Contractors achieve 'premium' pricing as costs escalate on energy projects, says Middle East study

'Contractor costs have escalated as contractors seek higher margins in order to offset project risks, due to project and budget over-runs,' said Contax Chairman Tony Bury.

'It's currently a 'sellers market' and contractors have bargaining power. The demand for contractors exceeds supply, and project owners are unable to challenge contractors' pricing demands given the lack of any real alternatives.'

Summary of current market conditions

The GCC project activity market is booming and is expected to exceed the USD 450 billion mark in 2007 as:
-High oil prices continue to fund development of new growth sectors.
-Regional governments continue to diversify into new revenue streams such as infrastructure and petrochemicals.

This project activity boom comes with its challenges. The sustainability of project activity is potentially under threat as projects face over-runs and delays due to:
-Contractors factoring in higher risk and profit premiums in today's 'sellers' market thereby inflating total EPC costs;
-Plethora of projects making contractors more selective in the types of projects they choose to bid for;
-Severe pressure on contractor workloads and other critical project inputs such as construction equipment, materials and labour;
-A severe talent crunch leading to poor project management as well as increased difficulty in hiring the right people with the right competencies for the job.

Our analysis suggests that as the market has not yet peaked, this situation has the potential to deteriorate in the short to medium-term.

Key highlights of the report

The report will provide analysis and insights on the current contractor landscape incorporating an understanding of the following:
-Drivers behind the growth in GCC energy project activity and its impact on contractors;
-Increases in EPC Prices, their magnitude, and the contributing drivers of these;
-The challenges being faced by project owners in delivering their projects;
-Future forecasts on the likely outcomes and scenarios of project activity;
-The views of leading contractors and owners on the state of the current contractor landscape and how it will evolve in the future;
-Recommendations on what Contax views as the key focus areas for meeting the challenge of the future within the industry.

Benefits

This report will allow you to make more informed business and investment decisions in this challenging environment, by giving you a deeper understanding of:
-The growth in various energy sectors, possible challenges they may face and where the potential opportunities lie;
-The factors underlying the current price escalations and delays in project delivery and what players can do to mitigate potential risks;
-Contractor strategies, their effectiveness and their implications for project owners and contractors.

Contax believes that current contract and pricing strategies are unsustainable in the mid-to-long term, with both project owners and contractors facing a less buoyant market in the future. Paul Eccleston, Contax CEO, warns: 'Both parties will need to learn to minimise and share overall project risks in order to cope with more difficult conditions.'

Full details can be found in the Contax report The GCC Contractor Landscape 2007. This survey of project owners and contractors in the GCC (Gulf Co-operation Council) explores the entire energy project landscape, with particular emphasis on contractor price rises, and on overcoming the challenges associated with project delivery.