Building gets more expensive

The prices of construction firms have shot up by well over 10 pct within the past year. Most developers have come to terms with this; others have tried to manage without general contractors

Piotr Kroenke, the managing director of Globe Trade Centre states that: "Each of our projects is a little different, but when you take a closer look at the costs of constructing office buildings this year and last, it is immediately evident that they have risen between 10 and 15 pct on average". Marcin Klammer, managing director of EC Harris describes the situation: "I know of an office project which was to have begun in the spring of 2004. Then it was impossible for several reasons, and now that work has started, the difference between the previous and present prices comes to all of 12 pct. The project changed very little over the past dozen months or so, and the same companies were bidding in the same tender. This is not an isolated incident, and is happening over the whole market."
According to Anna Kot, head of the office space department of Jones Lang LaSalle: "The last few years have been a painful period for the construction industry. Some investors seem astounded by the rise in prices, especially those which have just come to the Polish market or are here only occasionally. Companies have been subject to a natural selection process, in which only the best and strongest have survived. And it is they who are negotiating contracts from a much stronger position."

Prices regulated by the competition
This opinion is not shared either by general contractors or subcontractors, although they are far from complaining about a lack of orders. Furthermore, construction company officials stress that though wounded, the competition is still dangerous and when it takes part in tenders, keeps its head well above the surface. Andrzej Mogielnicki, a board member of Porr (Polska), insists that: "We can raise prices to the extent the competition allows, but were we to go further, we would surely fail when competing for contracts." But he refused to reveal how much his company\'s prices had increased, though he insists his profit margin has not moved and remains at between 1 and 2 pct. Piotr Kołodziej, the commercial director of Mitex, confirms that: "We want to increase our profit margin and put more cash in our pockets, but we just cannot afford to do it. Developers are pressing us on the one side, while on the other we have to cope with such things as rising cement and fuel prices."
Marcin Klammer adds that: "Another fact driving this phenomenon is the price of steel. The enormous Chinese economy is consuming huge amounts of steel products, forcing prices upwards. Admittedly, the first big wave of demand seems to have subsided somewhat, but remains strong."

Hope in the East?
Fuel and building materials are not the only factors affecting general contractor rates. The prices demanded by subcontractors for their services have a definite impact. After all, there is no sense in having a full order portfolio if there is no one to do the work. Andrzej Mogielnicki elaborates: "Building workers started moving to EU countries last summer, mainly Ireland and Scandinavia, causing a headache for subcontractors, who now have trouble in finding on-site specialists, while workers who have remained in Poland are demanding and getting higher wages." The Ministry of Labour seems to have recognised the seriousness of the problem by considering the partial opening of borders for building workers from the East: Ukraine, Belarus and Russia.

General contractors prefer housing
General contractors were not enamoured with housing construction up to 2000, when orders were less profitable. The crisis experienced by the industry in 2002 and 2003 changed the approach of even the largest firms, who were forced to compete for smaller-scale residential projects to survive. Now that prices are rising again for building services, developers have to accept this, as booming house prices are rising even faster (between 10 and 15 pct in the largest cities) than construction costs (5 to 7 pct, according to a PKO Inwestycje official.
But there are developers who  try to bypass the general contractor. An official of a construction company told us: "We know of cases when developers have announced the tender for a project, to which building companies then submitted highly detailed offers. The tender is then called off and the organisers use the knowledge they have thus acquired to do the job themselves, often recruiting some of the employees working for a general contractor to make things progress smoothly." He gives as an example a Polish-Spanish company involved with projects in the Wilanów district and an experienced Polish developer who will soon be merging with an Italian company which, he claims, are doing just that. Andrzej Ciechulski, president of Reescon, which is planning a housing estate in the Warsaw district of Mokotów, speaks frankly about his plans to move along those lines: "We shall proceed with our projects without general contractors, since all they do is raise the cost by hiking their profit margins. We shall employ our own supervisory personnel, look around for subcontractors and will buy directly from their producers."

Managing as best they can
Developers who are committed to employing general contractors are having to find other ways of cost cutting.
Spiralling construction costs make building proprietors less flexible in negotiations, for instance by restricting their contribution to the costs of equipping a tenant\'s office. Negotiations concerning so-called rent holidays are becoming less frequent. Effective rates which were once even as much as 10 pct and more lower than the asking rent are clearly settling down. In the opinion of Waldemar Lesiak, the director of Office Projects Department at Echo Investment:  "Developers are trying to eliminate the effects of price rises by reducing the  common space in a building, through drawing up unusually scrupulous investment cost calculations which are analysed many times over. In these ways, substantial savings can be made in terms of building services and materials."

A ray of hope
There is a consensus among experts that the present surge in the price of building services cannot last. Marcin Klammer of EC Harris offers this optimistic comment: "I feel that construction prices are already stabilising - indeed, should these rises continue, new projects will become unprofitable to investors. You can only go so far and no further."

Ewa Andrzejewska