Manpower, materials shortages ease, but construction costs expected to continue rising

Nov 14, 2023

SHORTAGES of manpower and building materials seen in the early days of recovery from the Covid-19 pandemic have faded. However, construction costs have risen sharply and are likely to increase further.

The good news in the construction sector is that industry players are not seeing any shortage in either manpower or building materials now, and China and India will continue to be the main source of foreign labour for the sector, said consultancy AECOM executive director for cost management Hyacinth Tan.

However, while the number of work permit holders allowed has increased after the pandemic, skilled labour shortage continues to be a major constraint, and this has placed upward pressure on overall construction costs, said Turner & Townsend.

“In addition, the shortages in dormitory spaces for migrant workers have become a challenge as it is now more difficult and costly to secure dormitory spaces,” said Khoo Sze Boon, Turner & Townsend’s managing director for Singapore and Vietnam.

Over the last three years, construction costs have also risen across most building asset types, said Khoo, with construction costs for residential flats up 26 per cent between 2021 and 2023.

Based on the Tender Price Index published by the Building and Construction Authority (BCA), construction costs for condominiums and commercial buildings have risen around 30 per cent over the last three years, added AECOM’s Tan.

Industry observers note that high construction costs – be it from manpower, materials or other resources – will inevitably lead to higher home prices, as these are passed on to users and home buyers.

Turner & Townsend expects costs to remain high in 2024, based on current market dynamics. Khoo noted that the average tender price for construction projects in 2023 is about 8 per cent higher than 2022. While he expects this increase to slow next year, he does not see prices returning to pre-pandemic levels.

Architectural firm RSP’s Singapore director Tang Kai Vern does not foresee any decline in construction costs next year. He said: “Since we import most of our construction materials, we are not spared from surprises in the global markets that upset the supply chain.”

Even though there are initiatives to promote less reliance on unskilled foreign labour, “this is in exchange for more high-value products with increased productivity such as pre-cast and design for manufacturing and assembly components, which directly translates to more cost”, said Tang.

Rising cost of building materials is a key driver of high construction costs. AECOM’s Tan shared that the price of concrete was up 20 per cent year on year in 2022 while the price of steel increased 18 per cent. But she noted that the costs of these materials, together with sand, are currently on a gradual downward trend since last year’s peak.

Singapore’s construction sector, which was severely hit by disruptions caused by the Covid-19 pandemic, is on a recovery path.

The sector grew 6 per cent year on year in Q3, extending the 7.7 per cent growth in the previous quarter, based on advance estimates from the Ministry of Trade and Industry (MTI) in early October. MTI said this growth was supported by expansion in both public and private sector construction output.

However, current geopolitical tensions, higher-for-longer interest rates and high borrowing costs have raised new red flags for builders in Singapore.

Margins will be impacted as long as borrowing costs remain high, said a spokesperson for Sim Lian Construction. High oil prices also affect the cost of building materials, which the company procures for its construction activities.

The high oil prices raise the cost of transporting goods and materials, manufacturing, and operating of machinery and equipment, added Turner & Townsend’s Khoo.

Mitigating rising costs

“As with many companies in the construction sector, the ongoing impact of higher costs can create challenges which we continue to manage to maintain stability and drive value for clients,” said Khoo.

To be better prepared, Sim Lian said “more advance planning is needed” when sourcing for manpower and building materials supply. It noted that material costs were up about 25 per cent versus three years ago.

Khoo added that construction timelines for projects have been extended compared with the pre-pandemic period. To mitigate the longer schedule, his company has been supporting clients in developing more “robust procurement strategies” such as long-lead equipment procurement and adopting early contractors’ involvement for more complex projects to tap into their planning, programming and constructability input.

To mitigate higher construction costs, Sim Lian said it will look at the overall design and simplify the method of construction.

RSP’s Tang said his company tries to reduce wastage and redundancy through careful planning and design, and added that contractors can also cut costs by considering bulk purchases of building materials.

A key to managing high construction costs is to adopt collaborating contracting practices in projects, suggested Khoo.

“Collaborative working and contracting models offer the opportunity to mitigate many of the challenges currently faced by the construction industry. It helps to bring clients and the supply chain together to deliver shared and agreed outcomes, and at the same time ensure a more equitable risk allocation between project stakeholders,” he added.

Early adoption of digital strategies is also key to optimising and streamlining design management and construction processes, added Khoo.

In the early part of 2023, the BCA said the value of construction contracts to be awarded this year would range between S$27 billion and S$32 billion.

BCA had said that 60 per cent of this projected demand, worth between S$16 billion and S$19 billion, would be from the public sector, supported by strong Housing and Development Board Build-to-Order flat supply. Meanwhile, private sector construction would contribute between S$11 billion and S$13 billion.

Turner & Townsend’s Khoo said that while construction demand is not expected to rise significantly this year, there remains a strong pipeline of projects over the next three to five years – particularly in infrastructure, healthcare and public housing.