Martin Scheuch: Construction Costs Caught Up in a Price Tornado
19 July 2021
Martin Scheuch, partner at Sentient and managing director of our Czech and Slovak operations, was approached by thePrime.cz, a local real estate news portal, in order to comment on the ongoing increase of construction costs. You can read the transcript of the full interview on this page, or click on the link below to read the original article. Thank you, Robert McLean, for the opportunity.
Skyrocketing prices of various construction materials, price jumps of commodities and labour shortages have set in motion a whirlwind that’s nowhere near over, says Martin Scheuch, managing partner at the consultancy Sentient. “We’re witnessing a sudden and unprecedented rise in demand as well as a lack of supply of construction materials. That’s behind the sudden increase in materials prices that began in March. This has placed not just the construction market, but also the development and investment markets in an extremely uncomfortable situation. Building is continuing but the supply chain connecting materials producers to the pyramid of suppliers and the big general contractors is spiralling out of control.”
How much will construction materials cost by fall? Or in a year’s time?
No one knows the answer. What’s so serious about this is precisely this unpredictability and the turbulence of the rise in prices combined with the lack of preparedness of the market. We’re talking about commodities like steel whose prices have jumped 100% year-on-year. Then, consider that construction contracts are signed for a period of years based on tenders and commitments that reflected the situation two or three years ago. They take inflation into account, of course, but what if you’ve got construction steel rising by 100% all of a sudden?
Sentient is involved in the Grand Hotel Evropa project
You’ve been active in construction and cost management for years now. Can you see any logic in these increases or say why a particular commodity has gone up in price?
From the beginning of the year, the prices of iron and thermal insulation materials have risen by up to 100% year-on-year. And despite such radical price hikes, there’s still a lack of supply. With plywood or laminate, it’s quite common to wait three months for delivery. It’s the same for plastics, claddings and tiles. I could go on and on…Sometimes the increase is 5% to 10% — but I’m talking week to week! How can you build efficiently and smoothly in such a situation?
We also see that higher construction prices are going hand in hand with construction labor prices. You can’t find masons or carpenters…the whole foreign labor sector that the Czech construction sector depends on has fallen apart. It’s all connected to the Covid pandemic: workers went back to their home countries and there’s no one to replace them. I haven’t seen waiters and restaurant staff rushing on to construction sites to man the cement mixers. Which is a pity.
It’s just one thing after another.
You can add to all that the lack of construction plots and the complicated nature of Czech legislation. Anyone who has ever built something here or worked on a development knows what I’m talking about. Projects drag on for years because of the approval process and the complicated laws. Imagine a developer who’s arranged for bank financing after fighting for planning for seven or eight years finally gets his construction permit. But right at that moment, Covid hits, so there’s no one to construct the project.
Besides just pricing, how has the pandemic impacted construction and development markets?
It’s delayed many projects because of uncertain about the future and because restrictions have greatly slowed down production. Many suppliers are suffering from a lack of employees, either because of the restrictions or because they’re sick with Covid-19. If half of your company is suddenly in quarantine, you stop production and put down the hammers. Products are going straight from the producers to the buyers, rather than being stored as inventory. The lack of steel, for example, was caused by the closure of the steel mills during the first wave of Covid. The borders in Europe were also closed for nearly a year, drastically limiting construction materials imports. So, the pandemic slowed down production and imports. Now there’s a short-term increase in demand and the market isn’t ready for it.
How do you deal with delivery times that have gone from weeks to months?
The current situation is complicating things for project and cost managers primarily during tenders. The falling supply of construction materials makes securing suppliers take longer. So, you have to react quickly to bids, constantly re-check prices and capacities, and you have to continually re-approve budgets. We’re seeing prices go up from one round to the next in tenders, which is unheard of since they usually go down.
The increase lead times for delivery can have a fatal impact on suppliers if they have fixed contracts. In such cases, they’re unable to generate a profit and go into negative numbers. That forces them to ask for deposits, or even to request contractual price increases. That means contracts have to be renegotiated and this can lead to conflicts and disputes.
How are the investors you work with reacting to all of this?
Investors are trying to begin their projects as soon as possible because especially with residential projects, higher sales prices can compensate for the higher costs. But before construction begins, it’s uncertain what the final price of the project will be. That’s driving uncertainty on all sides. If you don’t know how much you’re going to pay for something, it’s hard to set a price to sell it at. But then you have your marketing and sales channels to consider….To sum it all up: a tornado has hit, leaving behind a complete mess. People are still in shock. They’re counting their losses and analysing the impacts and waiting to see what will happen. Another tornado doesn’t look likely but after the 15 months we’ve just been through, I’d rather not make any predictions.