Responding to soaring building material costs
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Update time : 2022-05-05 18:06:59
THE recent fluctuations in building material prices could trigger another round of growth in house prices. Up to March 2022, prices for steel, glass, and metal sections have increased by 28.8%, 25.8%, and 24.1%, respectively, since January 2020 compared to relatively slow growth rates of 9.8%, 1.2%, and 7.5% within July 2017- December 2019 (chart).
A significant increase in prices is observed for other building materials as well, ranging from 2.7% (for sanitary fittings) to 14.4% (for bricks and wall) within the
period of January 2020-March 2022. While the soaring material prices may not have a significant impact on ongoing projects as the construction costs have already been locked in when the contracts were awarded, it is likely to increase the cost of doing business for new projects. To ensure that contractor can complete the project within the calculated cost despite significant volatility, risk allocation measures can be adopted, whereby contractors
can peg material prices with developers at a mutually agreed threshold rate. In case the actual material costs are higher than the assumed value, contractors are entitled to increase the contract sum to reflect these costs, otherwise the savings accrue 100% to the developers if the actual costs are lower than the assumed value.
The contracting parties can even mutually agree to a maximum or minimum amount that the cost of material may fluctuate, whereby the developers will bear the risk for increases beyond the maximum amount, while the contractors will bear the risk for
decreases below the minimum amount.
