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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’.

Source : Business Times - 18 Jun 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.

Source : Business Times - 19 May 2008

The Economic Development Board has launched a $20 million solar capability scheme to help the private sector become more environmentally friendly.

Announced at the Semicon Singapore show yesterday, the scheme aims to encourage companies to install solar technology in new building projects. It is offering financial support of up to 40-50 per cent of the cost of solar solutions, capped at $1 million per project.

‘The scheme enlarges the practice field for our solar energy ecosystem,’ said EDB managing director Ko Kheng Hwa. ‘We believe this will go a long way towards building up critical capabilities among various players, including system integrators, architects, engineers and developers.

‘The implementation of capabilities nurtured under the scheme will be exportable, as there is growing demand internationally for eco-friendly developments. These capabilities will also support wider adoption of solar energy in Singapore as its cost continues to fall.’

The scheme is applicable to new private sector building developments that meet Green Mark Gold standard, under a benchmarking system administered by the Building and Construction Authority. Projects at existing buildings may be considered case by case.

The scheme is the latest initiative by the Clean Energy Programme Office (Cepo) led by Mr Ko.

Set up early last year, Cepo is an inter-agency workgroup tasked with coordinating clean energy efforts.

Yesterday, Cepo announced the formation of a clean energy international advisory panel . Chaired by EDB chairman Lim Siong Guan, the panel will advise Singapore on the development of a clean energy industry and help chart R&D direction. Panel members include British parliamentarian Ronald Oxburgh, European Photovoltaic Industry Association president Winfried Hoffmann and Norway’s Renewable Energy Corp president and chief executive officer Erik Thorsen.

Source : Business Times - 07 May 2008

Govt scheme trims cost of tapping the sun for energy by 30% to 40%

Tapping the sun’s energy has just been made easier for building owners.

The Government yesterday announced details of a $20 million scheme that could see as many as 100 solar projects sprout around Singapore in the next two years.

The carrot being dangled in front of private developers and building owners is a subsidy that trims the cost of a solar project by 30 per cent to 40 per cent.

The grant is capped at $1 million for each project.

Solar projects usually cost from $100,000 to a few million dollars, depending on the scale and technology used.

‘This is a very attractive offer… We expect keen interest from the industry,’ said Economic Development Board (EDB) managing director Ko Kheng Hwa, who unveiled the initiative yesterday at the annual Semicon Singapore conference at Suntec City.

The top priority of the Solar Capability Scheme, said Mr Ko, is to build up a critical mass of projects so as to develop manpower capabilities in Singapore’s fledgling solar industry.

‘We are focusing on boosting the demand side…so the local professionals will learn how to design good solar systems.’

The scheme, first mooted by Senior Minister of State for Trade and Industry S. Iswaran in Parliament in March, is the Government’s latest answer to increasing calls for incentives to kick-start the solar industry.

The sector has attracted headline investments in the last year, including a $6.3 billion giant solar manufacturing plant that Norwegian firm Renewable Energy Corp is building.

‘This scheme will go a long way in building up critical capabilities among various players in the solar energy ecosystem,’ said Mr Ko.

It starts with immediate effect and applies to new private buildings that meet a minimum Green Mark Gold standard, according to the EDB.

The Green Mark is a rating system developed by the Building and Construction Authority that rates buildings for their environmental impact and performance.

Developers like City Developments have already incorporated solar systems into new condos, which have been given the Green Mark stamp of approval.

Some factors that will determine the grant size include innovation, design, effectiveness and skills development, said Mr Ko.

The EDB also announced yesterday a new international advisory panel for clean energy that will hold its first meeting next month.

Industry players like Mr Christophe Inglin, the managing director of solar firm Phoenix Solar, hailed the new scheme, saying: ‘It’s the best news the industry has received for some time.

‘We’ve seen an increase in interest in solar systems. Hopefully, this boost will convince clients that solar is the way to go.’

Source : Straits Times - 7 May 2008

Even as hundreds of contractors gathered at two separate events yesterday to discuss how to answer the Prime Minister’s call to make worksites safer, a pallet of glass panels came crashing down on two China workers.

The 500kg pallet pinned one of them, a 42-year-old, to the ground for 21/2 hours. His 41-year-old colleague escaped with just cuts to his left wrist.

It was a delicate task for the Singapore Civil Defence Force to get the trapped man out as any sudden movements could cause the 2cm-thick glass panels - each measuring 3.7m by 3.4m - to shatter.

Paramedics and a medical team from Tan Tock Seng Hospital supplied oxygen and kept the victim on an intravenous drip throughout.

He suffered a broken right arm and scratches to his body.

The accident happened at the worksite of a still-unnamed condominium in Kovan owned by Duke Development.

The builders, Lian Beng Construction, had been working at the site for several months. The publicly listed company did not respond by press time on how the accident happened.

The Manpower Ministry is looking into the matter and has asked the contractor to revise its loading and unloading method. The ministry said it will continue to inspect and review the safety practices of worksites under Lian Beng.

Just last week, PM Lee Hsien Loong set a target to slash worksite death rates to 1.8 per 100,000 workers within the next 10 years.

Two industry events yesterday also tried to drive home the safety message.

Contractors were reminded to keep a close watch on worksite safety at the Construction Safety, Health and Security campaign organised by the Singapore Contractors Association.

And the first bizSAFE workshop was conducted for about 200 subcontractors who work closely with the organiser, CPG Facilities Management.

Businesses which complete the five-session course would receive bizSAFE certification which will give them better recognition with clients looking for safe contractors.

Source : Straits Times - 6 May 2008