For the exclusive use of M. DUTTO, 2015.
UV6118
DHAHRAN ROADS (A)
Hassan Malik, the financial manager of SADE, a Bahrain-based civil engineering company,
reread the recently received fax. He was delighted that the nearly endless conversations with the
Transportation Ministry of the municipality of Dhahran in eastern Saudi Arabia were finally coming
to a close.
SADE had been selected as the prime contractor for a 168 million Saudi riyal (SAR) project
that involved the reconstruction and upgrading of the highway network linking the several terminals
of the Dhahran airport and connecting the entire complex with the city. The Dhahran Roads project
was indicative of projects on which SADE had established its international reputation for being a
leading construction contractor. The total cost of the project was estimated to be SAR146 million, so
the SAR168 million value provided only a 15% return, which was, unfortunately, below the 18%
hurdle rate required by SADE for projects of this nature. On the other hand, the slightly less-than-
desired return seemed a small cost to pay to maintain a steady flow of new projects during these
slow economic times.
The fax requested that Malik respond to the project proposal within a week. The wording of
the contract would then be finalized in the subsequent weeks and the contract signed by mid-January
1993.
The Project
The terms of the proposed contract contained several provisions:
At the signing of the contract, the ministry would advance to SADE 15% of the contract’s
total value.
If work progressed on schedule, SADE could bill the Ministry as milestones were reached in
accordance with the following schedule:
This case was prepared by Michel Schlosser, the Swedish Management Institute (IFL), and Sherwood C. Frey Jr.,
Professor of Business Administration, Darden School of Business. It was written as a basis for discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 1983 by the University of Virginia
Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used
in a spreadsheet or transmitted in any form or by any means-electronic, mechanical, photocopying, recording or
otherwise—without the permission of the Darden School Foundation. Rev. 2/94.
This document is authorized for use only by MART?N. DUTTO in 2015.
For the exclusive use of M. DUTTO, 2015.
-2- UV6118
1993 SAR 11,000,000
1994 SAR 36,000,000
1995 SAR 45,000,000
1996 SAR 43,000,000
1997 SAR 33,000,000
The Ministry would pay 80% of each bill received. Payment would, of course, be subject to a
satisfactory inspection of the site by the Ministry. The 20% deduction would be withheld for
(1) the recovery of the advance payment (15%) and (2) the accumulation of a retention fund
(5%).
Half of the retention would be reimbursed at the time of completion (end of 1997). The
second half would be repaid at the end of 1998, provided the roads did not show any flaws in
their first year of use.
During the past several months, the SADE engineering department had inspected the site,
confirmed the surveys, and reviewed the drawings that had been provided by the Ministry. In the
opinion of the vice-president of engineering, the project presented “no unusual challenges.” It was
similar to several SADE projects in other countries that were now nearly complete and that had
moved ahead without difficulty.
For SADE to proceed, equipment would have to be ordered immediately so that it would be
available in the fourth quarter of 1993 when earth moving would commence. The cost of the
equipment would be SAR38 million. Seventy-five percent of the cost would have to be paid upon
placement of the order; the balance was due on delivery. At the end of the project, the equipment
would have no salvage value. The engineering department estimated that the cost of completing the
project (not including the equipment) would be SAR108 million. SAR7 million would be expended
in 1993 for preliminary site work. The project would then proceed with estimated costs of SAR25
million, SAR29 million, SAR27 million, and SAR20 million for the subsequent years.
Preliminary discussions with several banks indicated that SADE would be able to raise SAR4
million in loans to help finance the project. The loans would carry a 12% annual interest (2% above
prime, 5% above government securities) and would have to be repaid in full at the end of 1997.
The project would be managed by one of SADE’s experienced project managers, Harold
Smithers. Smithers had just completed a major waterworks project in East Africa and was noted for
strong engineering skills and tight fiscal control.
Although the contract would be denominated in Saudi riyals, the foreign exchange exposure
would be minimal since the Bahraini dinar was pegged to the Saudi riyal. In addition, Saudi Arabian
and Bahraini tax laws would not require SADE to pay taxes on the profits of this contract.
This document is authorized for use only by MART?N. DUTTO in 2015.
