Construction industry laments cost increase

Significant price variations in building materials such as cement and steel over the past two years have had a significant impact on the construction industry and profit margins due to construction costs being increased by over 50% during the period.

Speaking to The Morning Business, Chamber of Construction Industry Sri Lanka (CCI) President Maj. Eng. Ranjith Gunathilake stated that over the last two years, the increase in construction costs is at a minimum of over 50%. He stated that he would not suggest anyone to commence construction of a house in this market unless one is absolutely desperate.

“All construction materials have gone up by 20-65% or more, leading to an overall construction cost increase of over 50%. This situation is further exacerbated by the increase in labour costs, which has also increased by over 20%. However, I feel that this increase in labour costs will either come down or stagnate.”

The primary reasons for this increase in building material prices are global prices being increased due to the supply disruptions caused by the Covid-19 pandemic, the depreciation of the Sri Lankan rupee, and the building material shortage observed in the country due to the US dollar liquidity crisis plaguing Sri Lanka.

Gunathilake further stated: “According to the law of the country, specially for government projects and even for private projects, the contract must follow the standard bidding documents. In such contracts, if the construction period is more than three months, the price escalation shall be paid. However, when contractors are desperate for work or in the case of private contractors where the client insists on a fixed price prior to granting work, the contractors may enter into such a contract under the belief that any such price variation will be limited to around over the next one to two years which can be converted by their targeted profit. However, this time it is no longer the case; building material prices have surged by around 20-65%.”

Therefore, he pointed out that there was a need to protect the small-scale construction contractors who were disproportionately affected by the construction cost increase. As a consequence, the Minister of Finance and the State Minister of Construction, together with the Cabinet, set out recently that in the case of any construction project commenced before March 2020, the contractor may be compensated for any price variation up to 20% of the initial invoice price, stated Gunathilake. 

However, he added that while this compensation of 20% does provide some relief to the construction industry, particularly to the small-scale contractors, it is adequate only if around 75% of the project had already been completed. In such an event, 20% compensation for the remainder would be sufficient. Further, Gunathilake noted that in cases where the project commenced recently, considering the increase in building material prices observed in the market, this increment of 20% is not sufficient.