After a brief lapse, industry observers have recognized that the construction business is booming again in the Middle East, with estimates of a project pipeline in excess of USD $1 trillion. The sheer number of projects requiring significant labor, finance and project management resources is likely to entice more contractors to explore work opportunities in this particular region, even with an improving overall global economic forecast.

The opportunity for large-scale work will invite more new players to the market on big-risk, big-reward projects.  To raise the chances of success in the Middle East, constructors and managers exploring new business prospects may benefit from a few straightforward tips about regulations and business culture, offered in the spirit of “know before you go.”

Security remains an issue. In Afghanistan, award cancellations and contract terminations have left U.S. contractors unable to finish projects and with idled work forces and equipment. While U.S. investment in the form of aid continues to flow to the country, contractors must be prepared to deal with uncertainty and be able to carefully manage cash flow and safety at each project stage.  The possibility of violence as a means to resolve contract disputes, with or without involvement from local militias, law enforcement, and judges remains a daily concern.  The cost of safe transport to and from camp, as well as private security, should not be underestimated.

Unique labor laws and customs can cause delays. Rules governing subcontractor payment are more stringent in the Middle East than most places. Rules vary by country, but many Middle Eastern nations provide strict, tangible protections for local laborers and subcontractors. Failure to pay subcontractors and vendors is considered a criminal theft under many local penal codes.  Construction firm employees with contract execution and check writing authority have been detained, or had a passport held at airports, when domestic workers are reported to be unpaid.

Bonding rules differ. Performance on many Middle East projects is secured by a Demand Guarantee, as opposed to a surety bond. Typically in the U.S., a surety bond issued to a project owner serves the purpose of assuring that the contract will be performed and subcontractors will be paid.  In the U.S., a claim on a bond is often a long and complex process which typically involves court intervention.  Depending upon its terms, a Demand Guarantee may be liquidated by private demand on the issuing financial institution with no court involvement and without notice.

Obtaining visas for workers can be cumbersome. Complex jobs often require the hiring of U.S. or UK general management. But when labor laws such as those in Iraq require local hiring, a skilled labor shortage can become acute.  Often times projects are staffed with workers from around the globe. While employing local laborers may be a lower cost option, when factoring in timelines and quality, foreign labor is almost always needed. In these cases, costs can spiral and delays may result if there are bureaucratic delays in obtaining visas. These hurdles are common.  Visa costs often exceed $2 million on large projects.

Local experience can be essential to bridging language and cultural barriers. Monitoring and enforcement of the Foreign Corrupt Practices Act raises compliance concerns that companies may unknowingly violate if they do not have trustworthy local business guides. Individuals who speak Arabic or other local languages and understand the business culture can help navigate scenarios and clear logjams for activity in likely places, such as supply shipments, obtaining entry for workers, and access to decision-makers.

Dubai, United Arab Emirates – March 4, 2014: view on the Burj Khalifa and other tall buildings seen from the streets near Business Bay metro station.

 

–By Thomas Crist

Thomas Crist is a Cleveland-based lawyer and Co-Chair of the Construction Practice Group at the international business law firm Benesch. Mr. Crist has a global reputation in the construction industry as an accomplished advocate with years of experience working in the trades. He has represented contractors and owners involved in construction of industrial facilities, commercial structures and infrastructure projects including those in the energy, defense, and oil & gas sectors. For more information visit www.beneschlaw.com or email [email protected].