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Large construction projects in the Middle East are at the highest risk of cost and delivery overruns, with claims for derailed projects now averaging $154 million per project.
Now in its fifth edition, HKA’s annual CRUKS Insight Report sheds light on the state of litigation in the major capital projects and infrastructure sector. For its analysis, the global consultancy analyzed 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 total value of the claims was $80 billion, while the cumulative delays added 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 expenditures (35% of CAPEX). From a time perspective, the losses are even more severe. The requested time extension averaged 16.5 months – equivalent to 69% of the originally planned project duration.
“Based on first-hand investigations by our expert consultants around the world, the report quantifies the enormous contribution of project overruns to the global economy, our industry and project stakeholders,” said Rennie Borhan, CEO of HKA.
Near East
According to the report, the Middle East is the world’s most challenging region for the realization of construction projects, with delays averaging 22.5 months or 83% of the deadline. The average amount in dispute ($154 million) was more than a third of the project’s cost (36% of CAPEX).
In the region, HKA experts assessed 380 projects in 12 countries, most of which are projects in three segments: commercial buildings, onshore oil and gas, and transportation infrastructure.
The main causes of claims and disputes in the Middle East have been relatively stable over the years. Since the first edition of HKA’s CRUKS Insight Report, change in scope has topped the list.
“This main cause can be seen in all regions. Projects are tendered and launched when the designs are still immature. Change is inevitable in large construction projects and, if not managed, inevitably leads to a wave of claims that escalate into disputes,” explained Toby Hunt, partner at HKA.
Scope change is accompanied by design information that is either issued late or is incomplete, problems with contract interpretation, and failure to manage and/or administer the contract.
Hunt: “Many of the dominant causes of claims and disputes in the region are design focused and stem from a lower level of maturity in the construction and engineering industry.”
“The high-risk, low-margin contracting model prevails in most parts of the Middle East.” Risk allocation is distorted by heavily modified standard contract forms with onerous terms of payment and obligations. Often poorly drafted, they tend to include additional tailor-made clauses that may have been designed to address problems that arose on previous projects but conflict with other provisions of the current contract. There are lawsuits and disputes over the interpretation of contracts.”
Issues more specific to the region include the reliance of foreign contractors on (poorly) translated versions of contracts in Arabic and relatively high competition for prestigious projects – resulting in overambitious bids.
Meanwhile, a growing skills deficit (exacerbated by the Covid-19 pandemic) is putting pressure on delivery, with builders and contractors struggling to hire skilled workers. Overall, however, lack of craftsmanship was a far more significant cause of discord 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, HKA Middle East Co-Leader, said lessons learned from the overshoot should be captured and shared between construction and engineering community across the region.
“Understanding the multiple causes of capital project distress can help project promoters and the construction and engineering industry better mitigate project problems and ultimately help them achieve better project outcomes.”
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