By NEIL HARTNELL
Tribune Business Editor
An ex-Bahamian Contractors Association (BCA) president yesterday said many contractors are “on the brink of collapse” due to fixed-price contracts that exclude the impact of 40 percent cost hikes.
Leonard Sands, disclosing that he himself has experienced this pain, told Tribune Business that many in the construction industry are sustaining losses because contracts are not being adjusted to account for the sharp post-COVID increase in building materials costs.
He explained that this was a particular problem with bank-financed mortgages, where the construction contract set a fixed value that cannot be adjusted for inflation. When increased materials costs push the work beyond this price, contractors are seeing their profit margins wiped out and having to eat these losses.
With post-COVID demand, as well as the supply chain backlog, combining to drive construction material prices up by 40 percent “across the board”, Mr Sands told this newspaper: “Contractors are suffering because of fixed contracts, especially bank-financed contracts that don’t adjust for inflation.
“If the market goes up and down, it’s always the contractor that takes the hit. Construction financed through the private sector or the client, there’s adjustments that can be made to the inflation rate of the day, but not with fixed or bank contracts.
“This has been a long two-year period with COVID-19. Contractors are hurting and it’s really impacting their livelihoods and many are on the brink of collapse. That’s a reality that’s going to be painful for us, and many Bahamians have got caught up in construction that has taken a 40 percent increase in costs and there is no way to recover it.”
Mr Sands added that profit margins for many have “already gone”, and many contractors are now “in the loss column and have the burden of completing these contracts” at their own expense rather than leave the job unfinished.
“That’s the state where a lot of them are,” the ex-BCA chief said of his colleagues, while calling for talks between the construction industry and the banking sector, as well as the Government, to help resolve the issue.
“Hopefully, it’s time to make adjustments moving into 2022,” Mr Sands said. “I’ve been in this situation myself. That’s the reality. We took a hit during COVID, and there was no room to recover because the contract is fixed. There’s no way to recover that cost. There’s no adjustment for inflation in a fixed-price contract.
“That’s been my experience, too. We have to look at how we create a solution where contracts for construction reflect that, sometimes, you have volatile circumstances where costs increase, and you have to adjust those contracts so the costs don’t flow to the contractor and he doesn’t take the loss. These are discussions that need to happen.”
Mr Sands’ comments likely refer to contractors working in the domestic economy as opposed to those hired on foreign direct investment (FDI) related projects.
Meanwhile Stephen Wrinkle, Mr Sands’ predecessor as BCA president, told Tribune Business he was unsure if the upcoming two percentage point cut in the VAT rate to 10 percent come January 1 will “make that great of a difference” to construction costs.
Acknowledging that it will lessen the tax burden on construction material costs, he said: “I think every contractor in business today must have a clause regarding cost overruns. You can only guarantee what you quote at the time of the contract. There’s no way anyone is in a position to absorb costs not already quoted.”
Mr Wrinkle again implored the Government to give effect to the regulations, and Construction Contractors Board, that will oversee legislation that introduces licensing, registration and self-regulation of the construction industry for the first time.
Voicing optimism that the Davis administration will gIve effect to an Act passed by the last PLP government, Mr Wrinkle said this was critical to “standardise the industry and protect contractor and client”, since it would “go a long way to eliminating the inconsistencies and inadequacies” that exist between the two parties and address the fixed-contract situation.
With construction material prices having gone up by between 40-50 percent, and in some cases by 100 percent, he added that some products required as long as a six-month lead time before they can be delivered.
Mr Wrinkle recalled how he was told that one shipment, which had been ordered months before, suddenly experienced a 25 percent price increase that had to be paid just ten days before it was supposed to be delivered otherwise it would not arrive in The Bahamas.
“That has to be shared by the individual parties,” he added of such a hike. “You cannot expect the contractor to absorb all of that. It’s not right. They cannot absorb those costs. They will be out of business. It’s not their fault. It’s nothing they’re doing.
“It goes to the consumer ultimately. They have to pay the difference. Ultimately it has to be passed on to the consumer, and finding a way to do that is going to require some attention from the Government and the private sector, particularly the BCA.
“There’s too much money in these contracts. A 30 percent rise in materials can add $100,000, and the average Bahamian does not know what to do. He’s in a bind. You’re going to have a situation where the contractor stops work, the client does not have a home and the bank has an unfinished home for its security.”