PUBLIC SECTOR CONTRACTS (Provision of fluctuating clause for building material prices)

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PUBLIC SECTOR CONTRACTS:

(Provision of fluctuating clause for building material prices): 9.

Dr Teo Ho Pin asked the Minister for National Development (a) whether the public sector contracts will provide for a fluctuating clause for building material prices; (b) what measures are being taken to prevent the escalation of building

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material prices; and (c) how much has construction cost increased over the last 3 years (2001, 2002 and 2003).

Assoc. Prof. Koo Tsai Kee (for the Minister for National Development): Sir, the Public Sector Conditions of Contract (PSSCOC) has an optional price fluctuation clause for building materials. Public sector agencies decide for themselves whether to adopt it, depending on the nature of their projects.

The agencies are as concerned as contractors about the potential impact of increases in building material prices on their projects. A number of them, such as PUB, MOE, CAAS and LTA, have incorporated the price fluctuation clause for reinforced steel, for example, in some of their contracts. Others such as HDB and DSTA are considering doing the same for new contracts. This could help to alleviate the financial risks of contractors in public sector projects.

Building material prices are affected by various factors such as the global supply-demand imbalance and increases in raw material costs, freight charges, and export levies. These are largely beyond our control, as in the recent hike in steel price. BCA helps the construction industry by monitoring the prices of key building materials such as cement, bricks and steel, and providing regular information updates to the industry

At the same time, contractors should diversify their supply sources for the key construction materials so that they would not be caught by any steep price increases from any single source. To this end, BCA will continue to help explore and facilitate alternative sources of materials supply for the construction industry.

On Dr Teo's question on the actual construction cost increases in recent years, BCA's Tender Price Index showed that the increase was 2% from 2001 to 2002, and 6% from 2002 to 2003.

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Dr Teo Ho Pin: Sir, may I ask the Senior Parliamentary Secretary actually how many contracts were awarded with this fluctuating clause in the contract, and whether the inclusion of this fluctuating clause for materials will make it a fairer contract, in view of the very dynamic global conditions?

Assoc. Prof. Koo Tsai Kee: Sir, some agencies do include this price fluctuating clause in their contracts. Not all agencies do that. There is a good reason. Because some contracts have long gestation duration and are heavily dependent on basic raw materials. If you have steel structures, then you might want to have a price fluctuating increase clause inside there. But for standard building, the cost of steel, for example, is only about 5% of the total construction cost.

So, in the last quarter, we saw a 50% increase in steel prices. This means a 2.5% increase in total construction cost. So, for projects like that, both the agencies as well as the contractors might not need a price fluctuation clause. In any case, these sharp increases in prices of steel over the last few months were a normal thing because the events that took place in the last few months had caused this sudden increase. But in the last 10 years, basic material prices had actually fallen and many contractors in the years preceding the last six months were not in favour of price fluctuation clauses. They would rather have a lump sum tender because, in a price fluctuation clause tender, when prices go down, the agency reserves the right to claim back the savings.