Saudi Arabia’s economy is in top gear. The Kingdom has consolidated its resources to focus on the Saudi Vision 2030 – a strategic initiative comprising a massive overhaul of economic priorities announced in 2016 to diversify the economy to move beyond oil dependency.
The initiative promises growth opportunities across various sectors, including more than USD 1 trillion in investments in the construction industry.
Saudi Arabia has been a top performer in the construction sector across the GCC region for several years. The thriving industry in the Kingdom offers huge growth potential, especially for small and medium-sized players. But with growth opportunities comes its share of risks and challenges, which needs to be understood to be tackled.
Before the COVID-19 outbreak, the construction industry in Saudi Arabia was amongst the largest in the Gulf Cooperation Council region, with more than $825 billion worth of planned and un-awarded projects.
However, no one can deny that the COVID-19 pandemic halted activities in the construction industry. The industry had seen an increase in the contracts awarded- from $11.2 billion in 2016 to $14.6 billion in 2018. Not to mention, there needed to be more productivity but also cost overruns and delays due to the lockdown and its consequences across the global economy.
A recent report by the Digital Transformation Program suggests SMEs represent 99.5% of the total companies in the Kingdom, which goes on to show the critical power these companies can leverage to transform the way the sector is run.
Compared to the Q4 of 2021. the number of SMEs has expanded to 892,000 with an increase of 25.6%, assesses the Small and Medium Enterprises General Authority.
But during the recent Covid-19 lockdowns, the SME players in the construction industry visibly took a hit as more than 8,000 construction companies, mainly small firms, pulled out of the market in 2021, according to the Gulf Kingdom’s top contracting body.
Here, we have listed Five reasons that make small and medium-sized players bow out of the industry. They are the most recurring factors that most small and medium-sized construction businesses identified.
Late payments are a notorious issue within the construction industry. This problem worsens in times of economic volatility when cash possession becomes a greater priority for many businesses.
The closer you get to the end of the value chain, the longer you’ll be waiting to get paid. To maintain a steady cash flow, companies tend to sign more contracts than they can comply with to meet their requirements, and those same companies end up hiring third parties to keep the boat sailing.
In other words, for SMEs, late payments can ruin the company’s financial stability.
If payments aren’t made on deadline, the contractors have no other option but to cover the expenses from their pockets to ensure that a job in hand is completed.
Estimates show that three months of lockdowns cost contractors in the region approximately $30bn in revenue. The Kingdom contributes more than 54% to the total construction in the area. The impact has been keenly felt.
The construction industry in the Kingdom often suffers from acute labor shortages as the industry heavily relies on foreign workers, who are hired on contracts from abroad. It’s a classic problem for a booming industry that is highly labor intensive.
Finding and hiring skilled laborers is one of the contractors’ biggest challenges, which naturally has a domino effect.
Shortage of labor slows down projects, making it almost impossible to meet the deadline, and delaying work that can lead to financial penalties.
Technological advancements have always played a major role in the construction industry. Ultimately, it gives construction workers a safer and more efficient way to get work done.
The point is advancements in construction technology have always driven construction a step forward to growth and prosperity. However, SMEs are likely to need help to afford these advancements. Studies show only 6% of the construction contractors in the Kingdom are utilizing machine learning. The major reason cited is the lack of funds.
Naturally, they need help to cope with the ongoing innovations. Due to this, their business begins to suffer. Construction also gets hard and dangerous for labor.
Secondly, some SMEs need access to dynamic innovations that are taking over the construction sector world. It is all happening because they need deep pockets to finance such initiatives.
Nonetheless, the government is encouraging small players to join programs with free access to skill development, ushering in a new digital transformation in the construction sector.
Furthermore, in these recent years, there has been a global impact, and the prices of resources have started to shoot up. With these rising prices, the cost of raw materials required for the construction sector has also heightened.
The cost of raw materials has grown sharply in recent years. The inability to afford the required materials creates a hurdle in their path, affecting their ability to complete a project on time.
The rising costs are out of everyone’s hands, but the only viable solution for contractors is to find a way to manage their materials and waste efficiently.
Execute methods to optimize resource management and plan better inventory controls.
As the construction industry focuses more on designing, developing, and delivering, it often overlooks the significance of proper safety training in this sector. Lack of safety training has also been a recurring issue.
SMEs need help to ensure the required safety protocols because of a severe shortage of experts.
It is more than crucial for the workers to be provided with insightful industry knowledge in ground experience. Maintaining good relations on these matters is more important than ever.
But, small firm companies cut corners to maximize their profits. Unfortunately, this keeps them and mainly their workers at high risk.
Given the list of problems, it is understandable that the SME players in the construction sector need to be more efficient in every way to stay in business. But despite the challenges, it is important to know that it is arguably the best time to become a part of the construction industry in the Kingdom — if you aim to grow your business by leaps and bounds in the years to come.