Saudi giga-projects: How innovation can offset risks

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The Saudi Arabia giga-project programme is a series of geographically diverse tourist, residential, commercial, retail and industrial capital projects aimed at transforming the kingdom into a tourism and entertainment hub while creating hundreds of thousands of jobs in the process.

Funded primarily by the kingdom’s Public Investment Fund (PIF), the total pipeline value of the Saudi giga-projects has reportedly grown to more than $850bn in 2023.

Due to their size, scale and innovation, these giga-projects present a host of legal and contractual risks for their stakeholders. There is an increasing awareness in the kingdom’s construction market of the necessity for more collaborative contracting methods, not only to get these projects across the finish line but also to ensure that all stakeholders – including contractors and developers – emerge profitably from these massive endeavours.

Here are how these potential risks could be addressed:

Risk #1: Delays and cost overruns can impact giga-projects

Projects in the Middle East have a track record of having the most significant programme and cost overruns in the world. These projects are likely not going to be immune from this trend. The fact that there are several projects underway in parallel creates a perfect storm for labour and material shortages, which may be compounded by unexpected disruptions from economic and political events.

It will be key for employers and contractors to be realistic about project scheduling from the outset, but when delays do inevitably arise, both parties must proactively commit to operating the contractual claims provisions in good faith.

In the Middle East, the prompt operation of claims provisions for additional time and cost has too often been viewed by both parties as an aggressive tactic. Yet if both parties embrace the claims provisions as a necessary and proactive mechanism to nip project challenges in the bud (rather than allowing them to fester and poison the project), both parties (and the project) will benefit.

Giga-projects could also benefit from fast-track contractual dispute resolution options, including the use of independent dispute boards and expert determination (ideally established at the outset of the project), to determine time and cost disputes swiftly and cost-effectively, when the project is proceeding, giving parties greater certainty over emerging risks.

Risk #2: Design changes

These projects are inherently more vulnerable to variations of work than smaller projects, due to their scale and complexity, the integration of the latest innovative technologies and long project durations. An under-cooked design is an obvious risk to time and costs, but when a giga-project attempts to push the boundaries of emerging technology, often in multiple directions all at once, it is almost inevitable that parties will discover design and implementation issues as the project is being constructed.

At a basic level, parties will need to ensure their contracts have unambiguous variation provisions, contractors must be fully compliant with notification provisions to avoid variation claims becoming time-barred, and employers will need to inject a healthy dose of realism into their budgets.

Parties will especially need to carry required levels of project contingency funds to account for costly and reasonably foreseeable design development costs that are “part and parcel” of a futuristic concept design based on untested technology (but will have to be mature by the time of completion).

Perhaps a more fundamental issue to be aware of is where the ultimate liability for the associated costs of design and its development lies, especially where novel and innovative concepts are in play.

Risk #3: Defects in the works

A unique structure such as the 2-kilometre tall Rise Tower in the kingdom’s North Pole Project presents unique design risks (for example, geotechnical risks, such as the risk of sinkage due to the sheer weight of the structure; seismic loading risks presented by an earthquake and severe weather events, selection of appropriate materials, including external cladding, to mitigate fire-safety risks, etc.).

The shortages of skilled and unskilled labour and typically ambitious project delivery timeframes, increase the risk of poor workmanship, leading to construction defects.

When the stakes are so high, the risk of defects should be mitigated through contractual quality control mechanisms that enable early detection of defects, such as through more stringent notification, inspection and testing mechanisms as the works progress.

Risk #4: Change of law

The kingdom currently is experiencing a significant legislation and policy boom, aimed at creating legal certainty and thereby attracting foreign investment.

The landmark corporate law and civil transactions law both entered into force late last year, with amendments bound to follow in the ordinary course.

Alongside these significant changes, giga-projects such as NEOM, Red Sea Global and AlUla are developing their bespoke regulations, including for environmental and heritage protections, in line with international best practices.

For giga-projects, which have immense scope and long schedule durations, the risk of potential adverse impacts due to a change in the law is also heightened simply because a longer project duration normally makes

Sachin Kerur is a partner and Alison Eslick is an associate at Reed Smith.