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Monday, December 22, 2008

Drop in building material prices benefits contractors and Govt

The slump in building material prices will not only benefit contractors but also save the Government a significant amount of money.

In the middle of this year, the Government agreed to include the variation of price (VOP) clause into design-and-build projects on a 50:50 basis instead of limiting it to conventional contracts.

The list of claimable items was expanded to 11 from five previously due to the escalating prices of building materials. Since then, these prices have declined significantly.

Master Builders Association Malaysia president Ng Kee Leen said the VOP clause allowed either party to claim back any cost savings or shared any cost increases.

Ng Kee Leen

“The Government can claim back from contractors if the building material prices had fallen below the base price as at Jan 1, 2008,” he told StarBiz.

“It is only fair that the Government gets compensated when prices come down (below base) and vice versa for the contractors.”

Profit margins were little impacted as these were accounted for in the project bids and contracts, he added.

However, with the exception of petrol prices, the rest of claimable items were currently still above or hovering around the base price, Ng said.

An analyst at a brokerage said compensation to the Government, if any, would not affect contractors’ earnings.

For conventional projects, which are on tender basis, the margins are protected from fluctuating material prices as contractors can make a full claim if the costs are higher than a certain threshold.

For design-and-build projects, contractors can benefit about 50% from the price fall, or lose 50% of the price increase.

“Nonetheless, the companies that I’ve spoken to indicated that they have not made any claims for VOP this year,” he said.

A research house, in its report, said the near-term outlook of the construction sector had improved due to the sharp drop in prices of raw materials like steel, oil and bitumen, which would ease margin pressure.

The prospects for replenishing order book had also improved with the Government’s pump-priming initiatives.

Earnings of construction companies in the third quarter, however, were still impacted by the higher cost of building materials as some of these inventories were locked in earlier, the research house said.

By The Star (by Yeow Pooi Ling)

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