Tuesday May 17, 2022

Constructors to boycott govt projects on dated escalation formula

January 27, 2022
Constructors to boycott govt projects on dated escalation formula

LAHORE: Rising costs of construction materials and dated escalation formula have forced constructors to stop participating in government construction tenders at old rates, which would hamper new development programmes and slowdown ongoing projects, industry official said on Wednesday.

However, mega projects remain on track because of a clause on project cost escalation due to inflation and other factors, thus the government understands and allows the increase.

Constructors Association of Pakistan (CAP) Chairman Kamal Nasir Khan in a discussion with media said more than 80 percent were small constructors that were working with running capital in the government’s Annual Development Programme (ADP) projects.

However, these small constructors were “unable to complete the ongoing projects due to cost escalation”, and were “boycotting the tenders of the new projects”.

Provincial governments have already estimated the construction cost of the projects and could not pass the tender above than the highest financial ceiling of the projects. Thus, the constructors would not be able to complete the projects within the government’s estimated project cost.

Prices of steel, cement, bricks and other construction material has registered an average increase of 75 percent during the last one and a half-year, while escalation in the public sector project either does not exist or ensures only a 10-15 percent upward revision. Thus, constructors have to bear the additional expense of 60 per cent on their own.

“Escalation in the prices of construction material impacts both the developers and contractors of government projects, but developers can add the increased prices to their end cost for private buying, whereas contractors in the public sector have to follow the agreed prices,” Khan said.

Escalation cost was not given to provincial contractors, who were headed for complete destruction now. “If immediate relief was not provided, ongoing projects worth trillions of rupees will soon come to a halt,” CAP chairman said. “These small contractors do not even have working capital and they complete projects through payments made by the government.”

Big constructors do have the capacity to complete the projects even in loss by borrowing from the banks or selling their assets to save their reputation, but small contractors involved in construction of streets, small roads etc do not have such capacity,” he added.

Price of steel increased to Rs195,000/tonne from Rs104,000/tonne in March 2020; cement increased to Rs730/bag from Rs480/bag; Bitumen reached Rs130,600/tonne up from Rs64,700/tonne; and aluminium doors/windows now cost Rs825/square feet up from Rs475/square feet. Same goes for other materials.

Constructors were running pillar to post for the last one and a half years to get project costs revised upwards per the hike in rates of construction materials, Khan said. “The government had given a onetime escalation to the constructors in 2004 during Musharraf era vide SRO No 26/(183)Plan Cord-II/PC/2004 and earlier in 1974 in Zulfiqar Ali Bhutto’s tenure,” he added.

He urged the planning commissioner, Finance Ministry, and Pakistan Engineering Council (PEC) representative to come up with a formula for a one time escalation payment to constructors, while also revising the existing escalation formula to reflect present market dynamics.

CAP chief claimed that stoppage of ongoing construction projects and boycott of new tenders would cause a direct impact of Rs100-120 billion on the government, while industries allied with the construction sector would also face a slowdown, further denting the national exchequer.