Construction costs: rise in costs in Hong Kong

Sky high prices

22 May 2015

Roy Ying explains the reasons behind the continuing rise in construction costs in Hong Kong


According to the latest Demographia annual survey, Hong Kong has the most unaffordable housing market in the world. The medium home price in the city is currently running about 15 times the annual household income. Meanwhile, a recent CBRE survey of the commercial sector ranked Hong Kong's Central Banking District as the second most expensive market, just behind London's West End but well ahead of Beijing and Moscow. In the past, the shortage of land supply was considered the main cause, but recently, the sharp increase of construction costs is becoming a major contributing factor in high property prices.

Hong Kong does not appear to have a shortage of labour in terms of quantity. According to the Construction Industry Council's (CIC) labour registration figure, there were 220,000 construction workers in 2007 and more than 320,000 in 2014. However, the skilled workforce is ageing, with 40% of their number aged 55 or over. Most are either retiring or becoming very selective on the type of work they undertake owing to their physical fitness. Currently, there is no pipeline of young workers entering the construction industry, and only 6% of registered construction workers are aged 25 or below.

CY Leung, current Hong Kong Chief Executive, writes in his blog:

"Because the general impression of the construction industry is that it consists of low-end jobs and its workers are exposed to unfavorable weather conditions, most young people are reluctant to join."

The CIC has rolled out a number of schemes offering training, qualifications and employment opportunities in an attempt to inject new blood into the industry. But a recent survey by the Hong Kong Construction Association reveals that the industry is still short of 10,000 construction workers.

Working hours

With a serious shortage of skilled labour, the wages of construction workers have gone up significantly over the past few years. The Census and Statistics Department shows that the minimum monthly employment earnings of industry workers have increased 33% from HK$9,000 (£770) in 2009 to HK$15,000 in 2014 and are expected to climb even further in the near future.

For trades such as bar benders and fixers, carpenters (formwork) and concreters, the average daily wages for skilled workers can reach HK$1,800, and monthly wages can be up to HK$35,000 or above. In the private sector, contractors need to pay even more to compete with the government for the same pool of manpower resources.

In addition to rising wages, contractors are worried about the move toward new legislation covering standard working hours. Following a commitment given in the 2011 chief executive policy address, the government issued the Report of the policy study on standard working hours in 2012, and a committee was officially formed under the Labour and Welfare Bureau in 2013 to engage public discussion on this subject.

Imposing a working hours limit would affect not only construction workers, whose earnings comprise roughly 35% of total project costs, but also put pressure on the already stretched pool of qualified professionals such as project managers, engineers, architects and surveyors. The cost of construction is likely to rise at a more rapid rate once the legislation is enacted.

Pipeline of projects

Multiple major infrastructure projects are currently underway in Hong Kong. These include the Hong Kong-Zhuhai- Macau bridge, the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong express rail link, the South Island line (East), the Sha Tin to central link, advance works on the Tuen Mun-Chek Lap Kok link, the Kai Tak development and the Xiqu Centre of the West Kowloon Cultural District, among many others.

On top of these public works, the government also has a very ambitious public housing target of 470,000 residential units over the next 10 years. Every project is in one way or another competing for the same pool of resource. Many quantity surveying firms believe that 2014 and 2015 will be the busiest time in Hong Kong's construction industry, with all public works at their peak of manpower needs.


A stable and visible pipeline of long-term public works will help attract investment, encourage younger people to enter the construction workforce and motivate university graduates to become professionals in the built environment

Going forward, with major infrastructure and other projects entering the construction phase in the next few years, the estimated annual expenditure on capital works is expected to exceed HK$70bn. Although there appears to be a commitment from the government to offer a stable pipeline of project and job opportunities, the Legislative Council's slow funding approval process when assessing public works projects is a genuine concern.

Of the HK$70bn capital works planned, only 4% have been approved owing to the differences in policy priority between the administration and a number of Legislative Council members. If the situation does not improve, it is not difficult to predict that after one or two years there will be a severe drop in construction volume, thus affecting the livelihood of construction workers.

A stable and visible pipeline of long-term public works will help attract investment, encourage younger people to enter the construction workforce and motivate university graduates to become professionals in the built environment. Currently, the growth of demand is driving up prices, but equally worrying, an abrupt decline in public works in the near future could have an enormous impact on the sustainable development of the industry and thus the stability of construction costs.

Possible solutions

Although the manpower and funding approval issues are outside the remit of the chartered surveyor, there are a number of tools and new technologies to enable projects to be carried out in a more effective and efficient manner, with a consequent reduction in overall construction cost.

New Engineering Contract: For better risk management, employers and contractors could make more extensive use of the New Engineering Contract (NEC) form, which emphasises mutual trust and cooperation between the contracting parties. The NEC form allocates contractual risk to the party best able to manage it. Moreover, it provides a collaborative risk management mechanism to reduce occurrences, as well as mitigating the consequences when they arise.

The sharing and management of risk in the NEC form could help reduce project costs. Furthermore, the target cost payment option provides a pain/gain share mechanism where the employer and the contractor share the difference between the actual construction cost and the final target cost. It encourages the contracting parties to reach a common goal of completing the works together and at a reduced cost and within a shorter construction period. To limit financial liability, the employer would only share the overspending up to a certain percentage above the final target cost.

Building information modelling: According to a CIC report, projects using building information modelling (BIM) can help to:

  • provide multi-dimensional visual images and timely information related to construction projects
  • test models and quickly generate options for better decision-making in respect of time, cost, process, risk
  • detect design faults (especially clashes) and minimise the number of changes
  • improve site safety management and education
  • enhance financial risk management and minimise financial claims due to variations and delays
  • facilitate better project coordination by bringing together relevant participants in the construction project to collaborate and achieve an integrated design at an early stage
  • facilitate third party and public engagement by enhancing communications with a view to soliciting the support of the community at the project planning stage.

Although there is no empirical data in Hong Kong measuring the cost savings from projects using BIM against those without, according to a Stanford University Centre for Integrated Facility Engineering survey of overseas construction markets, BIM helped to eliminate 40% of unbudgeted changes. Currently, the adoption of BIM is market led.

Conclusion

The cost of construction is not the only factor affecting property prices. For a stable and healthy market, the long- term solution is to engage the public to develop a vision for Hong Kong's future. This will enable the government to take a strategic role in planning future needs for land, construction projects, labour, professional talent and regulatory adjustments.

The government needs to take the lead in enhancing the delivery capacity of the construction industry and invest substantially in manpower resources to plan and prepare for the projects to come in 5 to 10 years' time. The ability to build capacity for the future is crucial to sustaining the city's economic growth, and to maintaining Hong Kong's position as Asia's World City.

Roy Ying is RICS Head of Communications and External Affairs North Asia

Further information

Related competencies include: Project process and procedures