Rising Construction Costs Put Squeeze On Builders

Source : The Business Times, June 18, 2008

Some manage to factor into contracts the higher risks of price fluctuations

Construction costs have risen across the board by at least about 13 per cent in Singapore in the six months to end-March. And for the residential/ condominium segment, costs have risen even faster, by as much as 16 per cent, according to a report by construction cost consultancy Rider Levett Bucknall (RLB).

The rise comes in the light of a 23 per cent increase in the Building and Construction Authority's tender price index in Q4 2007 on a year-on-year basis, making Singapore among the most expensive in the world.

At the top end in Q1 2008, the construction cost for a luxury condominium, a five-star hotel and a 55-storey office now comes to as much as $4,000-$5,500, $5,650-$7,680 and $4,960-$5,660 psm per gross floor area (GFA) respectively, according to RLB.

Says RLB managing partner Winston Hauw: 'High demand and competition for limited resources, the lack of tendering capacity among contractors, sub-contractors and suppliers, and volatile commodity prices have contributed significantly to building price escalation.'

RLB also found that the prices of crude oil, copper and aluminium have increased by 22-26 per cent between January and April.

According to RLB's 2007 data, Singapore ranks after Macau and Hong Kong on its tender price relativity matrix. Against this index with Hong Kong at 100, Singapore is 97 while Macau is 102. London is 144, New York is 140 and Sydney is 105.

RLB also has its own tender price index. At end Q4 2007, the index rose 26.3 per cent year on year and it expects this to rise a further 15-18 per cent in 2008. Property prices have eased but RLB believes this will have a limited impact on local construction demand in the short term due to the large existing project commitments on hand from both the public and private sectors.

These 'commitments', together with rising costs, are adding strain to the industry.

United Engineers Ltd (UEL), which has operations across Asia, agrees with the growing market sentiment that Singapore could actually be the most expensive in the world in building costs. But a UEL spokesman added: 'But it is likely to be a temporary phenomenon.'

To mitigate against rising costs, some construction companies have priced in the risk of price fluctuations at higher levels. A spokesman for a construction company said that in general, this could amount to 10-20 per cent of the construction package. Saying that this has increased by at least 10 per cent over the last three years, he added, 'In fact, three years ago you might still have had to mark down to increase competitiveness.'

Straits Construction Co director Wong Chee Herng, however, says that these risk factors are still very 'material specific'. And although such contractual clauses are becoming more common, Mr Wong said these are not always adopted.

Singapore Institute of Surveyors and Valuers president Lim Lan Yuan believes the pricing-in of risks may have increased by as much as 10-15 per cent since 2007 simply because 'prices are so uncertain'.

The filter-down effect of rising costs is that more projects could be delayed. While private sector developers have stayed largely silent about the impact, it was recently reported that the completion of the Singapore Sports Hub could be pushed back to 2012. While it was only reported that the delays were due to the 'contract's financial and legal details', it is probably safe to assume that construction costs were a factor too.

A spokesman for City Developments Ltd told BT: 'There is a significant increase in demand for construction work over the past two years. However, we are fortunate to have a team of regular contractors who continue to build our projects over this difficult period.'

A spokesman for Kajima in Singapore says that delays are also not simply due to construction costs per se but also due to the 'inability to pay' for certain materials or services. Citing the cost of steel re-bars as an example, which have doubled in price since 2007, he says: 'It's an additional cost we have had to bear. Basically, if (a construction company) can't shoulder this, it will have to default.'

Reiterating the plight of construction companies, Singapore Contractors Association (Scal) executive director Simon Lee says: 'It is not true that Singapore construction companies are pricing in high-risk factors for all contracts. They only price in high-risk factors in the demanding and unreasonable contracts.'

He added: 'Some contracts are very unforgiving and expect construction companies to take on all unforeseen risks and absorb all cost increases.'

But Mr Lee believes that construction costs are still competitive here because 'labour cost is still kept at a reasonable level'.

He also says that while costs and shortages of materials can affect the progress of projects here, 'on a case-by-case basis, the construction company and the developer will discuss the best way to resolve these issues. The parties always prefer not to nullify contracts if such issues can be amicably settled'.