The rise in material prices will push some buildings to a loss, says the head of Strabag

How difficult are the problems caused by the sharp rise in the prices of building materials?

Complications affect us in all areas, most in building construction. The increase in prices is noticeable for concrete reinforcement, where we got 35 to 40 percent higher compared to last summer. Prices for thermal insulation and waterproofing have doubled year-on-year.

The second thing is that the material is not available. We have it ordered for a certain date and the supplier tells us that he simply does not have it. The problem is also with products such as plastic windows or plastic sewer pipes. Huge demand is raising the prices of wood, whether it is wood products or even bare lumber for buildings.

There is also a problem with electronics. As part of digitization, for example, we equip construction managers with tablets so that they have all construction documentation at hand at all times and so that updates take place online. However, these electronics, as well as, for example, guidance systems for building mechanization, cannot do without chips. All of these commodities are now either not there at all or are tens of percent more expensive.

What do expensive raw materials do with profitability?

Logically, it falls into costs and profitability decreases or even falls below zero. We have constructions that will probably end up losing because of that. With rising material prices, you have to calculate for buildings right from the start. You have a contracted amount for the entire construction period and higher costs go to our shoulders as a builder. This is the case for private projects and also for most public buildings.

Only for large infrastructure contracts awarded in accordance with RED FIDIC international standards, such as the Railway Administration and the Directorate of Roads and Motorways, some valorisation is allowed. The problem is that valorization may not be in the first calendar year of construction. When we create a calculation for state investors for projects with an inflation clause, we calculate the amount of valorisation according to the given formula. We are therefore trying to predict what inflation will be like next year. It is a divination from the crystal ball, how much you get for valorization from the client and how much you will have to pay for yourself.

And what is the situation in the private sector?

There was a shock at the beginning of the pandemic. Today, the market is stabilizing a bit and the desire to build is returning. However, we cannot expect to be able to invoice the increase in input prices and the investor has paid it to us. However, it is essential for us now that the private sector does not stop building under the influence of fears of further development. In building construction today, it can be seen that there is more capacity on the market than buildings. This is a consequence of the covid, when companies push prices down and compete on the verge of zero profit.

So will the market be cleared?

I think yes. I don’t know how significantly, but I observe that for contracts where there used to be three or four bidders, today, for example, eight companies compete, often above their capacity limit and with unrealistically low prices. We do not want to go down this path, which cannot have a happy ending.

But many smaller companies will compete for suicide prices and pay for it.

Yes, it can happen. And this is not necessarily the case for small businesses alone.

When do you think prices stabilize?

I’m an optimist. Although the rise in prices causes us a huge problem, which fundamentally affects the results of construction, but such is the reality. On the other hand, I think it is largely the impact of logistics complications, where raw materials could not get where they were due to a pandemic. These consequences may last for another half a year. However, once the materials reach the market and become available, prices begin to fall. What we are experiencing today may not apply in 2022.

It makes no sense for the state to now borrow money from private individuals, says Strabag's boss Novák

Have you noticed that local governments would cancel planned contracts due to revenue restrictions, or were there generally fewer than in the pre-pandemic period?

I don’t see it yet, but it’s hard to predict how the situation will develop. I understand the mayors’ fears that there will not be enough money. Maybe it’s a bit of a pre-election harassment. I’m not worried about this year. Elections are approaching and what is planned will definitely be built. What I am worried about is whether all the election promises will be valid next year.

After the elections, it may turn out that the money within the covid was “painted on paper” and is not. This would mean the worst thing that could happen to the construction industry and what has happened in the past, that is, that someone stops investing. Because the construction industry is generally highly dependent on public investment.

We can only believe that if the government promises not to restrict investment within the framework of covid, then it will really pay off. And that even after the autumn elections, there will be enough funding in the State Fund for Transport Infrastructure to invest in this difficult period. It is a positive signal that it is being designed at the moment and the preparation of constructions has not stopped.

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