The Hindu : Project companies to rework formula for future contracts

Online edition of India's National Newspaper
Tuesday, Mar 23, 2004

Business

Business

Project companies to rework formula for future contracts

By K. T. Jagannathan

CHENNAI, MARCH 22. With unabated rise in steel prices, project construction companies are veering round to redo the formula, at least in future contracts, for estimating the cost so as to reflect current prices.

The new strategy is intended to insulate the construction companies from the adverse effect of the run-away rise in steel prices. It is also aimed at making the end user or owner pay for any escalation in costs.

Though they have very little leeway under the existing contracts to pass on fully the increase in steel prices, they have prepared to tighten the clauses in any future contracts. The move to take a closer look at future contracts is inevitable in the wake of decontrol of steel and has acquired urgency following the steep escalation in prices.

Close to one-fifth of the project cost comprises steel component. In the case of water supply projects, it constitutes at least 50 per cent.

Depending on the nature of the project, the percentage of steel content will vary. Given the fact that steel prices have shot up by around Rs. 8,000 a tonne over the past year or so, the project construction companies are really at their wits' end.

While admitting there cannot any `one-point' solution in a dynamic situation as one is witnessing now, top construction industry sources, nonetheless, advocate a new contractual formula that reflects the abnormal increase in steel prices.

The current mechanism for getting escalation in costs reimbursed, it is felt, needs to be realigned to the existing dynamics. In the construction field, labour comprises 20-25 per cent of the project cost. The Consumer Price Index (CPI) takes care of any increase in wages. Like-wise, the Wholesale Price Index comes to the rescue whenever material costs go up. Materials constitute about 50 per cent of the construction cost. The balance materials — petrol and diesel — account for 5 per cent of the cost. The balance comprises overheads.

The stand of the project construction companies is that they are only intermediaries and not end-users.

"You do not allow the intermediary to lose,'' sources said. "We believed the owner has to be pay for it ultimately,'' they added.

Nonetheless, they are clear that they will not ask the government to reign in the prices. As the Government itself is a major consumer of steel, they agree that the current price increase will hurt the Government much more. In contrast to the project construction companies, private flat promoters, at least in Tamil Nadu, have demanded Government intervention to check the rise in steel prices.

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