KING FAHD UNIVERSITY OF PETROLEUM AND MINERALS COLLEGE

KING FAHD UNIVERSITY OF PETROLEUM AND MINERALS COLLEGE OF ENVIRONMENTAL DESIGN CEM-520 CONSTRUCTION CONTRACTING AND ADMINISTRAION CAUSES OF CONTRACTORS’ FAILURES IN SAUDI ARABIA Thesis Written by : Adel Al-Barrak Presented By : Jalal Al-Khatam

OUTLINE INTRODUCTION LIMITATION OF THE STUDY OBJECTIVE OF THE STUDY METHODOLOGY STATISTICAL SAMPLING Sample Size Scoring CAUSES OF FAILURES MANAGERIAL CAUSES FINANCIAL CAUSES STATISTICAL METHODS TEST OF HYPOTHESIS MAJOR FINDINGS CONCLUSIONS RECOMMENDATIONS EXPANSION CAUSES ENVIRONMENTAL CAUSES

INTRODUCTION The construction business has very high risk. These risks, which could lead to failure, come from the sensitivity of the business to economy cycles, and from high levels of competition.

INTRODUCTION Cont. Contractor’s failure could be defined as Ceases operation following assignments due to the inability to continue construction. Goes into bankruptcy due to failure of collecting money from customers. Voluntarily withdraws because of dissatisfaction with business or profit.

LIMITATION OF THE STUDY This study is limited to building and highway contractors who are qualified and registered in the Ministry of Housing and Public Works as of 25th of Muharam, 1413H. The contractors are from grades one to four in Saudi Arabia. The technical failures of project are not covered in this study. The study is restricted to construction phase only.

OBJECTIVE OF THE STUDY To undertake a comprehensive analysis of the most important factors that cause business failure among contractors. To identify and analyze the most severe factors causing contractor's failure in Saudi Arabia. To test the hypothesis that different grades of contractors, generally agree on the severity of failure.

METHODOLOGY Data Collection Data Collected by reviewing related literatures, and gathering information through site visits, interviews, and discussions with different grade contractors. Data analysis and identification of the most relevant factors influencing causes of contractor failures. As a result, formation of the questionnaire which was distribution to the contractors.

STATISTICAL SAMPLING Sample Size The contractors who had qualified and registered in the Ministry of Housing and Public Works year 1413 H had the chance to participate. The Ministry of Public Works classified contractors to fields and activities. In this study, two fields have been included (Buildings and Roads) only

STATISTICAL SAMPLING Cont. Sample Size The Ministry of Public Workers classified each field to five grades for Saudi contractors and six grades for foreign contractors. The study includes Saudi and Foreign contractors for building and road activities.

STATISTICAL SAMPLING Cont. Sample Size In this study, the population of the contracting firm has been divided into three strata: Group 1 (Grade one and two) Group 2 (Grade three) Group 3 (Grade four) Grade one and two are added together because the amount of volume of grade one is just little greater than grade two.

STATISTICAL SAMPLING Cont. Scoring The options given for each question are on a four-point scale. Each factor has a severity index and the severity index is controlled by equation: Where i 1,2,3,4 4 Severity Index (Is) ai xi i 1

CAUSES OF FAILURES The Questionnaire includes (34) causes of contractors failure The 34 causes are divided into four groups Managerial Causes Financial Causes Expansion Causes Environmental Causes

CAUSES OF FAILURES (MANAGERIAL) MANAGERIAL CAUSES Lack of Experience in the Line of Work Replace Key Personnel Assigning Project Leader in the Site Labor Productivity and Improvement Bad Decisions in Regulating Company Policy Use of Project Management Techniques Company Organization Procurement Practices Claims Internal Company Problems Recruitment from One Country Recruiting Multinational Owner’s Absence from the Company Using Computer Applications Frauds Neglect

CAUSES OF FAILURES (FINANCIAL) FINANCIAL CAUSES Low Margin Profit Due To Competition Cash Flow Management Bill and Collecting Effectively Poor Estimation Practices Evaluate Project Profit in One Fiscal Year Employee Benefits and Compensations Controlling Equipment Cost and Usage

CAUSES OF FAILURES (EXPANSION) EXPANSION CAUSES Expanding into New Geographic Locations Opening a Regional Office Increased Number of Projects Increased Size of Projects Change in the Type of Work Lack of Managerial Maturity Changes from private to Public or Vice Versa

CAUSES OF FAILURES (ENVIRONMENTAL) ENVIRONMENTAL CAUSES National Slump in the Economy Construction Industry Regulation in Saudi Arabia Owner Involvement in Construction Phase

STATISTICAL METHODS Tabulation and cross tabulation Statistical techniques Correlation Ranking

TEST OF HYPOTHESIS It is concluded from Test of Hypothesis that all parties agree on the severity rank of failures and these parties are reliable in their responses

MAJOR FINDINGS The major causes of contractor failures are divided into four major areas 23.7 27.78 21.1 27.27 Managerial 27.78 % Finance 27.27 % Expansion 21.10 % Environment 23.70 %

MAJOR FINDINGS Performance measures ranking Group one (Grade one and two contractors) Group two (Grade three contractors) Group three (Grade four contractors) All contractors (Group one, two, and three) Cont.

CONCLUSIONS Insufficient experience in the line of work is the main important cause of failure. Poor estimation practices are a major source of failure. The proper use of new methods for estimating cost would help to reduce failure. One of the major causes of failure is that there is no restriction on those entering the construction market; anyone could become a contractor. Delays in payment are one of the main cause of failures because they result in a financial problem to the contractor. This may cause cash flow problem to the contractor.

CONCLUSIONS Cont. The study shows that the three Groups (group one, group two, and group three) generally agree in the rank of failure. Bad decisions in regulating company policy are a source of failure. Neglect is an important cause of failure. Neglect may add extra cost to the project which could cause a failure. Lack of managerial maturity as the company grows could cause a failure. This cause is more influential in grade three and four contractors because they manage small companies and are looking to become bigger.

RECOMMENDATIONS It is recommended that a set of procedure be established to restrict the construction industry. Contractors should improve the practices for calculating the project cost. It is recommended that each contractor establish a program for motivating workers. Contractor development should be done with a long term planning. It is recommended that the number of payments increase so that each payment amount will be less.

RECOMMENDATION FOR FUTURE RESEARCH The effect of the owner of a project on the failure in Saudi Contractors. The effect of government regulations on the construction industry. Construction company organization structures and their policies. Government policies that can be initiated in Saudi Arabia to help contractors stay in the business. The effect of the owner of a company on the failure.