The National Construction Association yesterday (21) warned the Government that unless fluctuating material prices and other costs are incorporated into the formula used for construction contracts, many projects across the country would come to a halt as contractors stand to lose their profit margins.
Speaking to The Daily Morning, Chairperson of the Association, M. Darinton Paul said that with the current unforeseen situation of the rapidly depreciating Rupee, contractors are struggling to finalise projects with clients based on previously agreed prices.
“In Government tenders, according to procurement guidelines and the formula of the Construction Industry Development Authority, price fluctuations are incorporated into contracts lasting longer than three months,” he said. However, he noted that on many occasions, several key inputs are left out of this formula.
“For instance, the electrical and mechanical aspects of construction - most of which are imported - are neglected. With the Rupee depreciating rapidly, import prices are surging, forcing contractors to bear unbearable expenses while losing their profit margins,” he said. He added that the formula reasonably covers other materials, and that in most cases, those expenses can be managed.
“The depreciation of the Rupee is not something that a contractor sees when bidding. Even if they do, if those inputs are included considering future price hikes, the contractor might lose the tender as well,” he added. He further explained that the price fluctuation formula does not apply at all to contracts under 90 days. The Association has requested that the formula be extended to such short-term projects, given the fast pace of Rupee depreciation.
He also pointed out that Sri Lanka imports tar and Bitumen from the Middle East. Bitumen, a petroleum by-product used for modern roads, is essential for many Government projects aimed at building carpet roads. However, prices have risen sharply. “There are many carpet roads that we have signed with the Government to construct. If this issue with the formula is not addressed, there is no way that we can construct these roads,” he warned.
“The other issue,” he continued, “is that due to import restrictions and the depreciating Rupee, there is a scarcity of some materials in the market. In this situation, some of our consultants still make certain materials mandatory for projects instead of recommending available alternatives.” He warned that if consultants cannot show flexibility in this unforeseen situation, the construction sector would face a crisis.
He added that the issue is most commonly seen in the private sector, where these formulas are not applicable.
He suggested the Industry Ministry introduce a bulletin method that incorporates all the monthly price fluctuations into the formula.