Taiwan Journal

Contractors threaten to halt work over plummeting profits

Struggling to complete public works projects amid soaring raw materials prices, contractors took to the streets in April calling for government support. (Courtesy of TRECA)

Stung by the soaring costs of materials, construction contractors called on the government last month to lower its subsidy threshold for public works projects and establish an arbitration mechanism for handling contract disputes.

After a meeting of its members in August, the Taiwan Regional Engineering Contractors' Association requested that the government provide subsidies to contractors when raw materials prices have risen to 1.25 percent over the costs at the time a contract was inked. The current subsidy threshold stands at 2.5 percent.

The association also urged the Executive Yuan's Public Construction Commission to keep its promise to stand behind the draft amendment of Article 85, Paragraph 1 of the Government Procurement Law, which passed its first reading in the Legislature in May. The amendment calls for providing contractors with the right to go to arbitration to settle contract disputes in the event governmental purchasing entities do not agree to accept what the commission proposes during mediation.

TRECA Chairman Pan Chun-jung explained that, the aforementioned two measures are crucial to addressing the dilemma many construction companies face when deciding whether to bid on public construction projects. "They are reluctant to bid for public works for fear of incurring losses caused by unforeseen hikes in prices of materials," he said. According to Pan, during the association meeting, members were considering a nationwide strike to halt all public works and stage demonstrations by displaying construction machinery on the streets.

PCC statistics indicate that, between January and April, the opening round of bidding for public construction projects failed in 4,364 out of 13,038 cases--a historical high of 33 percent. In 2006 and 2007, by comparison, the rates of initial round failures were 29.68 and 26.75, respectively.

"There are three main factors leading to the unpopularity of public works among contractors," Pan explained. "First, the levels of subsidies offered by central and local governments are inconsistent. Various government agencies have cited insufficient budgets as their reason for not providing subsidies in accordance with existing regulations. But by doing so, they've often driven construction companies into dire straits," Pan said.

"The second reason is the price index compiled by the Cabinet-level Directorate-General of Budget, Accounting and Statistics seriously fails to reflect real market prices, thereby adversely affecting budget allocations for public works," Pan continued. "Third, even newly planned budgets cannot keep up with rises in prices for materials. That's why many suppliers balk at bidding for new government projects."

The chairman described many contractors as "hungry" but not daring to take on public works projects "because they may be poisonous." Government agencies have to review related budgets, Pan added. "Otherwise, how are they going to carry out President Ma Ying-jeou's 'i-Taiwan 12 projects?'" Developers have mentioned that notable failures of initial rounds of bidding include four sections of the Taoyuan International Airport Access Mass Rapid Transit System railway, each of which have undergone five to nine failed rounds of bidding.

Establishing an arbitration system to deal with contract disputes is equally urgent, stated the association. At present, mediators are all employed by government agencies responsible for construction projects, which is problematic because "they are both players and referees," Pan noted. "We hope Article 85, Paragraph 1 of the Government Procurement Law can be amended so that Taiwan can adopt a compulsory arbitration mechanism such as those used in most advanced nations."

Continental Engineering Corp., one of Taiwan's leading construction companies, has not bid for any major public construction this year, instead focusing on enlarging its share of private-sector projects, said corporate relations manager Patrick Chou. "CEC has done so to avoid risks. The average gross profit margin for public works has been only about 3 percent, whereas the margin for private construction projects is more than double that figure, reaching 7 or 8 percent," Chou explained.

In response to contractors' appeals, the PCC said Aug. 25 that although the percentage of opening bid failures hit a record high in the first four months of this year, the latest figures reveal that between Jan. 1 and Aug. 22, contracts for 84.57 percent of public construction projects worth more than US$33,000 each have been finalized. "The number of settled bids has been growing steadily, indicating that public construction programs are making progress," the commission stated.

The PCC pointed out that in response to the 27.72-percent rise of the construction materials price index between last January and July of this year, contractors have had to bear only 2.5 percent of the increase, while the government has absorbed the rest. "As to the 2.5 percent threshold for subsidies, it should not be pushed down further because the figure was proposed by construction companies when they asked for a lower subsidy threshold in 2004."

Acknowledging that government agencies have too often failed to subsidize suppliers because of budgetary shortfalls, the PCC noted that the government has recently earmarked US$502 million to support local infrastructure programs and boost domestic demand. "This is aimed at assisting government agencies in solving their financial problems and making sure that contractors can obtain subsidies when they carry out projects under either local or central administrations," the commission stressed.

According to the PCC, in March and April, representatives from contractors' associations, the DGBAS and relevant government departments were invited to discuss whether the directorate-general's price indices accurately reflect market prices. "At the time, most participants regarded the indices, on the whole, as being consistent with market prices. Even construction company representatives agreed about that."

The commission said it understands contractors' request to amend the Government Procurement Law and their demand to directly proceed to arbitration should mediation not reach a satisfactory conclusion within a set period of time. "But we need to carefully consider to whom such a procedure is applicable. Otherwise, some companies may see mediation as a mere formality and move headlong to arbitration whenever mediation cannot settle disputes," it added.

Noting that raw material prices have begun to decline in recent weeks, the commission urged developers to faithfully complete their contracts, enhance the quality of construction and not "rashly resort to street protests."

Contractors threaten to halt work over plummeting profits

Recommended Articles