Saudi Arabia construction sector notes cost inflation in 2018
Tender price inflation of 1.8% is expected over the next 12 months, but margins will remain low, study shows
The average cost of construction in Saudi Arabia has increased by 1.9% in the 12 months between Q3 2017 and Q3 2018, according to the latest report from Colliers International. The report revealed the price of rebar in Saudi has increased by 16.5% over the period. There was a 6%, 8%, and 1% rise respectively in the price of timber, aluminium, and marble tile.
There was, however, a drop in the price of block work (-4.5%); sand (-4%); concrete (-5%); and cement (-2.5%).
Colliers' report continued: “Apart from materials, the two key drivers that will determine construction cost inflation over the next 12 months are workload and labour. Project pricing is also still very aggressive, mainly due to competition for work.”
A construction tender price inflation of 1.8% is expected over the next 12 months according to the report, which added: “Contractors will not increase their profit margins until their books begin to fill. As numerous projects have been announced over the last two months, and with progress on Saudi’s gigaprojects gathering pace, this will help to bring optimism to the industry.”
However, it was conceded that significantly more projects wold have to commence in the kingdom to have a real impact on increasing margins that contractors will include within their bids: “As such, reduced competition is predicted to have a minor impact on tender pricing over the next 12 months.”
Various taxes on expat visas and the continued push towards Saudisation have increased the cost of labour, according to the report.
“However, it is not until we see a significant drive towards recruitment in a more buoyant market, that the extraordinary effects of these regulations will be felt. On average, going forward, every 10% increase in the cost of labour will swing the cost of construction by circa 3%.”
Contract pricing is a crucial area that contractors and consultants will have to focus on in 2019, as Ciaran McCormack, Linesight’s regional director for the Middle East, told Construction Week earlier this month.
“The outlook for the construction market in Saudi has definitely improved, and opportunities do exist when you look at the number of projects at the tendering stage,” he said.
“Against that backdrop, there will be significant challenges for contractors,” he added. “It is a good challenge, but it really comes down to how they are going to price these projects.”