Projects & Construction - Southeast Asia
The prevailing theme of the construction industry in Southeast Asia in 2022 has been the rapid escalation of construction materials and labour brought on by COVID-19 pandemic and the Ukraine crisis. In this short update, we provide an overview of the impact of this on the construction industry in Singapore, Malaysia, Thailand and Vietnam, and measures that these jurisdictions have taken in response to these challenges.
Carrying on the trend in the past few years, manpower and building material costs used by construction companies have increased – in 2022, construction costs grew by around over 20%. This has led to the increase in the price of construction projects, especially those relying heavily on steel and iron ore due to the supply chain disruption in Russia and Ukraine. Despite rising costs eroding profitability of construction projects, support from the government and a steady pipeline of public sector construction projects has sustained the Singapore’s construction industry. Such key infrastructure projects which have pushed on in 2022 include Changi Airport’s Terminal 5, Tuas Port and the new town development in Paya Lebar. Given the large-scale nature of these developments, it is envisaged that government spending will continue to underpin the growth of the construction industry over the next few years notwithstanding rising construction costs.
The issue of rising costs comes at a time where the temporary relief under the COVID-19 (Temporary Measures) Act 2020 (“COTMA”) – including amongst others a moratorium on legal proceedings for disputes arising from the pandemic – is being lifted. We therefore expect to see an increase in construction disputes in Singapore in 2023 brought on by a confluence of factors the effects of COVID-19 and Ukraine crisis such as price fluctuations and project delay and the increase in construction projects.
Despite its post-pandemic recovery, Malaysia’s construction industry has been affected by labour shortage as well as a fluctuating currency due to its domestic political instability. These internal factors have created significant instability of construction costs, leading to knock-on effects on the price of infrastructure and other construction projects. Combined with external factors such as the events in Ukraine and the COVID-19 pandemic, Malaysia saw a hike in the price of construction materials.
To manage these increases in construction costs, the Malaysian government has offered the option of adding a Variation of Price (“VOP”) contractual clauses in public sector construction projects awarded between January 2021 and June 2022. Contractors in these projects may now seek the addition of the VOP clause into their existing contracts. It places the risk of construction material inflation on the employer.
Thailand too has seen substantial increase in material costs for construction projects as a result of inflationary pressures in 2022. This however has not impeded the growth of Thailand’s construction sector, which has been spearheaded by government-based projects. In 2022, Thailand’s current infrastructure works consisted almost 80% of its public sector’s construction works. Thailand has also confirmed major expansion works for its two international airports with bidding expected to be held in 2023 and construction works to begin in 2024.
Additionally, Thailand is in the process of passing a bill titled “Act on the Settlement of Disputes regarding Payment in Construction” (the “Bill”). The legislation aims to streamline payment disputes between construction industry players and improve cash flow for contractors. The Bill, if passed, will introduce a construction adjudication regime in Thailand, similar to the statutory adjudication regime Singapore’s and Malaysia.
The Bill, if passed, would bode well for contractors and sub-contractors. It now gives them another (and potentially better) option to pursue claims. With its lower-cost and shorter dispute resolution period, contractors and sub-contractors may now be encouraged to pursue claims which in the past, they would have either abandoned or taken a huge discount in settlement.
In the earlier half of 2022, Vietnam’s construction sector had been plagued by rapidly increasing prices of raw materials, fuel and construction materials, as a result of the Russian-Ukraine conflict and COVID-19 which had posed severe constraints on the supply chain. Inflation had directly affected the cost of investment and the efficiency of projects, thereby eroding profit margins for enterprises. Notwithstanding the rising construction costs, Vietnam, like her other ASEAN neighbours, has seen an acceleration in its public investment projects in 2022. Hanoi aims to focus on constructing major infrastructure projects, including the pilot metro line section Nhon-Hanoi station. Currently, the elevated section is scheduled to be commercially operated in 2023 and the entire route is scheduled to be operational in 2027. It is expected that public infrastructure works will continue to be a key area of development for Vietnam in 2023.
Projections for the ASEAN construction industry in 2023
With a number of government-driven construction projects forging ahead and a common focus on large-scale infrastructure works, the region is expected to see a greater expansion in the construction sector. At the same time, with the region emerging from the COVID-19 pandemic and still labouring under the effects of rising material costs due to the Ukraine crisis, Southeast Asia has seen a rise in the number of construction disputes, many of which are related to increased costs and delay caused by COVID-19 and the Ukraine crisis.
Industry players should be mindful of inflationary impacts that are likely to continue onto the year ahead and where possible, mitigate these risks by catering for contingencies in tender bid prices or price fluctuation clauses to share or pass on inflationary risk under their contract conditions.
Some examples of clauses that could mitigate these risks include:
- Clause 33 of Singapore’s Public Sector Standard Conditions of Contract governs material price adjustments. In particular, Clause 33.1 provides that the contract sum shall be adjusted to take account of any arise or fall in material prices. These adjustments shall be calculated based on fluctuations in the material price indices as published by the Building and Construction Authority (a statutory board to develop and regulate Singapore’s building and construction industry). The materials applicable for price adjustments are specified in the contract.
- Sub-Clause 13.8 of the FIDIC Conditions of Contract for Construction and Conditions of Contract for Plant and Design-Build provide formulae to adjust contract values to reflect escalation of costs due to inflation.
- Parties may also consider including in their construction contracts a force majeure clause which expressly includes embargoes and sanctions (pertaining to the events in Ukraine) and/or epidemics (pertaining to COVID-19) as force majeure events. Such clause may provide not only an entitlement to an extension of time to complete the works, but also to prolongation costs incurred as a result of these force majeure events.