Demand down, costs up, but builders will rein in bids

070320 - Demand down, cost up

Tender prices for new projects are estimated to rise by as little as 6 per cent as contractors compete to secure new projects, say consultants.

Updated from : The Business Times3 July 2020

SINGAPORE contractors are facing a double whammy – plunging demand due to the Covid-19 pandemic while needing to fill their order books but without being able to pass on all the additional costs of measures to ensure a safe working environment.

As such, tender prices for new projects are estimated to rise by as little as 6 per cent as contractors compete to secure new projects, said Cheryl Lum, director, head of research & data, at Turner & Townsend.

“Contractors have to fill up their order books, yet they have to balance all these new measures as well,” said Ms Lum. Turner and Townsend is a consultant specialising in project and cost management across the real estate, infrastructure and natural resources sectors.

Last weekend, the Building and Construction Authority (BCA) said a S$1.36 billion construction support package will help share the prolongation costs of contractors in public construction projects. It shares up to 0.2 per cent of contract sum per month of delay, capped at 1.8 per cent of contract sum.

During a tour at the worksite of the future Circle Line’s Prince Edward station, Minister for Manpower Josephine Teo said that safety measures in the construction sector are “far more stringent” but necessary to protect the larger community, according to a Sunday Times report. This means the pace of construction work would slow down. “We still want to have our MRT lines (and) our build-toorder flats,” she said, explaining the importance of helping construction firms.

Francis Koh, chief executive of construction firm Koh Brothers said the fund was “timely” and will help reduce losses but will not cover all costs. “Each bus used to ferry workers now has capacity reduced by 30 per cent,” he said. “We are also facing increased costs of up to 40 per cent for each month that the project is taking longer than expected to complete.” Koh Brothers is building tunnels and other structures between the Prince Edward station and the existing Marina Bay station.

Contractors will moderate their tender prices in order to clinch new contracts, despite all the extra costs which they had never factored in but now will have to do so, said Ms Lum.

“Under normal circumstances, pricing pressure will be reduced due to the lessening of projects and uncertainties in the global economy,” said Ms Lum. However, based on current market sentiments, construction cost will rise due to pricing allowances by the contractors for labour shortages and the implementation of all the Covid-19-safe restart measures and disruption in the supply chain, she said.

“Moving forward, for new construction projects to be tendered in 2020/2021, we are preliminarily anticipating that tender prices could increase in the range of 6-10 per cent, taking into consideration the new Covid-19-safe restart criteria of safe accommodation and transport, safe workforce and safe worksite,” she said. Last year the tender price index rose 1.2 per cent.

Covid-19 has severely disrupted the Singapore construction sector.

The industry has already seen a decline of 24 per cent in total construction demand in the first quarter 2020, compared to the last quarter 2019, according to the BCA data.

With Singapore in the circuit breaker situation from April 7, 2020 to June 1, 2020, construction demand in the second quarter 2020 has plunged further as the full effect of Covid-19 is more deeply felt across both public and private sectors, said Ms Lum.

Preliminary figures from BCA last month showed that construction demand in the private sector in April 2020 plummeted about 80 per cent compared to the previous month of March.

BCA has said in early June that only about 5 per cent of projects have been able to restart.

Some jobs could face delays of six months at least before they can fully resume, said Ms Lum.

“Based on current market sentiments, many of the new projects are likely to be put on hold as the immediate focus is to work on the resumption of existing projects. Given the severity of the economic downturn, some of the projects previously in the pipeline have already been deferred,” said Ms Lum

At the beginning of the year, BCA had estimated that construction demand in 2020 would range from S$28 billion to S$33 billion.

How much of that is achieved this year is unclear given the difficulty in assessing the situation since no one knows how long the pandemic will last, said Ms Lum.