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N. Ramakrishnan

Chennai , March 22

THE project construction industry is all set to re-work the formula adopted while submitting bids for tenders to better reflect the prices of various items such as steel and cement.

This move comes in the wake of the continuing increase in steel prices over the last year or more, because of which some of the projects even become uneconomical for the company executing it, according to sources.

The need for a new formula has been felt, as the present one does not accurately reflect increase in material prices, according to the sources. The present formula has an escalation clause, but it does not take into account the "abnormal increase" in steel prices, as has been seen in the last year.

Re-working the formula is meant to insulate the construction companies whenever there is an abnormal increase in prices and also to ensure that the end user pays for the increase.

In construction projects, labour accounts for 20 per cent to 25 per cent of the project cost. The Consumer Price Index takes care of increase in wages. Materials make up 50 per cent of the cost and the Wholesale Price Index comes is useful whenever material costs go up. Other materials, such as petrol and diesel, account for 5 per cent of the cost and overheads 15 per cent.

"All these days, it was holding good. But, with steel prices going out of bounds, people are trying to re-work the formula or are quoting the steel prices (at the time of submitting the tender)," says an industry source.

Industry sources point out that there is hardly any scope to re-negotiate existing contracts as most often those who have awarded them refer to the escalation clause in the contracts.

According to the sources, steel accounts for 15 per cent to 20 per cent of value of a construction project. Assuming there is a 10 per cent increase in price and that there is no increase in any other material, it will have an impact of 1 per cent to 2 per cent on the job. But, a water supply project will be affected to the extent of 50 per cent.

In the last year alone, steel prices have gone up by about Rs 8,000-10,000 a tonne. The sources say that future projects are protected if clients accept to bear the increase in cost of materials. Otherwise, companies will have to take a call. The decision before the companies is, "Whether I am willing to take that risk on my future contracts. Or, if the risk is greater for me than the job, I would rather lose the job rather than lose on that job."

The sources say that only those projects whose viability is in doubt because of the increase in prices will get postponed. Others will still be executed irrespective of the increases, mainly because they are needed. On an average, construction project costs escalate by up to 5 per cent every year, not taking into account any abnormal price increases in materials.

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