The construction sector may be hitting the high notes but the simple truth is that one can’t get building materials for a song. Their price has climbed with the boom in the industry.

While the cost of concreting sand came under the microscope earlier this year, a detailed study has revealed that, away from the headlines, the cost of other key materials like structural steel, clay bricks and ready mix concrete has also been going up.

Bundling the numbers together, construction cost consultancy Rider Levett Bucknall (RLB) has estimated that costs for Q1 2007 - captured by its in-house Tender Price Index (TPI) - were 15 per cent higher year-on-year (YOY).

The index registers changes in the cost of both, materials and labour. Labour costs, incidentally, have risen 15-20 per cent over the past six months.

RLB, formerly Rider Hunt Levett & Bailey, noted the ‘considerable pressure on construction resources, given the current volume of construction demand as well as the anticipated demand over the second half of 2007.’ In fact, it estimates that the previous construction demand peak of $24.4 billion achieved in 1997, ‘will be tested and possibly surpassed based on a projection of current trends’.

The costs have climbed, in part, on account of Indonesia’s decision in February to ban the export of sand. Even though concreting sand comprises only a small portion of the overall construction costs, the move also caused some disruption in aggregate supply, it noted.

Other materials also became dearer. The cost of structural steel, for example, has risen by 17.8 per cent. The price of copper, meanwhile, has fluctuated sharply, rising by almost 80 per cent over two years before registering a YOY decrease of 1 per cent in May 2007.

RLB says the prices of many materials are largely determined by the global commodities market which may react to speculation, foreign exchange fluctuations and geopolitical factors. Such gyrations, however, make life difficult for contractors who hope to tender for construction contracts.

A recent Goldman Sachs report, which was bullish on the industry in general highlighted certain investment risks, including execution risks, given the very tight project schedules and capacity, and the possibility of default of main contractors.

So far, at least one redevelopment project - Safra Toa Payoh - has been put on hold due to rising costs.

The government’s e-procurement portal, GeBiz, also revealed recently that the Housing and Development Board did not award at least four recent public tenders for building contracts. One industry player claimed that this was on account of the prices quoted.

Nevertheless, industry players are confident that, given the overall climate, they can weather the rising costs. Property developer United Engineers Group, which also has construction capabilities, believes the outlook will be positive for the next two to three years.

United Engineers group managing director and CEO Jackson Yap added: ‘In a booming property market where property prices are steadily rising, there would still be sufficient or additional margins to buffer against rising costs.’

Woh Hup director Eugene Yong said: ‘There’s uncertainty, but that’s the normal situation. That has not changed. The uncertainty is whether you have correctly priced in the risks,’ he said. The concern, he added, was not with new projects: ‘It’s existing contracts that are the issue.’

The construction boom has given contractors more bargaining power. UE’s Mr Yap says: ‘(Contractors) are able to bargain for more margins from developers as there is currently a shortage for contracting resources. However, due to this shortage in contracting resources, projects will also take a longer time to complete.’

Mr Yap also points out that construction materials are just one component of construction cost. The industry faces other challenges too.

Labour resources are tight particularly for supervisors and project managers, and dormitories and transportation resources for workers are also a constraint, he said. Equipment like cranes and piling machines is also witnessing shortage, and therefore sale and rental prices have also gone up.

Other developers are monitoring prices closely. A spokesman for CapitaLand said: ‘We will continue to review the impact of the increase in materials costs on a case by case basis with the respective consultants and contractors.’

If the rising construction costs have not been met by much alarm, it is probably because the returns from construction and property development are high.

Knight Frank director, research and consultancy, Nicholas Mak notes that the prices for new developments have risen faster than the construction costs.

Indeed, the latest official figures reveal that overall private home prices rose 20.6 per cent YOY with the high-end sector rising even higher. When compared to an estimated 2 per cent increase in development cost due to price hikes in sand and granite, increases in construction cost do seem negligible. Mr Mak added: ‘In a booming property market, there is a lot more opportunity to pass on increases in construction costs to buyers.’

Source: The Business Times, 06 July 2007