“Should Putrajaya bail out contractors (with taxpayers' money)?”
Source: EdgeProp 20 July 2022
(Putrajaya 's) move to add more building materials in the Variation of Price (VOP) clause will help contractors handling public projects, following the steep rise in cost of almost every building material.
Welcoming the government’s intervention and support for the construction industry, Master Builders Association Malaysia (MBAM) hopes the private sector will consider and emulate the move.
The government had previously singled out bricks, glass, steel, and ceiling and roofing materials to be on the VOP material list, which effectively allow prices in a contract to be varied.
Last week, the government added another 11 items, namely cement, aggregates, bricks and walls, steel and metal sections, timber, plywood, sanitary fittings, floor and wall tiles, plumbing materials, sand and paints.
Besides the VOP clause, the government also agreed to implement additional initiatives to help contractors such as giving them an Extension of Time (EOT) to complete their projects, subject to the superintendent officer/project director’s evaluation, and early release of retention money of up to 50%, subject to work progress of work exceeding 60%.”
🤠's take on the above:
A property developer succinctly explained to yours truly the dilemma the private sector industry faces when building materials costs shoot up:
“During the 2008 crisis, cement and steel prices shot up. Our main con came back to renegotiate. It was a question of continuing with him with higher prices or terminate and get someone new at higher prices. Either way we were stuck with higher prices. I am not surprised many developers will have same issue today.
Our lesson then was to have a price fluctuations clause so that if the actual was higher, we pay or if lower, the contractor gave discount. As developer you are caught in the middle with LAD to house buyers on one end and higher prices to contractor on the other end. Is the construction contract worth the paper it is written during crisis? You should do a survey. “
Ok. I get it VOP clauses actually make economic sense for the private sector. But when Putrajaya decides to allow VOPs AFTER fixed price building contracts for government buildings have been already signed to protect contractors' profit margins, who is the loser? By agreeing to absorb some of the price increases, the government pays more money for its buildings. It's the taxpayers who lose out. See Post Script and Disclaimer below
In my opinion Putrajaya should not knuckle down to their main cons. By agreeing, the government is setting up itself along a slippery slope. Why?
Now the flood gates are open to other government suppliers eg pharmaceutical companies to demand VOPs too AFTER raw materials price increases due to inflation, supply chain snafus, the Russian Ukraine conflict, global warming, and (+insert here another reason you can dredge up). Where will it end?
What do YOU (assuming you are the 16% of the working population that pays taxes) think?
Answers on a postcard please.
Post Script and Disclaimer
I am of course assuming the EdgeProp article is referring to fixed price building contracts signed by Putrajaya BEFORE building materials costs escalated. It's not entirely clear if the VOP clause extensions mentioned refer to old fixed price building contracts signed earlier or to new building contracts. If the latter I have no problem.
