-record at unprecedented speed; adopting and customer-first strategy.
in developing and delivering world-class technologies and putting in place the right
property, malls, and hospitality projects legislation to support future growth. To put What innovative construction
in countries around the world, creating it simply, we are preparing for tomorrow, technologies have you used when
thriving lifestyle communities while today. An important part of this journey, as building your most recent projects?
contributing to the local economy. Better a country and as a business, is the ability Dubai’s first 3D printed home is an
yet, we provide innovative and memorable to adjust and change course when faced Emaar project, can you tell us more
lifestyle experiences that enhance the with external challenges. As His Highness about this and how this may feature
everyday life of our residents. said, we are a country that faces facts and in your future strategy and where
reviews calculations. Agility is the recipe for you see the opportunities and the
As we continue to grow and innovate ahead success and will contribute to the success challenges with 3D construction in the
of the curve, our ongoing investment in of both Emaar and secure the future of the future? How do you see this impacting
customer-centric innovation across our UAE. the home of the future?
business results in continued interest Offering several benefits, including
from foreign investors in both residential There appears to be a large pipeline more flexibility in design, 3D printing is
and commercial developments. Today, of infrastructure projects for the also ‘greener’ with sustainable home
Emaar’s positioning in the global forthcoming years, how does this construction techniques significantly
development landscape is the result feature in your future strategy? lowering waste and noise pollution during
of that single-minded vision, and the We are primed for growth and redefining wall construction.
focus on long-term value creation for the landscape of Dubai remains at the core
stakeholders that has consistently been of our business. Upcoming projects, such In early 2019, Emaar launched a global
delivered. Emaar’s performance in 2019 as The Valley, encapsulate the next chapter competition, in which the world’s leading
was robust, maintaining growth within a of Emaar. Our ambitions are nested in the 3D printing technology providers
challenging market. This is a testament to future trends of the property market and participated to 3D print a model home in
our innovative concepts and products, and are focused on modern living – core to the Emaar’s Arabian Ranches III residential
the people behind them. Emaar does not development of building premium Real development. Following the competition,
simply look to the future — we build it. Estate. an international 3D printing technology
company and a UAE-based contractor were
How have you adapted your strategy Can you tell us more about Emaar’s awarded the contract. The construction will
to respond to the changes in the Real ongoing digital transformation journey be facilitated using a local contractor and
Estate market? and how this is being applied in your locally sourced printing materials with the
Our strategy is and remains to build developments as well as your day-to- goal of building in-country competencies in
premium real estate assets for regional day project management? 3D printing for the property sector.
and international markets. As a business, From efficiency and productivity, to
we remain resilient and agile to market connectivity and customer-centric services, Starting with 3D printing of the home’s
conditions. We are prepared for the technology is raising the standard of walls, this signifies a nascent crossroad,
complexities of our operating environment expectation across the industry. As we with rapidly evolving technology that will
and aim to meet the demands of an ever- come to be defined by the agility, flexibility continue to advance over time. Emaar’s
changing environment. Transformation is and responsiveness to the demands of 3D-printed home, printed on-site in just 72
ingrained in the fabric of Emaar and is a customers and a shifting market, the hours is the first step towards our ambition
mindset that helps us to secure long-term opportunity to significantly enhance the to become a leading adopter of advanced
and sustainable growth. value of our assets and properties sits construction technologies, allowing to print
within the technology sector. at scale and ultimately creating a future in
What are your views on Sheikh which customers can design, download and
Mohammed’s New Year letter and the Emaar is committed to implementing print their own homes and communities.
initiative announced to rebalance the continuous, seamless transformation
26You can also read
