Commitment needed from stakeholders to shoulder risks and invest in transformation

By: Yip Wai Fong

The construction industry is headed for a boom year as Malaysia’s economy is expected to grow. Furthermore, the industry will partake in the RM120bil development work slated under Budget 2025, where the government allocated RM86bil for development expenses, while the rest will be public-private partnerships and domestic direct investments by GLIC companies. The MIDF Research has noted that the construction sector is expected to expand by 9.4%, attributed to public infrastructure projects such as the East Coast Rail Link (ECRL), Rapid Transit System Link (RTS Link) as well as the Pan Borneo Highway in Sabah. 

However, the glowing forecast overshadows the reality that the sector is also grappling with escalating costs stemming from material prices, higher labour costs and compliance expenses.

Master Builders Association Malaysia (MBAM) president Oliver HC Wee told StarProperty that although the industry will be thriving, the projects and contracts are exposed to challenges due to policies, supply chain disruption and practices within the industry. 

“Cement and steel prices will increase in time because electricity rates are going to adjust upward. When the electricity hike takes effect the cost will be impacted, that is for sure,” Wee said, referring to the new tariff starting July 1st. 

“The mandatory 2% EPF contribution for foreign workers also impacts us considerably. It is not 2% of the minimum wage of RM1,700. The general construction workers are paid about RM80 to RM120 a day, which is more than factory workers. So the EPF contribution will be based on their 30-day wages, so that’s at least RM3,000 to RM3,500? (On the other hand), material manufacturers have to pay 2% to factory workers who earn between RM1,700 to RM2,000; they will pass the cost on to us (contractors). All these will push up the construction cost,” Wee said.  

Wee also said that when materials prices fluctuate due to supply chain disruptions and inflation, contractors are disadvantaged because most contracts awarded are on a fixed value. 

“The problem, ever since Covid-19, is we face different prices of construction material during the construction period, which can be from maybe eight months to one and a half years or even two years. The risks fall heavily on contractors because we are the party carrying out the work, facing fluctuations, material and labour shortages and delays. We shoulder the delays, the liquidated ascertained damages (LAD) costs us tens of thousands daily,” Wee said. 

Wee also said that the current pattern of price increase does not add any value to the finished construction nor to end users. 

“Price increases are just to accommodate the escalation in inflation or other external factors. And it could lead to disputes between contracting parties. I think contractors are always on the losing end when this happens,” he said. 

Balancing risk and reward 

Wee stresses the importance of incorporating a Variation of Price (VOP) provision within contracts to ensure a fairer distribution of risk and prevent disputes and delays in delivery. He said VOP was once a component in the government's public work tenders, where a list of materials was roped under a certain percentage of price fluctuations. Both parties would compensate each other should prices fall or rise within the agreed percentage. 

“Some GLCs such as Sime Darby Property have it, knowing that if the contractor fails to deliver, the developer also fails their customers. For the government, we are going to ask for more items to be on the list, not just cement and steel bars, but also materials that have fluctuated a lot during Covid-19 such as copper and aluminium. So we hope that there will be a cushion for everyone and make the risk and reward more balanced, rather than one-sided,” he said.

Unfortunately, Wee said that not many private developers are keen on VOP. 

“We have suggested, (however) private developers’ responses are not very favourable. I believe a special formula can be worked out, maybe we can work out say a 2% margin, so at least we both contracting parties capped our risk, and make the risk and reward more balanced,” Wee said.

“The more sustainable approach to dealing with cost increase is to really consider the VOP provision. When contracting parties are in dispute, clients have the option to sue and also to call for a new tender but the new tender will be based on the current price which will already be higher than the original contract. And delay will happen. So why don’t we just accept there will be price variation from day one and come up with a formula? This will also be fair to the end-consumers, the housebuyers, as this will prevent delay in delivery,” he added.

Investment, rather than cost

To remain competitive despite costing challenges, Wee said that contractors have sometimes kept their tender prices low and struggled to deliver. The need to keep costs low also has prevented contractors and developers from adopting better construction methods that could lead to cost-saving in the long run and better customer satisfaction. 

“Sometimes, contractors may quote low prices in order to be competitive. I think clients need to be selective and choose parties that can deliver. Sometimes contracts that are too low lead to many disputes down the road. On the contractors' side, they need more knowledge and experience in good construction methods, use digitalisation in procurement, and reduce wastage by buying the right materials. We also need to reduce leakages by improving on-site competency,” Wee explained. 

Wee also proposed wider adoption of the Industrialised Building System (IBS) to address the issue of quality, workers safety and labour shortage.

“IBS will cut down wastages and resolve quality issues. Since most of the work on-site will be installation, the amount of accidents will be reduced. It costs the developer 6% to 8% higher but the benefits are fewer accidents, better quality and lower defects. It is not just a cost issue, it is an investment in quality, as IBS is so much better than conventional construction methods,” Wee emphasised.  

Wee said that certain costs that lead to transformation needed to be accepted with a different mindset. 

“The industry needs to invest in transformation such as digitalisation, and they need to have the mindset that this is an investment, not just a cost. The bigger companies understand this, and the influx of data centres also brings in a lot of requirements which only the top-tier contractors can comply with. Contractors have to make the investment to move forward and to be more advanced,” he said.

The need to keep costs low also has prevented contractors and developers from adopting better construction methods, Wee said.

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