Monday, January 24, 2011

FUEL PRICE HIKE IMPACT ON CONSTRUCTION INDUSTRY

FUEL PRICE HIKE IMPACT ON CONSTRUCTION INDUSTRY


Rising fuel costs are on the minds of practically everyone because they are affecting the price of almost everything from school lunches to construction materials. Thus, the recent increase in fuel and building material prices will surely give the big impact on the construction industry, which is one of the country’s engines of growth, and it may experience a slowdown for the rest of the year.

Construction Industry Development Board (CIDB) Malaysia chairman Tan Sri Jamilus Hussein said since the government raised the price of fuel by 41 per cent on June 5, Malaysia's 63,000 contractors are starting to feel the pinch. Construction costs have gone up at all levels of the value chain from building materials such as sand, cement, concrete and roofing materials to logistics. Prices of many construction related materials, machinery and transportation costs have also increased substantially and builders are facing critical problems. A large number of trucks and heavy machinery is required to transport steel bars, cement, sand and stones from ports/plants to construction sites. These rely on large amounts of diesel to operate and will surely effect the construction cost.

According to Malay Contractors Association of Malaysia secretary-general Datuk Osman Abu Bakar, since the fuel price hike, the sector has seen an average increase of 30 per cent per sq inch of space. House prices may also increase between 25 per cent and 30 per cent and projects under the Ninth Malaysia Plan may not reach their targets. Moreover, from the feedback that they received, some of the association's 7,000 members had rejected letters of award for construction jobs because there was no profit to be made due to the high price of building materials. This will cause further delay in country’s development programs and infrastructure projects. Whereby, the construction of affordable housing, including low- and medium-cost units, may no longer be feasible.

Furthermore, these increases in the price of building material will have severely impacted both developers and contractors. The contractors would definitely ask to re-negotiate the contract prices. They are likely to ask for variation orders (VOs) to cover the rise in raw material prices. What we afraid of is that, if the contractors unable to obtain VOs, especially the smaller contractors who do not have the financial strength to absorb higher raw material prices, the possibility of projects being abandoned will be high. Even large contractors would be making losses from their projects. Contractors cannot proceed with such projects and would have to return their tenders.
For the new projects, it is very likely that the developer is the one which has to bear the higher building costs. Obviously they cannot stomach the rise in building materials and will be passing it on to customers. Many property developers are also delaying new projects due to the rising costs of construction materials. This is because property developers are unable to fix prices for their properties due to the current uncontrollable sharp increase in building material prices. Particularly, in housing industry, it is going to be slowdown and discourage people from buying houses. House buyers are caught in a dilemma of whether to put off their purchase to play safe in case the economy sours or buy now as property prices are unlikely to come down. The second choice seems to be more popular judging from the generally good demand for newly launched properties although they now take longer to sell. Developers and house buyers are generally adopting a wait-and-see strategy.

Although there is no certainty regarding what may happen in the weeks and months ahead, the difficulties that the construction industry is facing will inevitably impact the development. However, the continuous increase in fuel and construction material prices is proving to be an ordeal and it is hoped the construction industry will be able to tackle these challenges. The key to success lies in having a positive mindset and enhancing both efficiency and productivity in the whole construction value chain.

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