Expert calls for government initiative in face of rising construction costs

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Major cost components – with an emphasis on labour – of the construction industry hinder progress for Hong Kong. R&D and the development of construction productivity, led by government, is where the future lies. (Photo Credit: HKGCC)

On 19 June, The Hong Kong General Chamber of Commerce hosted a talk led by Francis Au, Head of Hong Kong and Macau, Arcadis, addressing the issue of rising construction costs. According to the International Construction Costs Report 2017 assembled by Arcadis, Hong Kong currently lies in second place, behind New York, among the world’s most expensive major cities for construction. Au also encouraged Hong Kong to strive towards developing construction productivity as the city suffers from chronic labour shortage and an ageing workforce which delay and drive up costs.

The construction industry incurs costs from three overarching components, namely material, labour and preliminaries. In contrast to Hong Kong’s top competitors in Asia, Singapore and Macau, the city has higher material and labour costs; unique drivers of cost include local environmental requirements and geographical site constraints. Hong Kong, being a financial trade centre and possessing one of Asia’s largest ports, facilitates the importation of various materials at low prices. This drives developers and contractors to source their materials from foreign sources, therefore relying heavily and being vulnerable to the change in price levels caused by the global market of commodities.

Labour costs and shortage in the construction industry are among the top concerns of stakeholders in the public and private sectors. The industry, currently and in the coming years, suffers from a shortage of over 10,000 skilled labourers. This, in addition to the high costs of living in Hong Kong, is driving up labour costs. The shortage is due to the lack of young entrants in the industry and the ageing workforce, with the majority of workers over the age of 45. The uncertain employment nature of the industry, and the educational and training framework in the city dis-incentivises young people to join the industry. The recent influx of labour to the industry, according to Au, has come from “industries such as logistics, people who used to work at the port, operators of port cranes who now become operators of tower cranes.” The development of clearer career paths after secondary education, through diversified vocational training schemes can promote greater interest among the younger population. Additionally, greater employment insurance for those working in the industry can also boost attractiveness.

Preliminaries make up 12-18% of total construction cost, which go towards components such as site management, supervision and facilities, as well as insurance. Among Hong Kong’s top Asian competitors, unlike material and labour costs, the city has relatively low preliminary costs. According to Au, referencing government statistics, for every 3.3 workers on site one of them is of supervising role. “This is one of the easiest ways to control our cost: How to make the system more streamlined,” explained Au. The inert lack of project managers who have a balanced and varied scope of knowledge raises preliminary costs as well-rounded project managers are able to cut costs efficiently.

Considering all the issues faced, construction productivity should be enhanced to ease labour and material demand and lower preliminary costs. This requires investment in R&D in the industry. The private sector is currently suffering from small profit margins and do not have enough confidence to invest in long-term gains, as sticking to long-implemented methods will provide higher short-term gains. Fundings for projects and R&D, in terms of percentage of GDP, is also at low rates in Hong Kong compared to its Asian counterparts. “Hong Kong only invests 7.5% of its GDP into R&D which is way behind our top competitors like Seoul, Japan and Singapore,” affirmed Au.

The floor raised concerns over the vast majority of funding for R&D purposes from the government going into academic institutions to conduct research rather than into practical technologies that can actually increase productivity. Au responded by stressing the importance of the connection between academic and construction institutions, consulting workers on the ground on how to use such technologies and applying the knowledge gained to practical use. Au also used the example of the Building Research Establishment (BRE) in the UK as an example of effective R&D. The BRE is an independent body that invests into R&D for government, industry and business to meet the challenges faced by society, including climate change, social and economic issues.

Au stated: “Government funding should be one of the key patterns in order to improve our situation.” He added that a more regulatory and time efficient bureaucratic and legislative system for financial approval can accommodate for R&D investments made by the private sector. Also, with government support, labour and preliminary costs can be lowered through changes in the educational and vocational training framework. Things can be done and changed to shift Hong Kong’s trajectory to a less costly future in the construction industry.