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Published May 30, 2011
Contractors surprise with margin surge
Foreign worker levy hike spurs firms to boost efficiency, squeeze out savings
By JOYCE HOOI
(SINGAPORE) Almost a year after the foreign worker levy hikes kicked in last July, construction firms now face a bloated capital expenditure from a bigger labour bill and more machinery.
Despite this, local firms appear to have re-emerged leaner, having taken the hikes squarely on the chin by finding ways to squeeze out savings. The resulting margin improvements have confounded those who had predicted margin decimation because of the hikes.
Main contractor KSH Holdings, for example, posted 10 per cent lower full-year project revenue but an even larger fall in the construction costs. Bundled with other peripheral expenses that were lower, the company ended up with a 20 per cent increase in annual profit.
KSH shrank its foreign workforce by 5-10 per cent over the last year following the foreign worker levy hikes that saw the levy rate for S-Pass holders rise by $50 or $70 per month. Even with a slimmer workforce, KSH's labour bill is estimated to increase 5-8 per cent yearly from 2010 to 2013 when the foreign levy hikes come into effect in their full quantum.
A large chunk of savings had come from old-fashioned bootstrapping and some degree of ingenuity.
'There was more efficient use of material and labour due to our planning. That takes planning and coordination. And if you can do it in such a way that the time spent on a certain project is reduced, the overtime that the worker does is also reduced,' said Tony Tang, KSH Holdings chief financial officer.
Ironically, one of the many recent regulatory pressures on the industry had also helped cushion its margins. 'Now, for the projects on Saturday and Sunday, because of the noise control, we can't work anymore. So because of all this, there's cost savings,' said Mr Tang.
Similarly, at Koon Holdings, revenue took a spanking last year, tumbling 42 per cent to $74.8 million. But it reined in cost of sales - even with a labour cost increase of about 3 per cent - to raise 2010 gross profit margin to 20.9 per cent from 2009's 10.6 per cent.
While there had been mutterings a year ago over the prospect of a larger labour bill, the converted now have a mantra that revolves around the Holy Grail of 'productivity' and 'buildability' being pushed by the government.
'I think all of us have gone into productivity in a very big way now because of the incentives and enforcement that have come out of (the Building & Construction Authority),' said Tan Wey Pin, Lum Chang Building Contractors' executive director.
'Some carrots and some sticks came out, and the man-year entitlement quota has been cut progressively as well.'
After the latest round of levy hikes was announced early this year - in which the increases would extend beyond 2012 into 2013 - it had been estimated that building firms need to brace themselves to pay an average of $320 more a month for every Work Permit holder from the time the new hikes were announced and July 2013.
There was griping, but there was also quick action.
Eugene Seah, joint managing director of construction consultants Davis Langdon & Seah Singapore Pte Ltd, has seen more construction firms opting for the very machines and technology that will set the construction business on a less-labour-intensive path.
'I see a lot of adoption of flying formworks, self- climbing formworks that do not even need tower cranes to lift. I'm seeing the use of robotics to clean the wheels of the tyres - so instead of having four workmen with hoses, now there are no workmen, and the robots just come in and clean the wheels (of the truck) for you,' he said. The final verdict on the foreign levy hikes for industry people like Mr Seah is simple: 'It's working,' he said.
While the foreign worker levy increases might have hogged headlines, they had been just part of an array of tools of governmental persuasion. Where the levy is not effective, the law might be. Regulation coming into effect in the second half of this year will see all building projects larger than 5,000 sq m in gross floor area needing a minimum Constructability Score in order to get government approval.
This score will be based on the efficiency of their construction processes, which appears to be the ultimate objective. Already, firms are beginning to eye increasing use of precast materials that can simply be assembled on-site with less manpower than building something completely from scratch. If dependence on foreign workers is reduced, it will be a bonus.
Even then, the causal relationship between the carrot-stick mix and the happy outcome of better productivity and margins is not entirely clear.
Some argue that while these advancements in labour-saving technology would have happened on their own accord, the levy hike had not been so much a stick as an electric cattle- prod designed to shock the industry into moving faster.
Others, like Tan Thiam Hee, the managing director and chief executive officer for Koon Holdings, believes that the firm improved its gross profit margin by 10 percentage points last year by doing what it had always planned to do.
Published May 30, 2011
Contractors surprise with margin surge
Foreign worker levy hike spurs firms to boost efficiency, squeeze out savings
By JOYCE HOOI
(SINGAPORE) Almost a year after the foreign worker levy hikes kicked in last July, construction firms now face a bloated capital expenditure from a bigger labour bill and more machinery.
Despite this, local firms appear to have re-emerged leaner, having taken the hikes squarely on the chin by finding ways to squeeze out savings. The resulting margin improvements have confounded those who had predicted margin decimation because of the hikes.
Main contractor KSH Holdings, for example, posted 10 per cent lower full-year project revenue but an even larger fall in the construction costs. Bundled with other peripheral expenses that were lower, the company ended up with a 20 per cent increase in annual profit.
KSH shrank its foreign workforce by 5-10 per cent over the last year following the foreign worker levy hikes that saw the levy rate for S-Pass holders rise by $50 or $70 per month. Even with a slimmer workforce, KSH's labour bill is estimated to increase 5-8 per cent yearly from 2010 to 2013 when the foreign levy hikes come into effect in their full quantum.
A large chunk of savings had come from old-fashioned bootstrapping and some degree of ingenuity.
'There was more efficient use of material and labour due to our planning. That takes planning and coordination. And if you can do it in such a way that the time spent on a certain project is reduced, the overtime that the worker does is also reduced,' said Tony Tang, KSH Holdings chief financial officer.
Ironically, one of the many recent regulatory pressures on the industry had also helped cushion its margins. 'Now, for the projects on Saturday and Sunday, because of the noise control, we can't work anymore. So because of all this, there's cost savings,' said Mr Tang.
Similarly, at Koon Holdings, revenue took a spanking last year, tumbling 42 per cent to $74.8 million. But it reined in cost of sales - even with a labour cost increase of about 3 per cent - to raise 2010 gross profit margin to 20.9 per cent from 2009's 10.6 per cent.
While there had been mutterings a year ago over the prospect of a larger labour bill, the converted now have a mantra that revolves around the Holy Grail of 'productivity' and 'buildability' being pushed by the government.
'I think all of us have gone into productivity in a very big way now because of the incentives and enforcement that have come out of (the Building & Construction Authority),' said Tan Wey Pin, Lum Chang Building Contractors' executive director.
'Some carrots and some sticks came out, and the man-year entitlement quota has been cut progressively as well.'
After the latest round of levy hikes was announced early this year - in which the increases would extend beyond 2012 into 2013 - it had been estimated that building firms need to brace themselves to pay an average of $320 more a month for every Work Permit holder from the time the new hikes were announced and July 2013.
There was griping, but there was also quick action.
Eugene Seah, joint managing director of construction consultants Davis Langdon & Seah Singapore Pte Ltd, has seen more construction firms opting for the very machines and technology that will set the construction business on a less-labour-intensive path.
'I see a lot of adoption of flying formworks, self- climbing formworks that do not even need tower cranes to lift. I'm seeing the use of robotics to clean the wheels of the tyres - so instead of having four workmen with hoses, now there are no workmen, and the robots just come in and clean the wheels (of the truck) for you,' he said. The final verdict on the foreign levy hikes for industry people like Mr Seah is simple: 'It's working,' he said.
While the foreign worker levy increases might have hogged headlines, they had been just part of an array of tools of governmental persuasion. Where the levy is not effective, the law might be. Regulation coming into effect in the second half of this year will see all building projects larger than 5,000 sq m in gross floor area needing a minimum Constructability Score in order to get government approval.
This score will be based on the efficiency of their construction processes, which appears to be the ultimate objective. Already, firms are beginning to eye increasing use of precast materials that can simply be assembled on-site with less manpower than building something completely from scratch. If dependence on foreign workers is reduced, it will be a bonus.
Even then, the causal relationship between the carrot-stick mix and the happy outcome of better productivity and margins is not entirely clear.
Some argue that while these advancements in labour-saving technology would have happened on their own accord, the levy hike had not been so much a stick as an electric cattle- prod designed to shock the industry into moving faster.
Others, like Tan Thiam Hee, the managing director and chief executive officer for Koon Holdings, believes that the firm improved its gross profit margin by 10 percentage points last year by doing what it had always planned to do.
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