'Things just went south': Construction firms under pressure as pandemic bites deep

Singapore's construction industry has been facing mounting challenges amid the pandemic, from acute labour shortage to skyrocketing material costs. ST PHOTO: KUA CHEE SIONG

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

Five subcontractors quit on 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, acknowledges that subcontractors have good reason to a jump ship: "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 subcontractor would have folded. Will I get the desired outcome?"

Singapore's construction industry has been facing mounting challenges amid the pandemic, from acute labour shortage to skyrocketing material costs, resulting in some firms 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 had 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 stands at 53,707.

The root of the problem is that in the years before the pandemic, some construction firms tendered bids for projects without buffering for the 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 razer-thin margins.

"Back then, there was no reason to price in additional labour and material costs. Some contractors managed to secure the job because they had bid at below their build-up costs," said Mr Choo, who declined to have his firm'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. Manpower wage costs have shot up 46 per cent on average for similar jobs as compared to the period pre-Covid, noted the Singapore Contractors Association (SCAL). The foreign construction workforce shrank by 52,800 last year and totalled around 288,700 as at Dec 31. Most of these workers come from India and Bangladesh, with smaller groups from China, Myanmar and other countries.

Instead of outsourcing, Mr Choo is bringing in his own staff to do reinforced concrete work and had moved his precast fabrication yard back 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 2020, steel rebar has jumped 54 per cent, aluminium rose 59 per cent, copper skyrocketed 81 per cent and concrete climbed over 20 per cent, SCAL said.

These and other challenges have substantially delayed Mr Choo's project but he said his firm has "sufficient reserves and is grateful that the Housing Board has not imposed liquidated damages despite the project delay".

Still, Greatearth Corp's collapse couldn't have come at a worst time.

In August, 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 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 subcontractors are now staring at sizeable losses on unpaid fees by Greatearth, while over 2,900 home buyers are facing long delays.

"The fear in the market is that there may be more Greatearths to come," he said.

Sky Vista @ Bukit Batok is among the five build-to-order housing projects which ground to a halt after Greatearth told HDB that it was unable to complete the projects. PHOTO: ST FILE

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 the HDB last year for not being able to meet project milestones at Waterway Sunrise II, a BTO project in Punggol.

Nonetheless, 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 even as these are creeping up.

Acra data showed that even as some construction businesses closed down, new ones are being formed at the same time. There were 2,037 business entities in the construction sector set up in the first eight months 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 any performance bonds until Sept 30. It was also amended to require the co-sharing of qualifying costs resulting from delays caused by the pandemic from April 7 to Sept 30.

A SCAL spokesperson said it 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, the spokesperson 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 in bringing in migrant workers and escalating costs for labour, raw material and freight plus other challenges, some industry observers say 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 industry's survival, noted Mr Sim Kwan Kiat, head of 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 the costs of implementing safe management measures account 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 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've gotten 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," he said.

"We need to allow more workers to come in. But public health concerns are paramount. The vaccination rate in the construction sector is quite high, compared with the 80-plus per cent vaccination rate of the Singapore population.

"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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