Price challenges continue as report charts record cost hikes

With the scale of growth across the region, the construction sector is struggling to obtain key materials. And in competition with booming economies such as China, the quest to source products and labour is becoming tougher than ever. Angela Giuffrida reports.

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By  Angela Giuffrida Published  December 30, 2006

Dubai and its neighbours have established themselves as the world’s cornerstone for ambitious and complex projects over the last decade. Around 30% of the world’s cranes are now at work on projects in Dubai alone, while an estimated US $1 trillion of developments is underway in the Middle East. But while local and international contractors have had rich pickings for work, and can look forward to more in the future, the sheer scale of development has left the region struggling to obtain building materials and resources at realistic prices. And without the security of a price escalation clause, contractors in the region have been left even more vulnerable to a surge in the cost of almost every kind of building material, as outlined in a recent report compiled by cost consultant EC Harris. The report found that the cost of construction in Dubai rose by over 28% during the first eight months of 2006, with materials prices up by 32% and labour rates almost 20% higher. “The figures are necessarily crude, since they are based on a limited sample of materials and labour rates,” said Mark Prior, regional managing director, EC Harris. “Nevertheless, the study throws interesting information on the rates that contractors are paying for some of the materials and labour that will form an essential part of their tenders, and provides guidance on the level of inflation within the construction industry in Dubai.” Worldwide demand for steel products, particularly from China’s burgeoning construction market, has left Dubai and the region susceptible to severe shortages in stock. According to estimates from the International Iron and Steel Institute, global demand for finished steel products was between 1.040 billion and 1.053 billion tonnes in 2006, compared with 972 million tonnes in 2004. And volatile steel prices have been having an even bigger impact on small- to-medium-sized companies, which cannot afford to buy large quantities from major suppliers or guarantee prices for more than one week. According to MEPS International, the raw material cost of steel is up to 30% of the total building cost. In the UAE, steel now trades on average at around $599-626 per tonne, compared to $435.70 a few years ago, and can cost as much as $7,200 for the most expensive grades. The price of cement also went up by 10% and now stands at around $80 per tonne, while aluminium prices increased by 9%. Oil prices have also led to a surge in the price of asphalt, leading to losses for contractors working on road projects. Mariano Domingues, project director, Odebrecht, which is working on the second runway at Abu Dhabi International Airport, said: “We are using one million tonnes of asphalt on this project and of course the price increase is going to have a huge impact; I have no doubt about that.” “It’s an equipment-intensive job, so diesel and asphalt are two materials that will have a big impact. Prices are probably going to increase and we have a lump sum fixed contract.” Wood prices also spiked this year with the price of plywood, whitewood, MDF and Red Meranti soaring by up to 30% during August. “Looking forward we would expect prices to rise by 1-1.5% per month for the next 18 months, as the high demands on the industry’s capacity continue to keep margins up,” said Prior. But Prior added that there are a number of measures that developers, investors, designers and contractors can take to mitigate the effects of rising prices. “By adopting a ‘solutions’ approach, value can be enhanced, costs reduced and escalation managed,” he explained. Such solutions include proactively sourcing alternative supply chains to introduce greater competition and using off-site prefabrication to manage the labour price escalation, as well as standardising design to reduce time and cost. Prior also suggests finding alternative material selection and choosing a design that reflects the changes in materials prices, such as structural steel rather than concrete frames. Other steps include assigning project risks to those who can best manage them, rather than simply transferring them and paying the premium, as well as reducing payment terms to 14 days and encouraging contractors through positive cash flow.

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