Why construction firms need to ensure that their foundations are sound
The Gulf region, on the surface, looks like the ideal place to be an incumbent contracting firm with a strong stable of relationships, a number of incoming projects and a growing base of talent.
But that may be news to the contracting companies operating in the region. Although they are enjoying compound annual rates of growth of around 35%, these contractors are trying to keep up with a wave of growth that has become, if anything, more difficult to manoeuvre and plan for.
The challenge truly began about a decade ago, as the region exploded with major project activity. 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 $100m, contractors are looking at multi-billion dollar projects, often involving complex civil works, electro-mechanical systems, and other vital infrastructure.
Certain mega-projects require unprecedented architectural and civil engineering feats. Perhaps most emblematic of this trend, Saudi Arabia’s Kingdom Holding Company has announced plans for a mile-high tower in Jeddah, a $1bn project that will test the boundaries of civil engineering and building materials science.
While most contracting firms outside the region would love to have a shot at these kinds of projects, the reality is that delivering them successfully is challenging.
There are, of course, the operational and technical challenges. But then there are those the public rarely sees: The banking relationships of contracting firms have had to be completely overhauled, as more complex financing leads to greater demands from lenders.
Supply chains have been stretched to their limits, and with managers seeking to control costs, there is a constant risk that necessary materials will be on back order when they are needed today.
The technical demands of certain infrastructure and power projects require firms to build networks of reliable sub-contractors, who must themselves be managed carefully to keep projects on time.
Finally, clients are more demanding, and are looking not only at how much a project will cost and when it will be built, but that it should be built according to exact quality specifications.
Meanwhile, European, Asian and US competitors have been lurking, trying to put their anchor down in one of the few global regions where construction has held strong through the economic crisis.
In the face of all these challenges, firms can move forward with some confidence: The region’s building boom will continue for the next few years. But booms do not benefit everyone equally.
Those that will do best in the coming years will be the firms that refashion themselves on the fly, reworking every aspect of operations, including supply chain management, human capital development, systems integration and investment and other critical functions.
They will also need to decide what they want to focus on and where – which may mean giving up the field of battle in certain markets.
What hampers many contractors is not so much the challenges of growth, but the challenges of fast growth. Very few of them had the time during the last decade to focus on anything more than bidding for work and doing the work.
That means they are meeting the challenges of growth with procedures and operating structures that are often a decade or more old. No wonder many of them feature virtual fiefdoms within certain construction segments or regions, and very rarely have a coherent strategy that applies to everyone.
You see it in the constant tension between those who make bids and those who purchase raw materials. While these two functions should work together to assure that bids reflect market prices, these are often separate entities – and the result is often unexpected costs that clients are unwilling to accept.
Right now, firms may be insulated from the challenges that come with a stalled market. But growth is both an opportunity and a risk. If they seek to grow everywhere and all the time, they might have some more success, but they will operate with less focus and, increasingly, less efficiency.
So when the market does inevitably mature and growth slows down as it is wont to, those that spread beyond their strategic core competencies will find themselves susceptible to competition in a way others would not be. And like a building with a weak foundation, the cracks will show.