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Bound to ‘dead’ projects, construction firms struggle to clear unprofitable work; poaching of workers a ‘serious problem’

SINGAPORE — More than a year since the Covid-19 pandemic hit Singapore, some construction firms are still losing money on each project that they have taken. One company, CHH Construction System, has been working solely on projects that are netting the building firm at least a 15 to 20 per cent loss each.

Bound to ‘dead’ projects, construction firms struggle to clear unprofitable work; poaching of workers a ‘serious problem’

Infection control measures and other Covid-19 restrictions on construction work have crippled many subcontractors, whose earnings and productivity rely heavily on how fast their workers can finish a project.

  • Many construction firms are locked into contracts that have become too costly to execute
  • These were signed before the Covid-19 pandemic caused manpower shortage and a spike in materials cost
  • Some firms have resorted to poaching workers, but this causes wages to rise too quickly
  • One contractor is now paying four to six times more to ship a container of building materials from overseas
  • Despite all this, more construction firms have formed since the start of 2020 than those that have closed

 

SINGAPORE — More than a year since the Covid-19 pandemic hit Singapore, some construction firms are still losing money on each project that they have taken.

One company, CHH Construction System, has been working solely on projects that are netting the building firm at least a 15 to 20 per cent loss each.

"We have projects signed before the pandemic and have to fulfil our contractual commitment," its managing director Nelson Tee said.

"We dare not take any new projects at the moment. We don't have enough workers to even finish the current projects."

News of two main contractors pulling out of five Build-To-Order (BTO) projects under the Housing and Development Board last week due to financial troubles have cast a spotlight over the pandemic-struck construction industry, which hires about 115,000 resident workers and accounts for 2.7 per cent of Singapore’s economy.

Faced with a severe labour shortage and high cost of materials, many contractors said they are bound to work on "dead” projects, knowing full well that they will be suffering huge losses by the end.

That is because construction firms often sign contracts and agree on payment months and years in advance.

Since the pandemic hit, costs of building materials have shot up. The price of steel reinforcement bars, in particular, has risen more than 50 per cent since January last year. 

Border controls also pose difficulties for contractors trying to recruit foreign labour.

The labour shortage has led to companies charging higher prices for supplying labour and firms “poaching” workers from other worksites. 

Mr Peh Ke Pin, general manager of PQ Builders, said that most of the projects available in the market are not commercially viable for his firm.

“All (contracts) that were signed before Covid — totally all dead,” he said. “Who knew labour and material would escalate to this extent?”

‘WORKING TO COVER COST’

To complete his current projects, Mr Nick Tay, director of Hiap Huat Demolition Contractors, said that he has been paying S$150 to S$200 for each worker he hires from a firm with excess manpower for a day. In the past, that would have cost him S$100. 

“Now we’re working just to cover costs,” he said. “It’s really tough for us and we’re struggling.”

With existing border restrictions for foreign labourers, a subcontractor said that to recruit a worker from Bangladesh or India — which used to cost him nothing — costs up to S$6,000 in fees in order to meet requirements for quarantine and stay-home orders.

Recruitment agencies generally work out arrangements with foreign workers to pay for flight tickets, but they do not cover the cost of isolation needs.

Despite this, the subcontractor is counting himself lucky. 

“Through normal avenues, companies like mine won’t even be able to bring in workers,” he said, adding that he was only allowed to import labourers for a project at an upcoming public hospital.

He declined to be named because he is not allowed to speak to the media about the project.

Other firms have resorted to poaching workers from other companies, which contractors say is a serious problem now in the industry.

Mr Tee of CHH Construction said that two or three of his workers have already been poached. 

“It’s very hard for us unless the borders open and more people come in. Now it's a vicious circle because there’s no replenishment and everyone is short of workers.”

He also said that firms have to keep paying higher wages to prevent their workers from being poached.

Infection control measures and other Covid-19 restrictions on construction work have also crippled many subcontractors, whose earnings and productivity rely heavily on how fast their workers can finish a project.

Freight costs, too, have gone up for some companies that have to import their building materials.

Mr Peh of PQ Builders said that the price of shipping a container from China had risen from about US$500 (S$672) to as high as US$3,000 over the past two years.

“It’s now maybe around US$2,000, but that’s still crazy high.”

GREATEARTH’S COLLAPSE

Despite being among Singapore’s oldest builders, established names such as Greatearth Corporation and Greatearth Construction — the two contractors that withdrew from the BTO projects — have gone bust.

Yet contractors who spoke to TODAY were not surprised.

The subcontractor for the public hospital project said that he had already witnessed three to four subcontractors closing down in the past two years.

He described subcontractors — who are hired by a main contractor to perform specialised tasks — as the “roots” of a tree.

“The root system is already damaged. It is only when people see the tree branches dropping, the leaves going bare, then they sound the alarm.”

Greatearth’s collapse also has wider implications to the industry.

Not only will the subcontractors working on its projects be affected, some firms also stand to lose money owed to them for Greatearth’s earlier projects.

Mr Peh estimates that he is owed about S$80,000 through a retention clause for a number of projects his firm completed for Greatearth two to three years ago. 

Developers or main contractors typically retain a portion of payment for subcontractors to cover the cost of defects within a specified time period.

MORE COMPANIES FORMING

Despite the roadblocks, more construction companies appear to be popping up in the throes of the pandemic.

In 2020 and the first seven months of this year, some 4,200 new construction firms have formed compared to 3,400 that have ceased operations, data from the Accounting and Corporate Regulatory Authority showed.

Mr Song Seng Wun, an economist at CIMB Private Banking, said that even though the materials and labour costs remained costly throughout the pandemic, the demand for construction work is still high.

New firms would also not have to carry the baggage of unprofitable contracts and can price their contracts at an appropriate rate.

Professor Sing Tien Foo, director of the Institute of Real Estate and Urban Studies at the National University of Singapore, said that a similar situation is happening in the food-and-beverage sector where companies have been created to capture the increased demand for online orders, despite how badly hit the sector had been.

Dr Lee Nai Jia, deputy director of the same research institute, said it is possible that workers of firms that have closed down could have formed their own smaller companies. 

LEGAL RECOURSE

Insolvency lawyer Lam Zhen Yu from law firm Withers KhattarWong advised construction companies that are in deep financial trouble to seek protection from the courts early.

This is to give the firms time to restructure their finances and avoid bankruptcy without creditors taking legal action to claim their debts.

“Construction companies should seek protection when they are still able to operate, rather than pushing it to the last moment when they are too saddled with debts to continue, which results in the whole project being stalled and subcontractors all left unpaid,” Mr Lam said.

Such protection, however, would only come in as a last resort for construction firms already facing bankruptcy.

For many subcontractors, they are hoping to reprice their existing contracts to take into account the higher costs, after failing to negotiate higher payment from main contractors or developers.

Mr Peh of PQ Builders said: “It is left to the main contractors’ decision on whether they allow the adjustment. If they don’t allow it, then do we seek legal help?

“Subcontractors won’t do that because once you start to pay legal costs, then profits will go down the drain. And we don’t have that sort of cash flow.”

Related topics

Covid-19 coronavirus construction foreign workers BTO business

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