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Construction projects have been hit by high prices and shortages of materials

Published 19.5.2022

Steel, bitumen, oil, wood, glass, concrete. These and many other materials are used in key infrastructure projects but in recent months, the construction and operations in the sector have been severely hit by high prices and shortages of materials. We asked Pekka Petäjäniemi, Director, Procurement at the Finnish Transport Infrastructure Agency, to explain what rising costs and uncertainties at construction sites actually mean.

In the infrastructure sector, the exceptional world situation is reflected in the prices of construction materials. For example, there were already increases in the prices of steel and wood last year. There were further changes in the situation after the Russian invasion of Ukraine, and shortages also emerged. “It is clear that these two factors boost each other and at the moment, they both make infrastructure construction much more difficult,” says Petäjäniemi.

In the latest purchase, the steel acquired for rails was up to 75% more expensive than in the past. Moreover, the increase in copper prices is a particularly significant factor in rail infrastructure construction. Copper is used as a material for electric cables in trains.

In addition to the laws of supply and demand, the way in which the materials are produced also impacts their prices. For example, steel is manufactured in high temperatures, which means that the process requires a lot of electricity and other energy. In other words, when energy prices go up, the price of steel also goes up.

The impacts of the Russian invasion have prompted the Finnish Transport Infrastructure Agency to also add the index clause to contracts of less than two years. This means that the Finnish Transport Infrastructure Agency accepts some of the financial risks arising from the contracts. “In addition to more expensive materials, we must also be prepared for price rises triggered by the index,” Petäjäniemi explains.

There has also been a lot of talk about bitumen in recent months. Soon after the start of the Russian invasion, the Finnish Transport Infrastructure Agency issued a recommendation on avoiding bitumen of Russian origin. “With this recommendation, we wanted to make clear that companies are fully responsible for the origin of the material. In fact, the EU will add bitumen to the list of sanctioned products in the coming weeks.”

There is also uncertainty at construction sites

The prices of construction materials are naturally only part of the total project costs, which also include the labour force, the use of the agency’s own equipment, subcontracting and what are called joint costs. Materials account for between 30% and 70% of the total project costs, and the average is about 40%.

Uncertainty is a major factor affecting the sector at the moment as nobody knows how the situation will develop. Estimating the costs may be impossible and the question arises how much the parties involved are prepared to pay to ensure that a project is successfully completed.

Subcontractors are responsible for most the work carried out at the agency’s construction sites and the sector is highly machine-intensive. This means that projects have been hit by such factors as increases in the prices of fuel oil.

According to Petäjäniemi, the prices of light fuel oil, used in construction machinery, have risen by as much as 80%. “Two weeks ago, the Finnish Government decided that transport companies are eligible for diesel subsidies but this arrangement does not apply to fuel oil used in construction machinery.”

“Some machine entrepreneurs have already terminated contracts with main contractors, and at the moment, persuading such small entrepreneurs not to quit construction sites is a major challenge, in addition to the prices of materials. In the current situation, companies try to complete the work quickly because this would mean lower overheads, such as electricity and site hut rents.”


The change may also be an opportunity

It is clear that contract prices will increase, and that the planned projects can only be carried out if additional funding is made available. Even though this spring has been a challenging period for the construction sector, there is still hope, and the change is also an opportunity to explore new routes in the market.

“Companies are working hard to keep wheels turning and to ensure that they can also work as our partners in the future,” Petäjäniemi says.

Once again, high prices and shortages are a reminder that materials can also be reused. Even though more environmentally friendly investments may not be a high priority in the current situation, the parties involved may be prompted to pay more attention to such issues as recycling and reuse of materials at construction sites.

“For example, I believe that each pole used in bridge construction is now recovered so that it can be used in the next project.”