Profiteering adds to construction woes

Source : Business Times - 19 May 2008

As costs of materials rise, some suppliers default on earlier contracts to make more

THE last thing the construction industry needs now is another roadblock. But with the cost of materials and shortages soaring, the opportunity to inflate prices is too much for some errant suppliers and sub-contractors to resist.

Sources told BT that some suppliers of building materials have been opting to default on earlier contracts because the current demand and prices are so strong, they can easily secure more profitable contracts elsewhere, stock piling materials in the meantime.

To add to the strain, labour supply has become so tight that crane operators, for instance, are said to be commanding salaries upwards of $8,000 per month.

A check with the Building and Construction Authority (BCA) reveals, however, that this opportunistic behaviour is not widespread - yet.

A BCA spokesman also said it has not received feedback of contract defaults by suppliers of steel and other construction materials, or of any delay in construction works due to such default of contractual obligations.

However, BCA said: ‘We do understand that the suppliers have increased their importation and stocking up of steel rebars in view of the surging prices. Suppliers have also shortened the period of supply contract for rebars from the previous 12 months to the current six months.’

‘Contractors and developers have to resolve the price issue based on their business practices, relationship and understanding. For projects which adopt price fluctuation for these materials, the cost impact on the contractors will be minimal,’ added BCA.

Construction companies that BT spoke with had mixed reactions to the situation.

A spokesman for United Engineers Ltd said: ‘The industry is particularly seeing some delays in projects, either in the midst of or commencing construction, that were awarded before the construction boom as prices negotiated at that time were definitely lower compared to now.’

Straits Construction director Wong Chee Herng said the industry has seen some smaller suppliers defaulting on contracts and causing delays but the level is still ‘manageable’.

He added: ‘Prices have moved up and there is no point lamenting . . . It’s a choice of either negotiating or just walking away.’

With so much uncertainty, Straits Construction is more selective about tendering for jobs. ‘If we feel we can’t deliver, we won’t tender,’ Mr Wong said.

Other construction companies like Hiap Hoe and Sim Lian say they are not facing any delays.

Giving an insight into how suppliers are also facing the same challenges, Lee Metal Group executive director Lee Heng Thiam revealed how a steel supplier for Marina Bay Sands was contracted to supply 85,000 tonnes over a two- year period at US$600 per tonne. However, the price of this steel has since risen to US$1,000. ‘It is too much for anyone to bear,’ he said. And while the particular supplier was able to renegotiate the contract, Mr Lee said: ‘I think they will still make a loss.’

To mitigate the risks, Lee Metal has to hedge its position. ‘In the past, the practice was to sell first and buy later; now, it’s the other way around,’ he explained. This means it keeps a stockpile of 6-8 months worth of supply to ensure it can fulfil its obligations.

Price fluctuation clauses are not a big help to suppliers who stockpile. ‘If prices are on a downward trend, we are in trouble,’ he explained. ‘Buying and selling needs to be managed tightly.’

HG Metal manages its stock on a tighter basis by maintaining 3-4 months worth of inventory amounting to as much as $200 million worth in stock at any one time. HG Metal CEO Wee Piew also said that it does not ‘lock in’ its prices. ‘Most major suppliers don’t set contracts,’ he added.

‘The only issue is when a big contractor wants to lock in prices. Then they have to deal with steel mills directly,’ he added.

These mills are usually in China but both HG Metal and Lee Metal say their supply comes from international traders instead because of the uncertain supply from Chinese mills.

PSL Holdings, a foundation engineering specialist contractor, says that its operators of construction cranes and other vehicles are commanding ‘very high salaries’ but it has managed to factor increasing manpower costs into its contracts. ‘The effect on our margins is minimal,’ added a PSL spokesman.

PSL says it has not encountered delays so far but apart from rising salaries, it is faced with rising costs due to surging diesel prices as well as shortage of personnel. PSL said: ‘We have managed to mitigate the higher costs because of the short duration of our projects.’

Developers that BT spoke too also say they are not facing delays.

City Developments Ltd (CDL) says it has not encountered any significant delays from its contractors. ‘Perhaps they have made early confirmation orders on the construction materials and are not really affected by the present rising costs of materials,’ added CDL’s spokesman.

Frasers Centrepoint COO Cheang Kok Kheong did say that to counter rising costs, it has had to take certain steps including continuously reviewing its plans and specifications to ensure that cost-effective construction methods and alternatives are considered. ‘In addition, we have improved and streamlined our procurement methods to get bulk pricing for construction supplies from our associates,’ he added.

The construction industry is perhaps beginning to show signs of strain, and may need more help.
To this end, BCA says it is also working with the Real Estate Developers’ Association of Singapore to encourage their member developers to make prompt payment to help ease the cashflow of the contractors.