GCC construction players: It's time for a remodel
The construction industry in the GCC region is going through a dynamic shift. Although overall growth in the industry has allowed market participants to succeed, they must start adapting their strategies and operating models to the demands of the new environment, or risk losing out to others, says Fadi Majdalani and Ahmed Youssef, Partners, Booz & Co.
There have been marked changes in the type, complexity, and size of construction projects. Financing requirements are higher and more rigorous, while the complexity of projects is placing new demands on supply chains, equipment needs, and human capital capabilities.
The construction industry in the GCC region is consumed with the demands of delivering government-sponsored infrastructure and other large-scale projects. “Considering the industry’s overall upward swing, reflected in its 35% plus compound annual growth, during the past decade, it appears that the industry is in a position of continued growth, despite a recent short-term slowdown and decreasing activities in selected segments and cities,” said Fadi Majdalani, Partner, Booz & Co.
The construction industry is undergoing a significant structural transformation, attributable in part to the business cycle. The growth spurt driven by megaprojects across the GCC region is forcing the industry to rapidly develop specialized expertise and to expand operations throughout the region.
At the same time, the residential and commercial megaprojects that defined the industry’s growth spurt earlier in the decade have been replaced in many cases by government-sponsored infrastructure projects, mostly in Saudi Arabia, UAE, and Qatar. This change in the mix of projects has presented the first of many shifts in the industry.
Yet the structural changes facing the industry are driven by factors far broader than project mix and shift in geographical concentration of projects. They emanate from five critical areas: project size and budget, customer expectations and sophistication, competition, suppliers and the supply chain, and investors and financing.
Project size and budget
In the past decade, the industry’s watchwords have changed from small, simple, and single to colossal, complex, and coordinated. Rather than the typical small to medium-sized projects of up to USD 100 million, contractors are looking at multibillion-dollar projects, often involving complex civil works, electromechanical systems, and other vital infrastructure.
“As a result, contractors now carry portfolios of projects far larger than they did just ten years ago. For example, in 2005, one of the largest GCC contracting companies managed a project portfolio of approximately USD 1-2 billion; by the end of the decade, the same company’s portfolio was over USD five billion” said Majdalani.
Finally, project complexity requires contractors to be far more reliant on an array of highly specialised subcontractors, which they often need to manage under challenging deadlines and high expectations for quality.
Other changes are also burdening contacting companies. As customers’ stakes have grown and capital has become more scarce, customers are taking a more active interest in their projects and contractors’ activities creating a rise in customer expectations.
Meanwhile, shifts in the competitive landscape have blurred the boundaries between large companies and mega companies, and have driven many small and medium-sized companies to re-evaluate their position in the market to continue to grow.
Finally, financing has fundamentally changed. Previously, contractors could obtain working capital for projects either through internal cash flows or through bank loans secured on the basis of their brand name and reputation.
The recent financial crisis and increased size and scale of projects now preclude contracting companies from using only cash flow for projects; indeed, some projects require preapproved financing as part of the bid. Companies are now seeking larger and more complex financing structures involving several banks.
“Despite the significant changes in the construction industry, few contracting companies have evolved their operating model to accommodate this change and position themselves for future growth,” said Ahmed Youssef, Partner, Booz & Company. Many have outgrown their organisations and are not taking full advantage of their scale; many have invested in the right systems but fallen short of their goal of fully implementing them.
And in their relentless focus on meeting customer demands for greater cost control and on-time delivery, they have not yet expanded their attention to other critical issues such as construction quality and contractual relationships.
Indeed, these companies are executing projects using the same project structures and procedures used a decade ago, with little attention paid to the new demands of the marketplace. As a result, even successful companies have developed internal weaknesses in their operating models.
In order to properly prepare themselves for the next inevitable surge in demand, contracting companies must address this problem with a systematic review and re-evaluation of their organisation, systems, talent, and priorities. To do these companies have to re-evaluate and redirect their fragmented operating models, their underused systems and information technology and their underdeveloped human capital strategies.
In order to make the necessary adjustments to their operating model without losing momentum in their current operations, companies must approach change in a synchronised manner.
The GCC construction industry, although buoyed through the economic crisis by a significant influx of government megaprojects, nevertheless faces several challenges stemming from strategic and operational weaknesses.
These weaknesses crept unnoticed into the firms during a period of rapid growth, but they represent a long-term risk to their ability to prosper further. To identify and address these weaknesses, companies will need to conduct a comprehensive review of their strategic focus, identify where they can dominate the market for their products and services, develop performance-based processes, focus on priority projects first, deploy technology selectively, and fully train and integrate new and more senior workers.
The end result will be far more streamlined operations, more competitive positions in key markets, and a stronger foundation on which to build. “Those that adjust their organisations to close any existing gaps will be well rewarded as the overall market strengthens around them and they emerge as market leaders,” concluded Youssef.
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