'Things just went south' for building firms as pandemic bites deep

As construction costs soar, it has become a case of every man for himself, as contractor Choo Zhan Rui has seen all too well.

Five sub-contractors quit a residential project he is building in Sengkang after they failed to get their existing contracts repriced to cope with skyrocketing labour and raw material costs.

He even took legal action against one to recover the $900,000 in costs to hire a replacement, but was unsuccessful.

Mr Choo, 28, acknowledged that sub-contractors have good reason to jump ship. He said: “Some new building contracts pay so much better. Why hang on to projects that are losing money? Even if I sue them, by the time I win the case, the sub-contractor would have folded. Will I get the desired outcome?”

Singapore’s construction industry has been facing mounting challenges amid the Covid-19 pandemic, from acute labour shortages to skyrocketing material costs, resulting in some companies going under.

In the first eight months of this year, Accounting and Corporate Regulatory Authority (Acra) data showed that 1,538 business entities in the construction sector ceased operations. This represents about 2.86 per cent of the total number of construction business entities registered with Acra as at Aug 31, which is 53,707.

The root of the problem is that in the years before the pandemic, some companies tendered bids for projects without buffering for risks, given that the industry at the time had been struggling with fewer jobs on offer and rising overseas competition. That meant declining contract prices and razor-thin margins.

“Back then, there was no reason to price in additional labour and material costs. Some contractors managed to secure a job because they had bid at below their build-up costs,” said Mr Choo, who declined to have his company’s name published.

“But when the pandemic struck, and raw material and labour costs skyrocketed, things just went south.”

Although most construction work resumed in August last year, strict border controls remained and constrained the inflow of migrant workers, pushing up manpower costs and delaying projects.

Labour accounts for about 40 per cent of overall construction costs. Wage costs have shot up 46 per cent on average compared with the pre-Covid-19 period, noted the Singapore Contractors Association (Scal).

The foreign construction workforce shrank by 52,800 last year and totalled about 288,700 as at Dec 31. Most of these workers come from India and Bangladesh, with smaller groups from China, Myanmar and other countries.

The number of migrant workers coming into Singapore is low compared with the number of workers we have lost. If this can be normalised, the industry will recover.

Instead of outsourcing, Mr Choo is bringing in his own staff to do reinforced concrete work and has moved his precast fabrication yard back here from Malaysia.

But labour costs are very high. “It now costs $5,000 to $6,000 to bring in one Indian or Bangladeshi worker, and $3,000 to $4,000 to bring in mainland Chinese workers,” he said. “Before the pandemic, it cost under $1,000.”

Disruptions to material supplies due to lockdowns hitting factory output and higher freight costs have exacerbated project delays and sent costs rocketing.

Since January last year, prices of materials have jumped: steel rebar by 54 per cent, aluminium by 59 per cent, copper by 81 per cent and concrete by more than 20 per cent, Scal said.

These and other challenges have substantially delayed Mr Choo’s project, but he said his company has “sufficient reserves and is grateful that the Housing Board has not imposed liquidated damages despite the project delay”.

Still, construction company Greatearth’s collapse could not have come at a worse time.

Last month, work at five Build-To-Order (BTO) housing projects ground to a halt after Greatearth told HDB that it was unable to complete the projects despite the government assistance given. Two public projects could be held up as well.

Earlier this month, winding-up proceedings began for Greatearth Corp, Greatearth Construction and three related companies. Several sub-contractors are now staring at sizeable losses on unpaid fees by Greatearth, while more than 2,900 home buyers are facing long delays.

“The fear in the market is that there may be more Greatearths to come,” Mr Choo said.

The construction sector contracted 7.6 per cent in the second quarter, reversing from 4.3 per cent growth in the first.

The slowdown has claimed other building contractors, including Lian Ho Lee Construction, which was fired by HDB last year for not being able to meet project milestones at Waterway Sunrise II, a BTO project in Punggol.

Nevertheless, a slew of government initiatives to help the beleaguered sector and unprecedented legal measures under the Covid-19 (Temporary Measures) Act have helped prevent a huge spike in business closures.

Acra data showed that even as some construction businesses close down, new ones are being formed. There were 2,037 business entities in the sector set up in the first eight months of this year, compared with 1,399 in the same period a year ago.

Mr Derek Loh, a partner at Singapore-based TSMP Law, said employers may have refrained from pressuring contractors during the relief period due to the Covid-19 (Temporary Measures) Act.

An amendment on April 5 extended the relief period for construction contracts, supply contracts or performance bonds to Sept 30. It also extended the co-sharing of qualifying costs resulting from delays caused by the pandemic to Sept 30 from April 7.

A spokesman for Scal said the association hopes that relief from legal action for businesses’ inability to perform contractual obligations can be extended past Sept 30.

“Given the ongoing infections in the community, including some dormitory cases, and the continued need for safe management measures, many businesses would need an extension of the relief period” until the labour crunch problem is resolved, she said.

Construction companies are already under a lot of financial strain and their survival is in question, she added.

But with little relief in sight, given continued constraints on bringing in migrant workers and escalating costs for labour, raw material and freight, some industry observers said that the temporary measures, even if extended beyond Sept 30, may not be enough.

Mr Loh said: “There should be a procedure or method allowing risk sharing, and for contractors to be fairly compensated for black swan events such as pandemics.

“As there is currently no such mechanism, some contractors are simply increasing their prices to buffer for these risks, and this has contributed to increased construction costs. This is inefficient and will lead to pricing imbalances that may favour some contractors and result in unnecessarily higher costs for developers and the Government.”

Cash flow is critical to the industry’s survival, said Mr Sim Kwan Kiat, head of the insolvency and restructuring practice at law firm Rajah & Tann. “When contractors can’t complete the project quickly enough due to labour shortage, their ability to meet payment obligations is affected,” he said.

“When their hard assets are already pledged for their loans, and their receivables or payments due from developers or other employers are assigned to lenders, how much is left for the company to pay its debt?”

Scal estimates that implementing safe management measures accounts for about 3 per cent of overall construction costs. But the bigger problem is “the loss of productivity that arises from stop-work orders whenever a Covid-19-positive case is detected, which in turn delays projects”, it noted.

Ironically, some measures aimed at easing the labour crunch have had unintended consequences, said Straits Construction executive director Kenneth Loo.

The Government has partnered with Scal to introduce a six-month retention scheme for experienced work permit holders whose previous employment has been terminated but who wish to continue working here.

They will be granted a 30-day stay, during which Scal will provide necessities such as housing and food, while a job match is facilitated with prospective employers.

“After this was announced, I had feedback that some workers are exploiting the system to get higher pay,” Mr Loo said. “Some who are paid $20 to $30 a day are now asking for $50 a day. And if they don’t get $50, they will jump ship.

“We need to manage this situation. We need to allow more workers to come in… The number of migrant workers coming into Singapore is low compared with the number of workers we have lost. If this can be normalised, the industry will recover.”

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