Material Price Fluctuation: Causes and Impact on Project Delivery—— February 13, 2020
Imagine this conversation.
Good evening Alhaji, can you please take this LPO as an instruction to supply 12 tonnes of reinforcement to our site early tomorrow morning?
Alhaji sighs and replies, ‘where do I start’? Getting the materials to site is not the issue but prices have increased from N175,000 to N240,000 per tonne in the last two weeks.
Infuriated by his response, I asked rhetorically, who increased the price? He exclaimed and replied, the manufacturer Sir.
Okay, please stay action on the delivery. I will discuss with the Managing Director and revert tomorrow.
The above conversation actually happened between me and one of my suppliers. There has been a 27% increase in the cost of reinforcement within a short period of time and this has been the usual response received from various suppliers of building materials, particularly in the last few months.
From personal experience, over 60% of the total construction input goes into building materials and with this percentage, there is no gainsaying the fact that materials are about the most significant component of a building project. Little wonder any slight increase in material prices could spell doom for overall project cost.
What is fluctuation all about?
Recently we received an inquiry from a prospect on our social media platform that reads “why do so many developers default”? Whilst we know so many factors could be responsible for this, however material price fluctuation is a likely significant cause of this phenomenon in Nigeria.
Fluctuation simply means a situation where there is a change in the cost of materials during the course of a project.
Provision for fluctuations in construction contracts provides a mechanism for dealing with the effects of inflation. On smaller projects, the contractor will be expected to take inflation into account when calculating his prices; while on larger projects, the contractor may be asked to tender based on current prices and then the contract makes provisions for the contractor to be reimbursed for price changes to specified items over the duration of the project.
Prices of building materials have skyrocketed in the last two years due mainly to the persistent fall in the value of the Naira, with the price of materials such as reinforcement bars and cables increasing by almost 100 percent during this period.
Some specific examples of such large price increases are;
- Cement which moved from N1,600/bag in April 2016 to N2,650/bag in April 2017,
- Reinforcement which moved from N130,000/ tonne to N245,000/tonne over the same period,
- Emulsion and Textured paints as well as Electrical lighting fittings which increased by between 30-35% in price,
and Electrical cables which saw increases of 100-120% over the same time period apparently because of the fact that the raw materials for the production of these cables are virtually 100% imported.
The list below though not exhaustive, discusses some of the causes of material price fluctuations and will give further insight into this issue;
Over-reliance on importation:
Most of the raw materials used in producing building materials are not available locally and since payment for any imported material has to be made in foreign currency, whenever there is a dip in the value of the Naira, cost of imported materials also rises.
Government Fiscal Policy:
Government policy sets the economic environment in which all sectors operate including the building materials sector. Unfortunately, most of the recent CBN policies such as the devaluation of the Naira, granting of special access to FOREX for specific sectors, aggressive injection of dollar supply into circulation, etc. have yielded no meaningful result as far as material price fluctuation is concern.
Lack of power supply has left our manufacturers with no other option than to use alternate power sources on an almost 24-hour basis. Road network to transport goods to their final destination is also of great concern not only due to increase in the cost of diesel and dilapidated road network but also due to comatose nature of our rail system, which is more or less non-existent.
Profiteering by material suppliers:
The best illustration one can give here is the speed at which our vendors increase the price of their goods whenever there is a drop in the value of Naira and their hesitance to reduce their prices when the Naira gains some strength against foreign currencies. The excuse usually given is that, reducing their price whenever Naira strengthened against dollar, will affect the quantity of their physical stock is, which in one’s opinion is not really tenable.
Fluctuation in the cost labour:
Most of the workmen engaged to produce these building materials locally have increased their daily wages by almost 25% due to decline in the purchasing power of Naira and this has ultimately translated to increase in material prices.
Other causes of building materials price fluctuation include fluctuation in the cost of raw materials, petroleum products (energy costs) plants and equipment, as well as higher interest rates.
Impact of Material Price Increase on Project Cost
Materials’ price fluctuation will lead to increased cost of construction for the Developer and possibly ultimately to the buyers.
Shoddy project execution: The dangerous trend here is that unscrupulous developers may result to cutting corners to protect profit margins. The resultant effect is that materials utilized may not meet specified standards.
Infiltration of the market with substandard materials by some vendors in order to seemingly maintain existing prices whilst the real aim is to maximize their profit.
Rampant cases of project abandonment due to increased cost of construction have also been recorded over time.
In the long run, persistent price increases can lead to increased shortage of housing with the millions of middle and low-income families being priced out of the market for home ownership.
How does the foregoing information assist the prospective homeowner in his property acquisition process however, the following are some points to note.
Potential subscribers should diligently research the pedigree of the developer whose real estate scheme they are looking to key into. And should deal with only developers who have a proven track record and would not resort to watering down quality when faced with price fluctuations on an ongoing project.
Dealing with experienced developers also reduces the chances of property price increases once the subscriber has keyed in as they are more likely to have allowed for possible price fluctuations over the project duration.
Buyers should beware of schemes that are seemingly priced low as this may be a sign that the developer has not taken into account all necessary variables in arriving at the advertised sale price and the project may eventually run into troubled waters.
Buyers should also review the project sale terms to see what options are available to them in the event the Developer defaults, significantly reviews the building sale price after project commencement, or fails to adhere to the earlier indicated building specifications and quality of materials.
As a last resort, potential buyers may also look at making some additional contingency sum available over the agreed sale price to cater for possible price variations in the course of the project.
Posted in General