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Tuesday, June 24, 2008

Contractors asking for price revision of projects

Developers may be passing on price ncreases to customers.

PETALING JAYA: More contractors are asking for a revision in their contract prices following the spike in prices of building essentials.

LBS Bina Group Bhd group managing director Datuk Lim Hock San said the company had been approached by “one or two” of its contractors for a change in the price of its contracts.

“We had to revise upwards the price or they would have run away,” he said, adding that the firm had already started to slow down in its property launches given the current challenging environment.

Meanwhile, Mah Sing Group Bhd group managing director & group chief executive Datuk Seri Leong Hoy Kum said that the company’s launches were “on track.”

“We have been closely monitoring the increase in building material prices over the past year, and have been building ahead of schedule to lock in the construction costs as we foresaw escalating raw material costs.

“Hence, construction of selected projects is at the tail end, and both Mah Sing and our contractors have locked in the old costs,” Leong said.

OSK Research analyst Mervin Chow said: “A lot of property developers have admitted that contractors have been coming to them, asking for changes to be made to their contract prices, given rising costs. It is a bit of a worrying situation right now.”

Chow said that while these “re-negotiation” processes had started two to three months ago, it was more pronounced now, given the added pressure of the recent hike in fuel price.

The price of steel, one of the main raw materials for property players for example, has almost doubled year-on-year to around RM3,600 per tonne currently.

Strong demand from China and the Gulf Cooperation Council region has helped push up prices thus far.

Contractors’ overall costs are said to have gone up as much as 28% to date.

TA Securities property sector analyst Kamarul Zaman Hassan said it was inevitable that re-negotiations of contract prices would occur, given the rise in raw materials, such as steel and cement.

“Yes, the contractors would definitely ask to re-negotiate. They are likely to ask for variation orders (VOs) to cover the rise in raw material prices,” he said.

Both developers and contractors would share the burden of rising costs in the case of ongoing projects, he said, adding: “For the new projects, it is very likely that the developer is the one which has to bear the higher building costs.”

Should contractors be unable to obtain VOs, the possibility of projects being abandoned will be high, in particular if smaller contractors – who do not have the financial strength to absorb higher raw material prices – are involved.

“And yes, obviously developers involved in new projects cannot stomach the rise in building materials and will be passing it on to customers,” Kamarul said.

Analysts had warned that certain property segments, i.e. those priced below RM250,000, were very price sensitive, meaning higher prices would see an erosion in demand.

“This puts developers in a very delicate situation. As we can see, many developers are already thinking about postponing their launches,” Kamarul added.

Having said that, higher-end office and commercial developers are still expected to enjoy brisk sales despite higher selling prices.

“The impact really depends on the company’s products,” he said.

Meanwhile, Ng Sem Guan who covers the steel sector at OSK Research feels that it is not a necessity to stockpile steel.

“The Government will need warehouses for this purpose. Basically, there is a lot of money involved to stockpile,” he said, adding the steel price would at most rise 20% and expecting it to hit RM5,000 per tonne “is a bit too much.”

Ng said at current prices, there was still some upside, probably up to 20%.

“But it (steel price) goes through a cycle, it will reach a point when it has to come down,” he added.

Last week, Master Builders Association Malaysia president Patrick Wong urged the Government to stockpile steel to stabilise the rising cost of steel products.

He said the proposal came in the wake of steel millers expecting prices of steel bars to hit RM5,000 per tonne.

By The Star (by Yvonne Tan)

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