During the past decade, the structure of the construction industry in the Gulf Cooperation Council (GCC) region is going through a paradigm shift, with 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. Although overall growth in the construction industry has allowed market participants to continue to succeed in this changing environment, they must start adapting their overall strategies and operating models to the demands of the new environment, or risk losing out to others. Today, 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 percent 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, a partner at Booz & Company, who have compiled this report. The 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. 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 $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 10 years ago. For example, in 2005, one of the largest GCC contracting companies managed a project portfolio of approximately $1-2 billion; by the end of the decade, the same company's portfolio was over $5 billion,” said Majdalani. Finally, project complexity requires contractors to be far more reliant on an array of highly specialized 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. The supply chain has also evolved. As customers exert greater control over project management, they are pushing contractors to assume greater levels of risk—for example, moving from cost-plus to fixed-price contracts and thus making contractors absorb increases in the costs of raw materials. This change is further exacerbated by growing volatility in the environment for raw materials. 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. Companies are now seeking larger and more complex financing structures involving several banks. Internal weaknesses “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, another partner at Booz & Company. Many have outgrown their organizations 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 make the necessary adjustments to their operating model without losing momentum in their current operations, companies must approach change in a synchronized manner. They can take five clear steps toward creating a more sustainable operating structure: Revise corporate strategy The proliferation of business lines, new markets, and types of operations has created a web of sometimes conflicting priorities, with little efficiency of scale and a diminished capacity to take the lead in certain segments. Therefore, companies must focus on those sectors, activities, and geographies where they enjoy competitive advantages. Focus on results, not just processes Many GCC companies have a tendency to put in place processes related to various corporate activities and follow those processes by rote, without sufficient attention to whether or not they are delivering the desired results. To succeed in changing the culture of a company and the behaviour of employees, companies and employees need to focus on what they are accomplishing. Prioritize and manage change Managers need to prioritize areas to change, and focus first on those most important to improving the operating model, on the basis of two elements: How essential are they for the development and sustainability of the company's core capabilities, and what is the degree of risk presented if they are not implemented? Use technology – but wisely Companies need to determine what is vital to their success – and technology investment will need to be prioritized accordingly. Invest in all generations of talent In keeping with the industry's overall growth, GCC companies have hired a lot of new employees, and they possess innovative perspectives, new technical skills, and an entrepreneurial approach to doing business. This generation of new workers must be integrated fully into the firm, without causing a loss in the contribution of incumbent employees. Conclusion 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. “Those that adjust their organizations to close any existing gaps will be well rewarded as the overall market strengthens around them and they emerge as market leaders,” concluded Youssef. Report compiled by global management consulting firm Booz & Company.
