A property developer succinctly explained to yours truly the dilemma the private sector industry faces when building materials costs shoot up:

“During the 2008 crisis, cement and steel prices shot up. Our main con came back to renegotiate. It was a question of continuing with him with higher prices or terminate and get someone new at higher prices. Either way we were stuck with higher prices. I am not surprised many developers will have same issue today.

Our lesson then was to have a price fluctuations clause so that if the actual was higher, we pay or if lower, the contractor gave discount. As developer you are caught in the middle with LAD to house buyers on one end and higher prices to contractor on the other end. Is the construction contract worth the paper it is written during crisis? You should do a survey. “

Ok. I get it VOP clauses actually make economic sense for the private sector. But when Putrajaya decides to allow VOPs AFTER fixed price building contracts for government buildings have been already signed to protect contractors' profit margins, who is the loser? By agreeing to absorb some of the price increases, the government pays more money for its buildings. It's the taxpayers who lose out.

In my opinion Putrajaya should not knuckle down to their main cons. By agreeing, the government is setting up itself along a slippery slope. Why?

Now the flood gates are open to other government suppliers eg pharmaceutical companies to demand VOPs too AFTER raw materials price increases due to inflation, supply chain snafus, the Russian Ukraine conflict, global warming, and (+insert here another reason you can dredge up). Where will it end?

What do YOU (assuming you are the 16% of the working population that pays taxes) think?

https://pictr.com/images/2022/08/03/B3gZNg.md.jpg

It is not a simple as it is appear. If really all the existing contactors are unable to deliver it anymore , they will rather let their performance bond burnt than completing the Contract. By letting the bonds burnt , at most they lost few hundred K & got blacklisted, they can still “limp” around. Had they decided to continue to honour the Contract , they will straight away “gulung tikar” & losses mil figures instead for few hundred K figure. You think government will benefits anything by taking companies already gulung tikar to court? There is nothing to claim back from them anymore as there are list of debtors ok the list.

In the end , the government are still at losing end also. When the government recall the tenders, the price of the new tender will be at the higher price also. The sudden rise of the raw material prices , none of them want it, none of them expect it. This issue is almost identical to the rise of the chicken price when the price of the feed went up drastically. All they want is the stability of the material prices.