Published August 29, 2008

BCA taps China as costs go through the roof

Construction industry can't cope with demand; tender price index shoots up


(SINGAPORE) With the cost of construction escalating to new highs, the Building and Construction Authority (BCA) has flown missions to China in the hope of attracting construction companies to set up business here.

A spokesman for BCA said: 'A few Chinese contractors have since registered with BCA.'

Many firms were weakened after the construction industry hit rock bottom at the turn of the last decade. As demand picks up again, the industry cannot cope with the upswing in jobs.

One industry player put the number of top-tier construction companies currently at 45, down from 100 during the last peak.

A spokesman for the Singapore Contractors Association Ltd (SCAL) added: 'The reduced capabilities of (construction) companies and their respective available resources were directly proportionate to construction contracts awarded during the period of the downturn.'

BCA said that, currently, it has more than 6,000 firms registered with its Contractors Registry. 'During the last prolonged downturn in the construction industry, the number of firms did not change much but many had reduced their capacity, in varying degrees, to cope with the downturn. As a result, the sudden steep upsurge in construction demand recently has added tremendous pressure on the supply of construction resources and contracting capacity,' BCA added.

According to a report by construction cost consultant Rider Levett Bucknall (RLB), Singapore has risen the fastest on its International Tender Price Relativity Matrix.

The report reveals that between October 2007 and July 2008, Singapore's Tender Price Index (TPI) - which is based on a universal basket of construction cost variables - increased by 18.7 per cent.

Singapore ranks 13th on the matrix with an index score of 122, below cities like New York (154), London (151) and Honolulu (141).

According to RLB, the cost range for Premium Office Buildings is $2,450- $4,580 per square metre in Singapore, $3,115-$4,407 psm in New York, $6,230- $8,049 psm in London, and $2,505-$3,373 in Hong Kong.

Apart from 'volatile commodity prices', 'high demand and competition for limited resources, (and) the lack of tendering capacity among contractors', has also worsened the rise in building costs.

A Citi note this month highlights that crane rentals surged to a record high of $446 per tonne per month (up 7 per cent quarter-on-quarter and 29 per cent year-on-year). So, the cost of building materials is not the only worry the industry faces.

Citi expects other major infrastructure projects to take up the slack after the integrated resorts (IRs) are completed. Its forecast seems in line with RLB's projection for the Singapore TPI, which RLB expects to increase by 20 per cent for the whole of 2008, and 15 per cent for 2009.

United Engineers Ltd (UEL) managing director Jackson Yap does agree that resources are tight. 'Currently, most contractors are overstretched with projects, and this is on top of the postponement of projects by the government and some private developers,' he added.

To date, $4.7 billion worth of government construction contracts have been deferred.

Mr Yap reckons the TPI will increase by 20 per cent in 2008 but does not expect it to increase by more than 10 per cent next year. 'The outlook for the construction industry at least for the next three years will be good,' he added.

Bovis Lend Lease, which is building [email protected] on Orchard Road, said that there are signs of the TPI moderating. And this could be attributed to rising costs.

A spokesman for Bovis Lend Lease said: 'While the construction market is still pretty tight based on the backlog of work flowing through from the major capital investments in the last 12 months, there are discernible signs of the industry's growth decelerating.' High costs and the uncertain global economic climate are contributing to this.

CapitaLand maintains that its projects, 'are progressing on schedule'.

City Developments Ltd is taking a slightly different tack. It said earlier this month that 'the group will proceed to construct developments where it has favourably secured construction costs from reputable and strong construction companies, even before launching them'.

More players in the construction industry will certainly ease some cost pressure but SCAL cautions that companies working in any new market will need to understand the regulatory environment and market practices.

SCAL's spokesman added: 'The effort and final success to bring new construction companies to work here will be limited and will not help much in relieving pressure in the industry.'

But he added: 'The industry is always open to foreign competition, and local construction companies have always been competitive in their project prices, quality and delivery time.'