As instability in the Middle East continues, risks in the overseas construction market are escalating beyond poor contract awards to include project delays, payment issues, and contract disputes. The government has decided to expand consulting support for small and medium-sized construction firms facing overseas construction disputes, allocating an additional 400 million won through a supplementary budget.
According to the Ministry of Land, Infrastructure and Transport, the government will secure 400 million won through the supplementary budget to enhance the "Integrated Consulting Support Project for Overseas Construction." This initiative provides legal, labor, and tax support for small and medium-sized construction firms that have registered for overseas construction. The ministry has increased expert consultation hours from 12 to 24 hours and has included labor consulting in the support services starting this year.
The government's decision to expand support comes as geopolitical risks from the Middle East are likely to lead to increased costs and contract disputes in overseas construction projects. With rising oil prices, raw material costs, and logistics expenses due to instability in the region, there are growing concerns about conflicts between clients and contractors over project suspensions, delays, and payment issues.
The flow of overseas construction contracts has already seen a sharp decline. According to the Overseas Construction Integrated Information Service (OCIS), the total value of overseas construction contracts in the first quarter of this year was $2.037 billion, a 75.2% decrease from $8.212 billion during the same period last year. This figure is also down 70.4% compared to the five-year average of $6.887 billion for the first quarter. Notably, contracts in the Middle East plummeted to $316.2 million, a staggering 93.6% drop from the previous year.
Given the heavy reliance on the Middle East for overseas construction, the impact is significant. According to the Ministry of Land and the Korea Overseas Construction Association, the total value of overseas construction contracts last year reached $47.27 billion, the highest in 11 years since 2014. Of this, contracts in the Middle East accounted for approximately $11.9 billion, or 25.1% of the total. The Middle East has long been a key market for domestic construction firms, particularly in the plant and infrastructure sectors.
The risks extend beyond just a decrease in new contracts. Ongoing projects are facing challenges related to logistics disruptions, workforce management, material procurement, and fluctuations in exchange rates and oil prices, which can lead to increased costs and project management issues. Prolonged construction periods heighten the likelihood of disputes over penalties for delays, contract modifications, and additional cost approvals between clients and contractors.
Small and medium-sized construction firms are particularly vulnerable to these disputes due to their lack of local legal and contractual expertise compared to larger firms. Overseas projects often involve complex interactions among force majeure clauses, requirements for extending deadlines, local labor and tax laws, and responsibilities for exchange rate and logistics costs. Delayed responses to these issues can result in significant losses.
The Ministry of Land plans to provide comprehensive consulting services through this initiative, including reviews of problematic contract clauses, assessments of force majeure related to delays, responses to defaults, local tax law advice, financial procurement, and risk management. Eligible applicants are small and medium-sized enterprises engaged in overseas construction as defined by the Overseas Construction Promotion Act, and they can apply through the Korea Overseas Construction Association.
An industry insider noted, "The Middle East risk is not just about delays in new contracts; it can also lead to issues with existing project timelines, costs, and payment recovery, which adds to the burden. Large firms have their own legal and contractual teams, but small and medium-sized firms often find themselves responding too late after disputes arise, increasing the demand for preemptive consulting services."
Kim Yoon-deok, Minister of Land, Infrastructure and Transport, stated, "Given the unavoidable situation of war in the Middle East, we anticipate that small and medium-sized construction companies operating overseas will face significant challenges. The government will do its utmost to minimize the damage to our companies."
* This article has been translated by AI.
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