Hammered Down

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: as engineering, auto, construction, etc. The pressure has been so severe on users of steel as well as cement, another product on the radar of the government, where a ban on exports exists at the moment, that apprehensions were being expressed of projects getting derailed due to this. The construction industry in particular has been badly affected on account of high steel and cement prices. “We have to contend with land costs, too,” says Kishore Kothapalli, director, RakIndo Developers, a joint venture company promoted by Rakeen, an undertaking of the government of Ras Al Khaimah, UAE, and Chennai-based Trimex. Land costs have been severe but coupled with raw material price hikes the matter gets worse.

Some players in the real estate and construction business do factor in escalation clauses in their contracts to deal with input cost pressures. L&T is an example of this. “We also work on a cost plus structure, where the cost is reimbursed by the customer,” says YM Deosthalee, whole-time director and chief financial officer, Larsen & Toubro. “In some contracts we provide for contingencies,” he says. “All of this takes care of input cost pressures.”

But for those who do not provide for contingencies and escalation clauses in contracts for the fear of losing customers, cost overruns are becoming difficult to handle. By some estimates, project costs in the real estate and construction business have gone up to 40% in the metros alone on account of a steep rise in raw material prices.

In Tier I and II cities, the escalation is a bit lower at about 10-20%. Despite this, says Amit Goenka, national director, investments at real estate consultancy Knight Frank, the increase is substantial enough for players to take a cautious approach to the business. “Margins have been squeezed on account of input cost pressures.” This is to the extent of 4-5%, which has also affected industry growth projections since developers have been walking away from projects to keep their budgets under check. “Growth projections,” says Goenka, “are down from about 30-35% to about 27%.”