The domino effect of price rise on the construction industry

The domino effect of price rise on the construction industry

While infrastructure has been taking centre-stage for India like never before, the price rise at an arbitrary rate is playing spoilsport, directly impacting project balance sheets. The unique feature of rise in cost of input factors is the domino effect that it creates, says Ajay Hans,...

While infrastructure has been taking centre-stage for India like never before, the price rise at an arbitrary rate is playing spoilsport, directly impacting project balance sheets. The unique feature of rise in cost of input factors is the domino effect that it creates, says Ajay Hans, Managing Director and CEO, Welspun Enterprises. He adds, “Developers who have been dependent on subcontractors for direct execution of work face supplementary challenges owing to such unprecedented escalation in material cost. Subcontractors under the pressure of increased cost may either resort to slowing down the pace of construction or compromise in the quality of delivery, leading to project delays. In fact, in some cases, subcontractors would need to be additionally compensated to continue onsite execution.” The continuous increase in the price of construction material has eaten into the thin margins of realty projects as well. In this scenario, builders have no option but to increase the price of unsold inventory and recover costs from there. Industry bytes Hans says, “The actual cost escalation paid to the concessionaire (only immunity against this unprecedented increase) calculated based on a pre-determined fixed formula (based on WPI and CPI in HAM) ends up doing little good. In fact, there is no remedy in CA (Concession Agreement) against such escalation in BOT projects, and in such cases, the impact has to be fully absorbed by the concessionaire. Concessionaires, who are already burdened with additional interest during construction charges due to delay attributed to the covid pandemic are finding it extremely challenging to accommodate such increase in input price and therefore, relief is to be provided to share this burden. Although it is quite complex, but still the Government needs to offer some adjustments for such an unprecedented price rise for steel, cement, bitumen, fuel and other inputs for infrastructure projects in the last three months.” According to SL Chanchlani, Executive Vice President and Chief Commercial Officer, ITD Cementation India, “The surge in steel and cement prices affects cash flow and profitability. The component of steel and cement varies from contract to contract and, therefore, the impact is different in each contract. Increase in raw material price leads to price escalation for tenders under preparation as we need to consider the prevailing raw material price. When such situations repeat or continue for more time, we do review and revise the mitigation strategy for future bids, which results in the price escalation of upcoming projects. It is challenging to manage fixed-price contracts. We have laid down a procedure to mitigate risks on account of input cost increase based on our past experiences and data bank. However, it is not possible to mitigate such an exceptional increase and it cannot be catered to; thus, it affects the bottomline. If we consider such increase in our mitigation, it makes the bid non-competitive. We hope and believe this surge is temporary and prices will come down to reasonable levels with government intervention.” Barun Pal Chowdhury, COO, Ashoka Buildcon, shares, “These are difficult times for construction companies that have taken up fixed-price contracts. In most fixed-price projects, rising prices are a challenge and have a huge impact. Projects beginning construction – at the RCC stage – where shell-and-core construction using reinforced steel is utilised, are the ones maximally hit. One can go back to the design book and look for spaces that can be value-engineered and get some reduction in the quantum of steel and other requirements that impact cost. We should look at means to speed up project execution, bringing in higher efficiency, digitisation and automation, skilled labour and reducing rework which is a huge cost. Due to rise in costs, offsite working will gain importance because it increases efficiency, offers control and reduces rework.” For his part, Rajendra Joshi, CEO, Residential, Brigade Enterprises, says, “It would immensely help developers if the Government can bring down the rates of cement, which is currently taxed on a par with luxury items, under a reduced GST tax slab. Effective steps to control volatile steel prices would also help the industry immensely, as it will stabilise the overall cost of construction to a certain extent. On an average, overall construction cost has increased by 10-11 per cent. The effect on project timelines would be negligible for established developers as the real-estate industry has been experiencing market consolidation with customer preferences skewing towards large and established builders whose projects are planned well in advance with provision made for possible eventualities. However, we view this increase in price to be temporary. Once the geopolitical issues are suitably addressed, prices should stabilise.” V Gopal, Executive Director - Projects & Planning, Prestige Group, says, “Steel is a major raw material consumed in construction and constitutes 20-25 per cent of the total construction cost. It has a direct impact on construction through rebar for RCC structures and indirectly through various ancillary materials, which are procured in the form of pipes and panels. Cement constitutes 5 per cent of our total construction cost and is an essential daily deliverable at sites for work to progress. The combined impact on ongoing projects has led to a 10-20 per cent rise in construction costs depending on the stage of construction, and about 15 per cent on our new construction projects. The impact is substantial considering the volume of construction we are executing pan India. These cost increases have indirectly led to delayed supply as contractors and suppliers try to postpone procurement of these key raw materials with the anticipation of price correction, which has been a mirage. This has subsequently affected project timelines, which we have been mitigating with a lot of hardship to meet our customer commitments.” Aditya Khushwaha, CEO & Director, Axis ECorp, states, “In the past one year, steel and cement prices have increased by almost 120 per cent. It has reached a stage where there seems to be no option but to offer unsold inventories at a higher price and try to recover costs from there. Developers who have already sold almost 90 per cent of their inventory are struggling to keep up with these prices. On the contrary, developers who have sold 70 per cent or less of their inventory are in a more comfortable position. They are looking at breaking even by offering their remaining inventory at an increased price. Timelines are directly tied to cash flow. Bigger players like us are not facing any challenges with regard to cash flows or timelines. Another factor impacting the timeline is the size of the project. If the project is small, then too, the timeline will not be impacted. But the same cannot be said for the bigger projects.” Rohit Poddar, Managing Director, Poddar Housing & Development, avers, “Builders are no longer able to cover costs, which will have an effect on the project costs. An increase in project cost is counterproductive to the interests of both the sector and the buyer. Rapidly increasing oil prices, which are already high at $100+ per barrel, also stoke inflation, affect input costs across sectors, increase prices and weaken our economy and our CAD (current account deficit). In turn, this will affect our economic recovery post-covid, just when we were making a robust comeback. The profit margins of housing developers are already razor thin and the rising inflationary trend of basic material costs like cement, steel and labour is posing a serious threat. It has become difficult to launch budget homes, especially for affordable housing developers, because boosting prices in this extremely cost-sensitive market is challenging.” Naveen Mypala, Founder and Managing Director, Urban Living Systems, says, “Cement companies in Delhi, Haryana, Rajasthan and Uttar Pradesh have raised the cement price by Rs 5-12 per 50 kg bag. Increase in cost of raw materials can lead to rise in under-construction project prices by 10-15 per cent. In India, there are approximately 11 lakh unsold residential units under which only 1 lakh units are ready. Builders may be forced to increase the prices of these projects to increase cash flow. Otherwise, it might lead to delay in project execution. Steep fuel prices lead to higher inflation and affect the cost of other essential goods as well. Domestic fuel prices have increased 35 times by increasing Rs 7-8 per litre. This may also affect the cost of road construction, which mainly requires bitumen (refined product of crude), further affecting transportation.” Dhaval Ajmera, Director, Ajmera Realty and Infra, affirms, “The overall construction cost has gone up by over Rs 400-500 per sq ft, and this still does not take into consideration rising transportation prices. This is affecting the overall profitability margin and viability of many projects. There are talks across developers in Maharashtra, NCR and other regions about requesting RERA to extend the construction timeline for six months as the prices of raw materials have increased to such an extent in the past two months that we could hold off construction for some time until prices stabilise. Today, every steel manufacturer has already deployed this as a force majeure and are not even honouring existing commitments. There can be an alternative where we go back to existing buyers and tell them to allow us to increase the price because raw material prices have increased. While RERA does not allow us to do that, some practical solution should come up.” And Vinit Dungarwal, Director, AMs Project Consultants, says, “New projects now seem to be at a loss as it is no longer possible to complete them at the cost at which they were tendered or awarded. The role of a project manager is crucial in all projects. They do a thorough assessment of the project, provide a risk assessment and share details with regard to work in progress. In these testing times, their role has become even more important as they can look at various alternatives available to cut down expenses, streamline processes and ensure timely completion of the project. At the current juncture, prices have increased substantially and there is no relief in sight. Some contractors are absorbing the cost for these under-construction projects.”- Shriyal Sethumadhvan Also Read: Rise in material prices hit project execution and company margins  Ways to deal with the current construction materials prices hike 

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