Friday, March 15, 2013

Construction firms' grim outlook due to rising costs

Straits Times  |  Mar 14, 2013
Contractors of recently-started projects in a bind as they must absorb price hikes

Construction firms which have signed contracts recently face the greatest financial peril from rising labour costs, industry players have warned.

They cited a range of factors stemming from the labour crunch which place growing pressure on the already significantly squeezed profit margins of these firms.

The industry has been cast into the spotlight after Poh Lian Construction, a long-established contractor, made public its weak financial position on Tuesday. It applied for a judicial management order last week.

The firm's plight could cause delays in projects worth hundreds of millions of dollars.

"(Main contractors) with projects that just started and have two to three years to go will have to carry the additional costs along," said Mr Dominic Choy, managing director of one industry player, Hexacon Construction.

A perfect storm of difficult factors have further squeezed margins for industry players.

First, foreign workers are no longer cheap, said Mr Choy. Salaries, higher levies, transport and accommodation for workers have risen. On average, costs for one worker from China would be around $2,500 per month.
Another factor is the upcoming tighter quotas on such foreign workers.

Then, there is the shortage of professional and executive staff in the industry since 2008.

The managing director of Ho Lee Construction, Mr Benjamin Tan, said: "It is hard to attract locals who have no interest in construction to switch over, even if we offer higher salaries."

He said if the firm is unable to hire enough professionals, it sometimes has to abandon a project.

A third difficulty is that the lump-sum contracts mean that the main contractor is usually unable to get an increase in the contract value from the developer if costs rise.

Main contractors will have to absorb their subcontractors' higher costs.

"If subcontractors cannot complete the job, it is cheaper to pay them more money than look for another contractor at the last minute," said Mr Tan.

Industry players added that contractors sometimes may put in low bids to make sure they win the tender. This could be because they have workers available.

Some contractors prefer to take on new projects, even if the margins are very thin, rather than have workers sitting around idle.

This exposes the contractor to higher financial risk when costs exceed initial forecasts.
The president of the Singapore Contractors Association, Dr Ho Nyok Hong, cautioned that contractors have to be more careful with bids.

He said: "In view of the push to improve the productivity of the construction industry, increasing costs and the series of tightened manpower policies, the construction industry has become very challenging, and contractors have to be prudent when tendering for projects."

But Mr Choy hopes that prices will reflect the cost pressures of the market in the near future.

"New tenders should rightfully see an adjustment upwards of about 15 per cent to take into account rising labour costs. Otherwise, main contractors will have to continue shouldering this burden," he said.

Martin Koh | 86666 944 | R020968Z
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