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Navigating rising construction costs

By Aleks Leitmanis, Director – Project Services, TMX

Over the last 10 months, the construction industry has been plagued by material delays, shortages, and price hikes, with COVID-19 lockdowns, also stifling manufacturing and construction on sites.

The rising cost of raw materials, China cutting steel production and COVID-19 delaying manufacturing and activities at construction sites have led to a shortage in steel and cost increases of up to 60% for steel design, fabrication, and installation. The sentiments on the ground echo this trend, with Vietnam experiencing a 34% increase in steel production this year to meet booming demand, while the Singapore market alone has witnessed an increase of 54% in the price of steel bars compared to last year[1].

The escalating cost of materials is being compounded by global freight issues, as well as rising crude oil prices and limited labour, which is making it even longer and more expensive to get construction materials onto our shores.

All of this has happened at a time of high development demand in the Asian industrial market, particularly as businesses look to adopt a China Plus One manufacturing strategy to diversify supply chains and de-risk operations. 

The growth of eCommerce has also fuelled major investments in industrial sites, in tandem with the increased focus on the need for efficiencies in supply chains as well as readily available global capital funding. 

However, with a booming industrial market and shortage of skilled labour, many builders are tendering for projects with zero margins and absorbing the increased construction costs in order to retain their workforce and keep contracts flowing in these uncertain pandemic times.

With the current trajectory of volatile construction costs and expanding procurement times, businesses committing to new industrial builds need to understand how to navigate these market cost and time risks to their projects. Businesses need to be forward planning and building smarter to ensure their new industrial sites are cost-efficient and aligned with their business objectives.

Overcoming the cost risks

Most industrial projects are engaged on a design then build contract where budgets are tight and risk allocation can swing the project between profit and loss.

The current increase in construction material prices is causing issues for builders on already contracted fixed price contracts where margins are diminishing. This places increased pressure on the need to seek adjustments on projects to redress the situation.

The scale of these price increases will likely put subcontractors and builders at risk which can affect the viability and successful completion of projects. Any business seeking a new industrial site needs to undertake comprehensive due diligence on the builders and developers to ensure they have confidence that they can deliver the project.

To manage market volatility, it is important that project requirements are well-documented in a robust design brief that clearly defines the project scope at the very initial concept stage – even before tender and site locations are even considered. This solidifies project and construction requirements to minimise the risks associated with cost escalation, variations, and resultant delays.

Additionally, businesses need to look at building smart and optimising the design of their industrial development to closely align with their operational purposes. This will ensure that the facility will drive operational efficiencies, optimise the footprint of the site, and minimise the potential of cost increases during the project delivery.

Forward planning

Global freight issues from demand outweighing global vessel supply are having a widespread impact on the global market including the construction industry. 

Many construction materials produced overseas have also seen shipping lead times spike. We have observed shipments to Singapore and the region taking eight weeks to arrive, compared to five to six weeks the same time last year.

Construction materials previously readily available by suppliers or wholesalers can be out of stock and sometimes months away from our shores.

To mitigate these delays, products coming from overseas need to be ordered earlier and longer lead times allowed in the development and build programs.

Alongside forward planning in the building program to overcome the lengthier construction period, businesses should consider integrating the fit-out program with the base build program through early access provisions in the contracts.

Early access provisions integrate the base build and fit-out works to optimise and accelerate the end-to-end program timelines. It helps bring forward go-live operational dates, which can keep projects on track with the current escalating risks.

As the demand for industrial projects continues, the cost and time risks could continue to grow. Businesses need to forecast their future objectives and act now for new industrial facilities to properly plan and manage the ongoing risk in a volatile market.

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