Inflation gets to the core, project costs may go up

Officials in the ministries of housing and urban affairs and road transport and highways said contractors had approached the respective ministries to rework the costs, citing the price increase.

Experts said the cost of new contracts could go up by about 15-20%

“There is a steep impact of inflation on government infrastructure projects. I see that the input cost has escalated between 15-20%. For fixed price contracts, contractors are paying out of their pockets,” said Vinayak Chatterjee, chairman, national infrastructure committee, CII.

While there is an inbuilt mechanism in government contracts for revision in costs of up to 10%, experts said that worked in normal situations but was unlikely to help in current times. Retail inflation hardened to an eight-year high of 7.79% in April, prompting a surprise rate increase of 40 bps to 4.40% by Reserve Bank early May.

The Ukraine-Russia conflict had pushed input costs by as much as 25-30% gnawing into their profit margins.

One of the officials quoted above admitted that contractors had requested for revision in costs, but so far there is nothing on the cards.

“There have been no post contract negotiations. While concessionaires have been requesting it, this cannot be possible unless the government comes out with a policy for the same,” a senior official from the National Highway Authority of India (NHAI) said.

Similar concerns were raised by realty developers working on the housing projects contracts under PMAY scheme. While they are struggling to contain the price, if the centre does not consider the rise in input costs, it could impact the quality of construction.

“Realtors are reluctant to take contracts. There is a very thin margin in low-cost housing projects which are now under severe pressure. Apart from cement and steel, rise in wages cost is really hitting hard. Somewhere we must cut corners. We have flagged our concerns to the ministry,” said a realtor working for multiple PMAY projects.

Rising prices have impacted the railways as well. According to an order from the Railway Board, the ex-plant listed price of a steel Channel (200×75 mm) rose to ₹69,000 per MT in April 2022 from ₹53,000 per metric tonne (MT) in September 2021. The cost of a Broad-Gauge Coaching Axle that is manufactured at

‘s Durgapur Steel Plant (DSP) has been revised to ₹72,338 a piece in 2022-23 from ₹62,887 a piece for financial year 2021-22.

Pain points

“For fresh projects there is no other way but to quote a higher cost, taking into account the hike in input cost,” Chaterjee added.

A senior official in the housing ministry added that while there is no cost revision on the cards for existing projects, they are anticipating future contracts to be expensive.

According to Confederation of Real Estate Developers’ Associations of India (CREDAI), an apex body of private real estate developers in India, at December-end cement prices were ₹325 per bag, which has since gone up to ₹400 and is expected to rise further, on account of high coal prices. Steel and cement account for an estimated 30% of the production cost in real-estate projects.

The cost of thermo mechanical treatment (TMT) bars from

Ltd (SAIL) sold at ₹2,091 apiece in May 2021 and has since climbed to ₹2,821 in April to settle at ₹2,692 a piece in May. This is used primarily by the realty sector.