Haroon Niazi from HKA and Khushboo Shahdadpuri from Al Tamimi & Company explore how a decade of geopolitical shocks is reshaping the construction and engineering market in the Middle East and Africa, drawing on insights from their guest speakers, Dr Mohamed Anees of Wave 1 Projects Company and Vision International Investment and Rashna Mistry of Tata Projects, all of whom are leading industry experts in investment, contracting and international dispute resolution.*

Once again, the Middle East construction market is recalibrating to a new geopolitical normal. The Iran conflict and closure of the Strait of Hormuz are the latest in a decade of disruptions following the Qatar blockade, Covid pandemic, SUEZ Canal blockage, and Houthi attacks leading to the Red Sea crisis.  

As ongoing uncertainties are normalised, the behaviour and contracting strategies of contractors, investors and owners are shifting and will change further.

Transportation disruption has an outsized impact on projects in a region that relies heavily on knowledge transfer, imported materials and equipment and foreign manpower from abroad, says Khushboo Shahdadpuri, Partner at Al Tamimi & Company focusing on construction, infrastructure and energy disputes: “It’s really a whole new world with a lot of nuances, and we need to be mindful of how we manoeuvre through those challenges,” she adds, noting how “contractors are being really robust now and learning from the experiences of the past”.

Contractors, investors and owners have shown their capacity to rise to the challenges and overcome them. However, this delivery mindset is being challenged in different ways across the wider Middle East and Africa region.

Current regional impacts

Dr Mohamed Anees is General Manager of Wave 1 Projects Company and of Vision International Investment, which has a wide portfolio of projects across the Middle East and Africa. “In Saudi Arabia, geopolitical risks manifest as supply chain volatility due to the Red Sea disruption – and insurance premiums,” which have risen 30-50%, he adds. Meanwhile, in Africa, the same tensions are compounding existing challenges around currency fluctuations, local content requirements, and “sometimes abrupt regulatory shifts”.

Higher insurance costs have been absorbed under sovereign guarantees in Saudi Arabia, where Dr Mohamed Anees is managing the first educational infrastructure PPP providing 60 new schools across Jeddah and Makkah. In Africa, the developer relies on multilateral guarantees among local partners.

“So, in Saudi Arabia, we are managing the logistics, pricing, the risk itself. In Africa, we are managing the liquidity and continuity,” he explains. The causes of claims and disputes also differ. “The main claim trigger in Saudi Arabia is delay and cost escalation. Meanwhile, in Africa, it is payment default and, of course, now it is force majeure.”

Apart from rising premiums and underwriters’ reluctance to renegotiate contracts, US trade sanctions have prompted some insurance companies to try and pull out of the region, says Khushboo Shahdadpuri. Another side effect of the geopolitical turbulence (and UAE withdrawal from OPEC) is to reinforce the strengthening ties between the Middle East – and UAE in particular – with Asia and especially, India. She cites growing bilateral trade, banking and other investments, and recent discussions on the agricultural sector.

Walking away from lump-sum risk

Indian contractors – along with their Korean and Japanese counterparts – are already heavily invested in regional projects. The latest disruptions arising from the Iran conflict have had a significant impact, particularly on fixed-price contracts, explains Rashna Mistry, who leads the legal, ethics and compliance functions of Tata Projects Ltd.

The international engineering, procurement and construction contractor recently declined a major opportunity in the Middle East “because the client was only willing to provide price variation coverage up to the date of notice to proceed. Given the current environment of heightened uncertainty, it has become increasingly challenging for us to accurately assess and manage these market fluctuations over projects’ duration, or the whole life cycle.”

As with the pandemic, the current conflict was not foreseeable. “Where there is limited risk-sharing in contracts, absorbing these risks becomes next to impossible for contractors, so it may be unviable to proceed,” Rashna Mistry adds. Her legal department flags such terms as a high alert for management to make a commercial decision.

Such situations give rise to legal arguments as, even before contracts are signed, agreed terms may be binding. “On the employer side, it depends on the price mechanism,” says Khushboo Shahdadpuri. Contractors are unlikely to avoid a valid contract unless they’ve only signed a letter of intent or understanding.

Flexibility is ‘the new fixed price’

Khushboo Shahdadpuri discussed how parties must incentivise payments by being creative in the way that works are valued, for example. When a high-profile contractor balked at a lump sum and fixed fee contract, Al Tamimi & Company helped devise a hybrid cost-plus arrangement. “If all the key milestones were met, there would be a sort of bonus awarded to the contractor, so there was a gain share/pain share hybrid approach. We haven’t seen a lot of that in the region because traditionally, contractors would be quick to absorb the risk.”

However, project delivery and risk transfer are fast evolving in the Middle East. In a new higher-risk environment, parties find new ways to bundle up risk and allocate prices. Both Tata and Wave/Vision have moved away from lump-sum contracts toward risk-sharing arrangements.

Major investors “are willing to absorb some risks, but selectively,” Dr Mohamed Anees confirms. They must be controllable risks that can be bridged, such as logistics, local supplier development, or schedule buffering. “But we push back on unquantified ones, the macro-risks – currency collapse, regulatory changes, or force majeure events.”

Risks are quantified, tracked and often shared with the help of sophisticated contingency modelling on megaprojects and index-linked payment clauses. While investors favour lump sum, contractors want risk sharing and seek cost plus. However, this is not a panacea for contractors and has historically produced a lot of disputes.

Dr Mohamed Anees agrees that a hybrid solution is proving the best model in today’s environment – “lump sum with escape valves for geopolitical inflation or supply chain shock”. Both the lump sum and project scope are well-defined with index-linked escalation especially for long-lead items, and remeasuring for ground conditions.

On African projects, risk pricing is more defensive, with a higher upfront margin and shorter contract terms, and heavier reliance on political risks insurance. “We are moving toward, most likely, cost-reimbursable with granted maximum price – or a phased lump sum with frequent re-baselining.”

The Wave 1 CEO sums up: “In short, Saudi Arabia engineers the risk. Africa insures or avoids it.” And “Flexibility is the new fixed price.”

Tata Projects had already begun to move away from lump-sum contracts before the Hormuz crisis, seeking cost-plus and positive margins, and pushing back on risks. “We are picking and choosing our contracts,” says Rashna Mistry.“We are not even bidding on contracts that put onerous risks onto the contractor.”

Re-evaluating claims strategy & force majeure

How else can contractors deal with supply chain uncertainty? It is important to inform employers immediately when suppliers notify price increases or delays, says Rashna Mistry. The proper paperwork helps reduce the risk of liquidated damages and supports negotiations, which are usually easier with private parties than on government contracts.

She also cautions against treating force majeure as a ready, universal remedy. Engaging with the legal team early and re-evaluating contractual strategy – and especially claims strategy – may well be a more prudent approach. “Everybody thinks force majeure is an easy clause and jump with it when the opportunity arises. Just approach your legal counsel, take the advice, and then move forward.”

Statutory guidance does not necessarily alter that position. In India, the Ministry of Finance issued a notification on force majeure at the end of April in response to the geopolitical uncertainty stemming from the Middle East. The memorandum outlines the scope of force majeure and responsibilities for costs and time. Tata Projects has not invoked force majeure on a single contract as it offers an extension of time (EOT) only, and not additional costs.

Nevertheless, as with Covid, developers are seeing a flurry of force majeure notices. Dr Mohamed Anees reports an increase of 40-50% in Africa, where claims are weighted more to payments and defaults, whereas in Saudi Arabia 60-70% are related to escalation or concurrency.

Khushboo Shahdadpuri then discussed the legal and contractual basis of force majeure claims. Under FIDIC Red Book Clause 17, force majeure is packaged as a risk for employers, which they tend to consider unfair. Employers may face disruption, for example, when managers are prevented by events from traveling to a country to monitor a project in progress.

Under civil law in Gulf Cooperation Council countries, the Sharia-based principle of exceptional circumstances is a broad concept that covers the current conflict. As the pandemic demonstrated, however, courts set a high bar for claimants who must be unable to perform their obligations. “You can’t rely on force majeure if you can still do the same obligation with increased cost, or time,” she notes, unless the obligation is completely impossible to undertake.

As claims are only in their early stages, there have been no court judgments on this issue as yet. But Khushboo Shahdadpuri expects the courts – as they did in the pandemic – to issue a circular explicitly stating the current conflict is covered by principle of exceptional circumstances. Though it may be helpful, a declaration is not essential, she adds, as force majeure can still be invoked whether as a legal principle or contractual mechanism.

Indeed, creative contract drafting can expand entitlement by “redefining the consequences of force majeure”. The threshold, for example, could be set at an additional 30-40% of time or cost resources, but both must be closely defined, she stresses. A clause setting a limit on scope change could entitle a contractor to costs quantified according to schedule of rates or bill of quantities to preserve project margins. Such a contractual remedy remains relevant whether contracts are governed by GCC, Singapore, Indian or common law.

Towards better solutions

What else can be done to manage and minimise disputes?

From his investor’s perspective, Dr Mohamed Anees cites the prevalence of quantum claims in Saudi Arabia and entitlement disputes in Africa while arguing that in most cases, “the best defence isn’t the legal wording [of the contract], it’s real-time documentation and transparency in communication”.

He is also a strong advocate of dispute adjudication boards (DABs). In the Kingdom this mechanism has resolved disputes amounting to some $12 million in just three weeks, which would have taken 18 months in the arbitration. “Dispute avoidance is not a cost centre. It’s a value conservation engine,” he emphasises.

However, Rashna Mistry sounds a more pessimistic note, based on experience in India. There, “DAB is just a formality in the contract, it doesn’t work.” The boards, usually made up of engineers, reject claims and employers block the release of funds. Without a change of culture, construction disputes remain inevitable, she says.

In Khusboo Shahdadpuri’s view, “the problem with DABs is that they’re not binding” without agreement. For DABs to be effective, she suggests that they be implemented on a statutory basis, similar to the Singapore model under Singapore’s Building and Construction Industry Security of Payment (SOP) Act (“SOPA”). SOPA deals with outstanding payment claims quickly outside of arbitration. It does not cover EOT and disruption-related claims that involve voluminous evidence and paperwork and result in protracted disputes – when payments are withheld even though these sums are not themselves disputed. “Just dealing with these types of claims – certified and uncertified payments, even variations – would protect the lifeblood of a project and keep it going.”

The adjudicators appointed in a SOPA process tend to be engineers which has proved effective, she says. But it could be argued that a mix of technical and legal expertise would offer more comprehensive and balanced answers to defusing disputes.

What is emerging across the Middle East and Africa is not simply a temporary contractual adjustment. Rather, there is a broader recalibration of how project risk is priced shared and managed. As geopolitical disruptions become embedded in market assumptions, employers and contractors alike have an incentive to move toward more flexible commercial models, contractual strategies, and mechanisms for resolving disputes, persevering cashflow, and securing project delivery.

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* Haroon Niazi is a Partner and EMEA Head of Construction Claims & Expert services at HKA, focusing on global risk mitigation and dispute resolution. Khushboo Shahdadpuri is a Partner at Al Tamimi & Company focusing on international dispute resolution and arbitration. This article is based on a HKA webinar co-hosted with Al Tamimi & Company.