We have witnessed a steady increase in construction material prices since mid-2007. A chart showing the trend of material costs increases is at Annex 2. For example, the July 2008 cost index for steel reinforcement has risen 48%, 90% and 150% over the corresponding indices in January 2008, July 2007 and January 2007 respectively (i.e. over the period of ½ year, 1 year and 1½, years).
These price increases and general labour cost rises are reflected in tender prices. The tender price index1 for government building works compiled by the Architectural Services Department for Quarter 2 in 2008 has risen by 14% over the last quarter and 48% over the past 12 months. More or less similar increases are also reflected in the tender price index compiled by the Housing Authority (Quarter 2 in 2008 has risen by 11% over the last quarter and 42% over the past 12 months). The trend of increases in tender price index is illustrated at Annex 3.
The increases in material prices and labour costs have given rise to two problems: projects under construction which have a price fluctuation provision in the contract would not have adequate funds to meet the price adjustments while the returned tenders for projects under tendering are considerably higher than the APE. We have to tackle these immediately so that construction would not be impeded and contracts could be awarded without delay. The overall situation as of to date is as follows --
As regards 28 (a), the list of the projects is at Annex 4. Under these projects, there are contract provisions for adjustment to contract payments in accordance with movements in the cost of labour and materials in government civil engineering and building contracts. The objective of this provision is for equitable risk sharing between the Government as the employer and the contractor. The contract price fluctuation (CPF) payment is calculated based on the difference between the indices of costs of construction labour and materials at the time of tendering and the current values of these indices at the time of payment in accordance with a predetermined relative proportion for each cost index. As a result of sharp escalation of material prices, the payment for CPF has increased significantly recently. For these 25 projects, the original provision for price adjustment in the APE is inadequate to pay for the increased CPF. Increases in the APE for these 25 projects are required to make up the inadequate provision.
A summary of the price adjustment factors for converting project costs from constant prices to Money-of-the-day (MOD) prices as promulgated to the PWSC from March 2000 is at Annex 5. The price adjustment factors over the period from April 2001 to March 2004 are mainly negative and will result in negative price adjustments. The price adjustment factors adopted in subsequent periods are very modest and will not be adequate to cope with the rapid rise in the contract price fluctuation payments required. For example, the provision for price adjustment for 6711TH – Route 8 between Tsing Yi and Cheung Sha Wan was -$123.1 million (i.e. anticipated fall in material prices at the time the project was approved). After the rapid rise in material prices, the latest estimated requirement for CPF payment is $1.23 billion. We are now proposing an APE increase of $600 million, and the remainder of the required additional CPF payment will be offset by contingency provision in the project. Another example is 8051MM - Prince of Wales Hospital-Extension Block, the provision for price adjustment allowed in the PWSC paper was $124.9 million. The latest estimated requirement for CPF payment is $413.9 million, and therefore an increase of $288.6 million is required.
As regards 28 (b), a list of the projects is at Annex 6. There are now a total of seven building projects and one highways project that would require APE increases before the projects can proceed to the construction stage. For these projects, works departments have carefully scrutinised each project in detail, and concluded that against the prevailing market condition, a re-tendering is unlikely to attract any favourable tender that could be accommodated within the APE. Instead, re-tendering will delay the project by at least six to nine months which is highly undesirable. This is particularly so in the case of education facilities needed to meet policy needs or leisure facilities serving local residents such as the Tung Chung Swimming Pool.
As regards 28 (c), a list of these projects is at Annex 7. Foundation works for these two projects have started and tenders for construction of the main works will be invited in November 2008. Based on latest tender price index and pre-tender estimates, the APE for these two university campus development projects will need to be increased before the projects can proceed to the main construction stage. In view of the urgent need to improve the campus facilities at The University of Hong Kong and The Chinese University of Hong Kong, the Administration supports the institutions' proposal to seek increases in APE in parallel with tender invitation.
Subject to Members' views, we propose to submit funding applications to increase the APE for these three groups of projects to the PWSC meeting on 7 November for consideration in order to avoid further delays in the progress of these projects.
Looking ahead, the recent financial tsunami may have an impact on construction costs, particularly the prices of materials. We will monitor the situation closely.
Note 1: The tender price index is a quarterly index compiled by the Architectural Services Department based on data from accepted tenders.