The increasing costs of materials and energy caused by the pandemic are having a negative impact on building contractors in Malaysia, both those dealing with government and private projects. The Department of Statistics Malaysia (DOSM) has a price index aimed at protecting contractors working on government projects from fluctuations in volatile markets. However, this index fails to capture the true prices of raw materials, leading to a surge in costs. The rising prices are also threatening the feasibility of construction projects, ranging from infrastructure to residential projects. This issue is particularly challenging for contractors working on private projects, as many of them do not have provisions to account for the increasing prices of raw materials in terms of price variation (VOP).
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One of the main difficulties faced by the DOSM building materials cost index is keeping up with rapidly changing global prices, which depend on the availability of key commodities. Without adjustments to contracts or updates to the price index, major public projects may struggle to find bidders or face delays in completion.
The soaring prices are putting many contractors at risk of going out of business. Some contractors are even considering not bidding for projects by local authorities because the contracts often transfer too much risk to them. The gap between tender prices and current prices needs to be addressed.
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In light of this situation, the Master Builders Association Malaysia (MBAM) has proposed several solutions to the government:
1. Lock the price for existing projects
Manufacturers and suppliers should lock the prices for all existing orders. For new orders or supplies, price negotiations should be conducted.
2. Review the VOP rate in government contract projects
The VOP should be extended until at least 31 December 2022, and possibly beyond. The current prices used for VOP do not accurately reflect the actual market prices. The government should consider adopting the material prices published by the Construction Industry Development Board Malaysia (CIDB), which oversees the construction industry. Additionally, the VOP list should include mechanical and electrical items that have experienced significant price increases.
3. Staggered price increase
Price increases should be implemented gradually over a period of three to six months, rather than sudden surges. This will not only prevent extreme price fluctuations but also help contractors mitigate their losses.
4. Seek government assistance in the form of subsidies/grants
To alleviate the increase in production costs, the government could temporarily exempt import duties on raw materials and provide subsidies/grants to manufacturers. Government assistance could also help stabilize prices.
5. Peg the prices with international markets
Manufacturers of building materials could provide detailed breakdowns of raw material costs, energy costs, etc., as references to align material prices with international prices.
6. Levy exemption for 12 months to support contractors and defer Human Resources Development Fund (HRDF) contribution
The government should consider exempting the levy charged by the CIDB for 12 months to support contractors, especially those in the G1 to G3 categories. Additionally, the construction industry should have the option to defer HRDF contributions for at least a year to help contractors deal with the price rise.
Contractors typically take price volatility and risks into account when preparing price quotes. However, the market turmoil in recent years has made it increasingly difficult to accurately estimate these factors. The risks of underbidding and failing to anticipate the extent of price increases are higher than ever, as skyrocketing raw material costs can significantly impact profits, making projects less viable.
The MBAM believes that it is crucial for the government to intervene immediately and assist the Malaysian construction industry in coping with the current price rise crisis. Government assistance will help contractors complete projects on time and avoid project terminations or abandonments. – Construction+ Online
Source: Master Builders Association Malaysia (MBAM)
