Lump sum contracts: has it gone on too long?

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Inflating overheads: Operational costs that are causing the inflation include a lack of labour accommodation, rent increases and the new mandatory health insurance policy costs.

Last week, Construction Week reported on escalating material costs, including the price of steel, which has gone up by almost 15% within the space of a week.

Raw materials make up about 30% of construction costs and if this wasn't alarming enough, it is not the only contributing factor to the inflationary bottom line.

Overhead operating costs are as much of a problem.

More worrying is the fact that these costs are affecting contract bids, which in turn could lead to a slowdown in the ongoing construction boom.

Apart from the obvious raw material costs, operational costs that are causing the inflation include a lack of labour accommodation and rent increases, the new mandatory health insurance policy costs, higher visa costs, a rise in costs for hiring equipment and additional bank charges due to a new labour policy that stipulates all employees, including construction labourers, will now have to be paid through bank transfers.

But what does this mean for contractors and what are the implications?

Freddy Lama, managing director and owner of Nova Electromechanical Contracting Company in Abu Dhabi has blamed it on the unavailability of office and residential space.

"Abu Dhabi in particular is facing a pressing shortage of office and residential space, which have caused rents to double over the past year. This in turn has caused our overhead costs to inflate. For example, let's say our dry costs [actual costs of labour and material] is US $1 million. Then our bid would be about $1.5 million. But due to inflation, our bid will now rise to $1.75 million and will probably go up even further if the inflation doesn't stop.

Lama added that the minimum increase on a contract bid is now 20%, which will result in more pressure on the client.

He also said that the cost of housing for workers has doubled over the past year.

"We used to pay about $68 (AED250) per head for semi-skilled workers. It has now gone up to $136. As for skilled workers, it was about $82 and is now $190. Engineers and foremen would cost us $109 in the past, whereas now they cost about $272.

Backing Lama's argument, Ani Ray, country director of Simplex Infrastructure, said that labour accommodation cost was one of the biggest issues, but additional expenses such as bank salary costs and the new visa costs were also compounding the situation.

"About six years ago labour accommodation was costing me around $218 per room per month for six people," said Ray.

"Now it is $1089 - $1306 for the same, which is almost six times the amount.

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