Current steel prices rose more than 40 per cent from the end of 2007. Brick prices have increased by VND700 per brick. The prices of sand, construction stones, cement and labour also went up 20 – 30 per cent, causing contractors headaches. Escalating prices have considerably impacted the construction industry.
Contractors commonly take into account the risks of inflation and prolonged and complicated projects before signing contracts. However, surging material prices plus service costs have gone far beyond their estimates since the end of 2007, particularly in recent months.
Many projects have to reduce speed as they may incur more losses. Investors have to make unprecedented concessions to contractors, and contractors to workers and material suppliers.
Assoc. Prof. and Dr. Vu Khoa, President of Vietnam Association of Contractors, at a workshop on March 18th, emphasized that this issue is seriously affecting ongoing projects.
“Some contractors have suffered heavy losses, others are unable to continue projects and have to choose between being fined or losing their contract guaranty,” he said.
Lucky to break even
Nguyen Bao Binh, Deputy Director General of Urban Development Investment Company (Udic) thought that contractors were in a disastrous situation. He cited evidence of steel prices increasing on a daily basis. Before the interview, his price update in the morning showed the steel price was up VND200/kg. Worker pay also rose 14 – 25 per cent up to positions. Daily pay of VND60,000 – 80,000 per person is now unreasonable. On one hand, workers ask for higher pay. On the other hand, neighbouring provinces are also in a wave of construction which attracts a lot of labour. Meanwhile, companies contract with only half of their workers, the rest are seasonal labour. Just breaking even is considered good luck for a project currently being implemented.
Nguyen Phu Hai, Chairman of Executive Board of Nam Dinh Industrial Construction Company, representative of Nam Dinh Association of Contractors, sadly said, “The contractor signed a VND5-billion package to build an irrigation dam in mid-October, 2007. The contract is to be completed before the rainy season this year. Unfortunately, material prices exceed estimates and the contractor has to pay roughly VND1 billion more to assure the construction speed.”
Consequently, a lot of contractors in Nam Dinh province are suffering from losses or burdened by bank debt.
According to Deputy Director General of Vietnam Construction Exports and Imports Corporation (Vinaconex) Nguyen Thanh PhhÆ°Æng, the company has over 60 contractors in total. Most projects are using budget capital. Estimates for those signed in mid 2007 have soared by at least 20 per cent.
Mr Phuong analysed that on the face of dizzying material prices, investors had to pay out of pocket from dozens to hundreds of billions of VND to save contractors and complete contracts before resorting to Government assistance. As materials account for 60 – 80 per cent of building price, even just a 1 per cent increase in material price can have great influence on building price. An average rise of 30 – 40 per cent in material price over the past time means a complete change in construction price.
Mr Vu Khoa added that with material prices as they are, selected contractors had to abandon or delay contracts. The biggest risk of insolvency is faced by contractors with fixed priced contracts, and massive losses are inevitable.
It is also unavoidable that some contractors will keep executing the work but attempt to reduce costs by using low quality materials, undercutting construction safety standards.
In need of a clear pricing mechanism
Contractors have made complaints about the “one year – one price” mechanism which goes against current daily price fluctuation. Pricing should be flexible on the monthly or quarterly basis. While projects with capital sources other than the state budget have better condition, state budget projects severely suffer from rigid pricing systems. Adjustment based on government price updates often lags behind the market. Furthermore, as regulated by the Ministry of Construction, price changes must be signed off by authorities in a series of time-consuming administrative procedures. To prove this, Mr Nguyen Bao Binh showed a list of 50 state budget projects waiting for price subsidies.
A Ministry of Construction Circular permits contract adjustment, does not state clearly who has the authority to do so. Moreover, procedures are complicated, requiring inter-ministerial discussion and then submission to the municipal government for approval. What concerns investors most is that material prices are still forecast to escalate endlessly, especially after oil price increases.
Most contractors at the workshop requested the Government provide a specific pricing mechanism to control the market, as material prices set by agents are, in fact, pushed higher than company prices, particularly steel prices.
Dr. Pham Sy Liem, Vice President of Vietnam Construction Association, suggested that the Government should abandon unnecessary projects to focus on more important ones. Simultaneously, it is better to encourage investors to advance capital so that contractors can maintain business and pay bank loans.
Anh Tuan
Vietnamese
