Responding to soaring building material costs
There are approaches which developers and contractors can adopt to cushion the impact of steep price increases
THE recent fluctuations in building material prices could trigger another round of growth in house prices. Up to March 2022, prices for steel, glass, and metal sections have increased by 28.8%, 25.8%, and 24.1%, respectively, since January 2020 compared to relatively slow growth rates of 9.8%, 1.2%, and 7.5% within July 2017-December 2019 (chart).
A significant increase in prices is observed for other building materials as well, ranging from 2.7% (for sanitary fittings) to 14.4% (for bricks and wall) within the period of January 2020-March 2022.
While the soaring material prices may not have a significant impact on ongoing projects as the construction costs have already been locked in when the contracts were awarded, it is likely to increase the cost of doing business for new projects. To ensure that contractor can complete the project within the calculated cost despite significant volatility, risk allocation measures can be adopted, whereby contractors can peg material prices with developers at a mutually agreed threshold rate.
In case the actual material costs are higher than the assumed value, contractors are entitled to increase the contract sum to reflect these costs, otherwise the savings accrue 100% to the developers if the actual costs are lower than the assumed value. The contracting parties can even mutually agree to a maximum or minimum amount that the cost of material may fluctuate, whereby the developers will bear the risk for increases beyond the maximum amount, while the contractors will bear the risk for decreases below the minimum amount.
Alternatively, contracting parties can consider the “material on site claim” approach, whereby contractors will directly procure the building materials the moment the building project deal is closed, while developers will pay the contractors once the materials are delivered to site. However, the downside is the high storage cost and pilferage risk, in which contractors need to renegotiate with vendors to ensure the delivery by schedule as per project timeline, or subject to critically required revision in enhancing the flexibility.
Another common practice widely adopted by developers is “cost-cutting”, whereby the overall project cost is balanced via adjustments in labour rates, reductions in fees, lowering profit margin, or value engineering. However, it would not be prudent to keep cutting costs as the productivity and quality of the project would be affected eventually. Most importantly, material costs in construction should not be seen as a factor that forces developers to sacrifice in design, quality, and workmanship of their products. Realising that property development is facing a year-over-year increase in cost of doing business resulting in slimmer chances of making profits, honouring more “sustainable construction practices” and “sourcing out alternate materials” are two of the best solutions to mitigate the impact of commodity price fluctuations in the long run.
By implementing technologies and heeding design processes including lean construction, BIM, and construction field management software, developers can achieve greater stability, reliability, efficiency, and flexibility in their projects, which will eventually lead to the reduction in operating costs. As for alternative materials, developers should also be more receptive to design professionals’ counter proposal of incorporating viable substitutes (higher concrete grade to reduce required steel bar, rebar coupler, AAC wall panel) as well as proven technologies (SMC modular toilet), which are deemed to help control costs while does not compromise on safety, quality, durability, or functionality.