26 Jan Saudia Arabia: Three common Scenerios of Construction Companies Collapse
There is no doubt that the construction sector depends entirely on the financial flow resulting from the implementation of existing contracts and the signing of new contracts in commonly short periods between a contract and another. Construction companies’ owners know that and they continually looking for new contract almost all the time to ensure they do not fail to pay their workers’ salaries and bank financing premiums, if any.
Our team has analysed a considerable amount of case laws in the Saudi courts and they came about with main factors that can bring a construction company to its knees. Our study firstly divided the factors into two types: one resulted from uncontrolled factors by owners and the other is for controlled factors. The example of uncontrolled causes of construction company failure is legislation reforms. However, owners can avoid the three recurring causes in most disputes that are directly related to owners actions, which are the following:
1. Leniency on verbal variation orders: Many construction entities make changes to the agreed scope of work relying only on verbal approvals from projects’ owners or their representative. Applying a change on the work will mean a contract modification, therefore, doing such thing before obtaining a written consent or direction is where most construction contracts start to loss time and money and likely collapse afterward. Project owners usually denies the approval of variation order, which cause construction companies to pay penalties and rectification cost.
2. Flawed delivery: Many contractors fail to comply with the specifications agreed in the contract either on the basis of the first reason mentioned above, poor control of work conducting or other reasons that do not exempt them from legal liability. Poor performance in Saudi Arabia usually results from unqualified or low ranked subcontractors, owners have to be cautious when using these kinds of subcontractor. Construction companies, also, must pay attention to project owners’ reservations and recorded in initial delivery, to avoid late final delivery.
3. The big contract: It is not in the constructions companies’ interest to enter into big contract that includes several sites. The reason why big contract is not in the interest of owners is because failure in part of the contract will cause disruption to whole contract and it could cause undesirable consequences to construction companies.
Therefore, it is better for owners to split the big contract into several separate contracts, in order to avoid financial difficulties resulting from deficiency in another related contract. One of the cases we handled is against a construction company who had won a big contract and failed in the implementation process of one of the sites, which resulted into 10 years of dispute that caused financial difficulties and unnecessary costs that led the company to collapse.
As a result, we believe that avoiding the above causes helps the owners to avoid actions that may create, stumble or slow the collection of their payments, or cause them a long term lawsuits that may cost them a fortune.