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Construction in Saudi Arabia: Time and cost impacts of Ministry of Labour crackdown
The Ministry of Labour is currently targeting expatriates in Saudi Arabia that are working for businesses other than their visa sponsors. Construction contractors, both local and international, have traditionally employed large numbers of such workers and many are now trying to rectify the status of their workers before the current 3-month grace period expires. Failure to do so risks deportation for workers and fines for businesses. This article poses the question, who bears the risk of these events on individual construction projects the contractor or the employer / client?
In response to the current Ministry of Labour actions, huge numbers of workers are said to be planning to leave the Kingdom (estimated to be between 50,000 and 500,000 expatriates). This will have an inevitable impact on the construction projects that they were working on and the construction contractors they were working for. In particular, rate of progress will be affected by the loss of productive workers that leave the Kingdom and perhaps an inability to replace those workers as quickly as is needed. In addition, significant costs are likely to be incurred, such as increased direct costs due to lost productivity and from fees to rectify workers visa status, along with increased indirect costs arising from prolongation.
This begs the question of whether contractors are entitled to additional time or cost by reason of these events. Not surprisingly, the answer depends on the terms of the relevant construction contract. While most contracts pertaining to Saudi construction projects are governed by the law of Saudi Arabia, the underlying law (Sharia) is unlikely to offer any relief to contractors over and above what the contract says. Sharia (and in particular, the Hanbali school that the local courts usually implement) will enforce agreements in accordance with their terms, unless the agreement offends particular Sharia principles. No such principle is obviously relevant here.
Turning then to some common forms of contract in use in Saudi Arabia, the (unamended) 1999 FIDIC Red Book provides that the contractor shall comply with all applicable laws. Furthermore, it says that the contractor must comply with all labour laws relating to the employment, immigration and emigration of its staff. On the other hand, this form of contract also says that the contract price shall be adjusted to take account of changes in law or in the official government interpretation of such laws. The contractor is also entitled to an extension of time where unforeseeable shortages in the availability of personnel arise as a consequence of government actions.
As it happens, the current Ministry of Labour actions are not changes in law as such. Rather, they reflect a change in approach to the enforcement of an existing law that prohibits the employment of workers sponsored by others. Hence, in the context of the 1999 FIDIC Red Book, the question would seem to be whether the current Ministry of Labour actions amount to a change in the official government interpretation of such laws (giving rise to an additional cost entitlement) and / or to an unforeseeable shortage of personnel caused by government actions (giving rise to an additional time entitlement).
By contrast, a comparable Saudi Aramco standard form (i.e. the In-Kingdom Lump-Sum-Procure-Build contract) states that the contractors personnel shall obtain the required visas and permits. It also states that the contract price constitutes the entire compensation payable to the contractor for the work and excludes any compensation for all government-caused cost increases imposed at any time. Saudi Aramco is also not liable to grant additional time or to pay compensation for standby time unless the cause of the standby is in its sole control, which is obviously not the case here. Finally, the inability to obtain iqamas or visas or renewal of iqamas or visas for expatriate workers is specifically excluded from the list of force majeure events that would otherwise relieve the contractor from performing its obligations, in whole or in part. In summary, in respect of this particular issue, the Saudi Aramco standard form is much less favourable to contractors than the 1999 FIDIC Red Book.
Accordingly, depending on the terms of the relevant contract, the current Ministry of Labour actions may be a grey area that both contractors and employers / clients need to be mindful of. Both parties would be well-advised to look closely at the terms of what has been agreed and to act accordingly. In particular, in order to protect their position:
There is no question that the current Ministry of Labour actions are changing the face of the workforce in Saudi Arabia, as was no doubt intended. There will be an evitable commercial impact on the construction industry in Saudi Arabia as it relies heavily on foreign workers to undertake works. On individual construction projects, who bears the commercial impact of such actions depends to a large extent on how the parties agreed to allocate such risk in their contracts in the first place, with different forms of contract giving rise to different outcomes.
For further information please contact Ben Cowling.