People are speaking out about the increasing costs of construction, pricier materials and labour as well as the lack of workforce. Purchasing managers face these challenges as they try to ensure that companies can acquire resources to move forward with projects. Haroldas Dovydėnas, Purchasing Manager at Citus, a RE developer in Vilnius and Kaunas focusing on one-of-the-kind projects, said that the situation has turned completely upside down since the beginning of the pandemic. Today, everything is much different from how it was a year ago. RE developers are facing the same problems as construction companies and sometimes these problems go even deeper.
“During the first quarantine, we mentioned the supply of materials as our biggest problem. Back then, manufacturers were suspending their operations, closed borders blocked the delivery of goods and our supply chains were in havoc, giving us some serious troubles. However, at that time, even with no payment deferrals, the manufacturers started reducing the prices to ensure they would get the order and retain their employees. The lead times were shorter as well,” said Purchasing Manager at Citus.
According to him, such materials as reinforced concrete, Styrofoam and various metal structures used in bulk in construction reached as of yet unseen low prices. Citus saw the benefits in this and while other developers suspended or edited their projects, Citus worked hard to schedule the start of several construction projects before the end of the first quarantine. The scope of work of construction companies got reduced as well.
“Of course, this brought many other challenges. The real estate sector received the label of a high-risk sector, with the contractors demanding that we extend the force majeure clauses, introduce additional guarantees, faster payments and larger advance payments. We had difficulties working with insurance companies as they reduced the RE sector ratings, making the entire procedure last longer. However, all these problems could be resolved. We took on the risks and have been taking advantage of the situation for some time,” said the specialist.
Roller coaster of the pandemic
Today, the real estate market is living in a contradictory mood. Since the second half of last year, the Vilnius RE market has reached record-high sales and exceeded the best possible scenarios. People are vying for apartments and houses and this is surely good news. However, according to H. Dovydėnas, some of the circumstances giving troubles to the RE development specialists prior to this surge in sales have remained; only their causes have changed. Not to mention that new problems are arising.
“Complex delivery of materials did not become any easier. Only the materials have gotten more expensive. This happened because the inflated need for construction increased the demand for construction materials. Manufacturers are fully booked for half a year ahead and cannot keep up due to the shortage of raw materials. Everything is getting more and more expensive due to the high demand. The same reinforced concrete, Styrofoam and metal structures went from the cheapest to the most expensive in the last twenty years. The prices of some materials are several times higher,” said the representative of Citus.
H. Dovydėnas explains how this situation affected the terms of agreements once again: suppliers are not accepting any reservations as they cannot ensure smooth supply or fixed prices, and offer validity terms shortening from one month to several days. Meanwhile, the delivery of some materials takes months or even half a year. Sometimes, a developer is forced to look for different suppliers of the same material in a single project, thus resulting in longer lead times, increased workload and reduced efficiency.
“At times, we face real-time price growth: we receive a number of commercial offers but the prices change before we can even review. Not to mention that companies lack heavy labourers for the main works, such as masonry or concreting. This paints quite a sad picture that only contributed to the inflation of the housing prices in Vilnius. A year ago, we had the possibility to choose from several contractors in each category,” said the Purchasing Manager.
Human compassion, reputation and careful planning to the rescue
“No one could have foreseen the pandemic. No one could have prepared for it. We had to look for solutions while working under quarantine conditions. Some of our solutions would not have been effective under usual circumstances but we took it up nevertheless and it helped us. We can also see that simple communication has never been as important as it is now. We have also greatly benefited and will continue to do so in the future from our many years of good reputation,” said H. Dovydėnas.
According to H. Dovydėnas, respect, appreciation, attention and precise formulation of expectations are the most important when talking to the contractors. Sometimes, contractors need a helping hand as well, and that helps to maintain good relationships and ensure the continuity of projects. As an example, H. Dovydėnas gave a rather common case where payment for raw materials must be made directly to suppliers instead of contractors. This helps to save time when suppliers or manufacturers refuse to offer payment deferral or contractors do not have enough funds to purchase the materials needed. Such a situation causes hassle for RE developers but they allow eliminating certain obstacles and enable contractors to complete the project and receive their remuneration on time, thus strengthening partnerships.
“We keep our word and try to fulfil our obligations in a timely manner, thus making sure that our company is trustworthy. We delve into the detail of the scope of the work our contractors take on and ask them to assess their capability carefully. We evaluate each case of non-performance and overdue terms individually and try to compromise so that the outcome would be beneficial for all. We can already see such strategy bearing fruit and I have no doubts that our good reputation will help us in the long run, both during the pandemic and after it has ended,” said Purchasing Manager at Citus.
The planning is also very important: materials and works should be ordered as early as possible. About a year ago, 1-2 months were enough to plan all the purchases but now managers must double the time needed. Sometimes, even this is not enough: the planning of building construction that requires reinforced concrete products and their installation must consider that the delivery might take up to half a year. Short validity terms of the commercial offers and the unwillingness of the contractors and suppliers to undertake obligations in advance and guarantee the prices also encumber RE developers.
“Once again, the scope of works completed projects and, of course, our good reputation, come to the rescue. The high demand for apartments in Vilnius incited the increase in their prices and started a whole chain reaction: materials and works got more expensive, thus increasing the final price for the customer. We need to be very careful and navigate all the possible risks to successfully control the construction costs,” said the spokesperson of Citus.
Numbers and facts:
- The price of 1 cubic meter of Styrofoam increased by 56% from December 2020 to May 2021
- The price of 1 t of reinforcement bars increased by 27% during the same period
- The price of metal increased at least by 35%. The price of RC products also increased
- Influenced by higher prices of materials, the cost of a typical 100-apartment project increased by 90–100 thousand euro
Translated by MP Translations Agency in Kaunas
