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MBAM members are feeling the effect of the recent diesel and petrol pump price increase which took effect on 5th June 2008. Furthermore, contractors are finding it harder to manage cost of construction as many other essential building materials are also showing drastic increases.
Mr Patrick Wong, President of MBAM said, “MBAM is very concerned with the negative impact of the recent price increase for fuel. Many of our members are paying around RM3.50 for industrial diesel which has increased approximately 40% since the announcement. Machineries such as bulldozers, various tower and mobile cranes and off-highway trucks are insatiable users of fuel and this will definitely eat into contractors already thinning margins. Construction materials all travel by truck which is passed through to the sale price of all construction materials. Furthermore, anything that uses petroleum, such as asphalt, bitumen and paint are being affected and we do see the cost of road construction increasing. We have also received information that there will be 40% increase in fuel surcharges for deliveries of sand. These increased costs are really affecting contractors very deeply. On the one hand, contractors are sandwiched between the need to fulfill their contractual responsibility to deliver on time at fix tender price and on the other hand the rising cost of fuel is a tightening noose on the cash flow, financing and continuous survivability of the construction industry.”
Commencing 12th May 2008, steel bar and cement started to show drastic increases and went as high as RM4100.00 a tonne. Cement also has shown increases by as much as 22%. These increases are beyond the capability of contractors to absorb and the situation is made worse by increase in all other essential building materials. Concrete which was increase by 14% by 5th June 2008 was further increased by 9% which is a total increase of 23%. Quarry products were increased by 30% in January 2008 this year and there is a further 30% increase expected in July 2008. Other products that have shown increases are as follows:- cement and sand bricks (10%), concrete roof tiles (25%), timber (12%) and machinery including lorry and crane rental (45%).Therefore, when petrol was increased by RM0.78 and diesel by RM1.00 per litre this has actually shook the construction industry tremendously.
It is very hard to pass the rising costs on to clients and for some companies the higher fuel cost are tolerated as contractors will have work even if they lose money, just to get cash flow. Many contractors are unable to absorb this increase and will be unable to continue to be in business if the increases are not kept in check. Should contractors stop or abandon their on going projects, the repercussions will be great as additional funds will be needed to revive projects especially for housing projects. The construction industry is an important and productive sector that plays a vital role to stimulate growth through its linkages with over 140 industries and professional services. When projects are abandoned, jobs too will be lost and this will be another knock-on impact that will leave ripples in the construction industry and the Malaysian economy in general.
Due to fuel increases, there is fear that cost of living has gone up and transport of workers will lead to extra labour cost. Labour cost has actually gone up in recent times and will be as major cost item for contractors. Considering that the material increase have not factored in power and gas increases, MBAM expects another round of increases from 1st July 2008.
Malaysian Iron and Steel Federation (MISIF) has requested for the waiver of Windfall Tax while their members continue to report unprecedented profits. We would like to call on MISIF to be more considerate to the construction industry. While their members would want the exemption, they should not sell materials at exorbitant prices but to take into consideration the completion of projects that will keep the construction industry going. I
n the light of uncertainty of cost, contractors are calling for the Government to look at ways to ensure the delivery and sustainability of projects in these trying times. Some of these cost-push factors include:-
a. Higher construction demand due to sudden churning out of works which includes the 9th Malaysia Plan (9MP) and the various Economic Corridors
b. High end property development and launches of normal properties
c. The continued demand for essential building materials and labour worldwide
d. The continued property and construction boom in neighboring countries and GCC countries
Hard-pressed to keep to construction schedules, MBAM is appealing to developers and the Government to delay/defer future launches so that demand for product machinery and manpower will be reduced. This will release demand pressure so that supply is stabilized resulting in manageable prices.
The Association also appeals that the government will extend completion time for existing projects. The rationale of decision is due to the rapid increases in oil and construction cost. By the delay/defer of future launches, contractors can also pre-purchased long-lead items that may rise in prices much sooner, like elevators, mechanical units and other products that are affected by fuel price increases and also mitigate other material cost and wages demand.
Suppliers must take note of this current scenario of building materials supply and consider that with incessant price increases demand for supplies would also be affected. As such MBAM calls for all suppliers to be mindful to not take advantage of the situation and charge higher prices. This will create a more stable and sustainable construction industry and thus create a demand stability to support the supply chain and the construction industry. MBAM urgently call on the Government to take immediate steps to resolve contractors’ problems and to avoid the industry coming to a standstill.
Looking at the current situation of escalating prices, MBAM also requests that the Government consider the need to have a law on mandatory fluctuation clause for all construction contracts in the future. In the interim, the Government should consider:-
(i) For Existing Projects (without price fluctuation clause) :- Compensate the builders for the additional costs incurred due to the material price increases by adjusting the contract prices. This additional cost can be computed using the same mechanism provided in the conventional “build” contract for Government projects.
(ii) For Future Projects :- The inclusion of adjustment for price fluctuation clause to be adopted not just for the conventional “build” contracts but also for all “design and build” contracts, direct negotiation contracts and other projects undertaken by semi Government bodies and Agencies.
(iii) For M & E Works Contracts :- The introduction of list of basic materials that are subject to adjustment for changes in costs/ rise and fall clause.
(iv) For Private Contracts:- Tender document should stipulate building materials for private jobs to be supplied at a fixed price and deducted from main contract.
MBAM believes that the above recommendations will bring about the following benefits:-
(i) The tender prices for projects will be more competitive and realistic as builders do not have to allow for any costs on any potential escalation of construction material prices;
(ii) Reducing the risks of projects being abandoned due to any sharp increase in material prices;
(iii) Small builders particularly the Bumiputra companies will be spared from any eventualities caused by the major price fluctuation of materials.
The Government should really take cognizance of this crisis in the construction industry as many contractors will go bust and revival will be costly. Moreover, if this rising prices of essential building materials is not resolved, this will definitely take its toll on other industries including financial institutions. The above recommendations will definitely alleviate the serious problem suffered by the building industry and help towards ensuring that 9th Malaysia Plan (9MP) and the various economic corridors will continue to be in progress without delay.
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