Construction in the public sector is affected by increased uncertainty and prices, as well as the ability of builders to fulfill their obligations :: Dienas Bizness

After about a decade of stability, we are once again learning to live and thrive in much greater uncertainty and higher prices.

In large construction (development) projects, this means much greater flexibility in terms of project implementation, required financing, and possibly also the introduction of additional evaluation criteria in construction procurement.

The daily experience of VNĪ shows that it takes about 4-5 years to implement a large-scale development project, from the idea to the commissioning of the object. Before covid, the relatively stable economic environment, when price changes (inflation) were small and money was very cheap, had made the implementation of large projects much easier to predict both in terms of the necessary finances and the deadlines for execution. But such a life is over for a long time.

In order to succeed in ensuring the continuity of construction processes today, business conditions require much greater flexibility from both public sector customers and financiers, as well as from construction companies. Compared to pre-covid projects, we currently estimate the costs of the new development project to be about 40-50% higher and we are considering several scenarios for the preliminary deadlines. The flexibility of the execution deadlines actually allows us to formalize the real conditions that we face on a daily basis and that sometimes tend to be perceived as extraordinary events.

Namely, VNĪ is mostly restored or rebuilt in the 19th – 20th centuries. buildings have been built. Although VNĪ puts forward higher requirements for the preliminary investigation of buildings than the building standard of technical survey provides, the real condition of buildings is revealed only during dismantling and construction works. A striking example is the beam in the Puppet Theater made of two wagon planks hammered together. This development project is one of those that started as a relatively simple improvement of energy efficiency at the conceptual level, but turned into extensive reconstruction works. Building reconstruction, of course, cannot be implemented as quickly as energy efficiency improvement works. On the other hand, working in the historical center of Riga with a rich cultural and historical layer, we have to take into account both possible archaeological finds requiring additional research, as well as the influence of previous buildings not discovered in the research. Thus, in the new home of the Museum of Writing and Music at Mārstaļu Street 6, unique testimonies about the beginnings of Riga were unexpectedly found last year, the research of which took a lot of time and extended the deadlines.

In summary: in fact, the application of any non-standard solution requires additional time, including the fact that the solution found must be coordinated with the supervisory authorities and must comply with the rules of the funder. So far, VNĪ has managed to coordinate everything, and in general, it must be said that we have overcome the obvious consequences of the price shock and disruption of supply chains caused by the Covid-19 pandemic and the Russian invasion of Ukraine. At the end of this year and the first half of next year, we plan to put into operation several facilities (New Riga Theatre, Puppet Theatre, Valmiera Drama Theatre, the new premises of the Museum of Literature and Music) in which work was slowed down by the direct or indirect influence of geopolitical factors.

However, the determination of the public sector client to ensure a stable financial flow, construction supervision, etc. is not enough, the ability of construction contractors to fulfill their obligations is just as important. The public sector invested a lot of effort to find systemic solutions to compensate for price shocks, including the development of common criteria for evaluating price shocks. VNĪ adheres to this principle even now: if the builder is able to justify the need for additional funding with documents and facts, then we are ready to look for possible solutions together with the user. Otherwise, the builder has to deal with it himself. In order to speed up the implementation of the project, VNĪ is increasingly using the “design and build” principle, that is, the design is provided by the general contractor. Perhaps all this was not enough. Perhaps criteria should be included in the regulatory acts, which would also allow evaluating the integrity of construction contractors and the fulfillment of obligations in previous projects in public sector procurement. But it may just as well be that the moment has come in the construction industry when it is no longer possible to work the way it was “accepted” just a few years ago.

It is no secret that currently one of the biggest challenges of the industry is related to the availability of labor and the increase in wages. The pressure on salaries will only increase in the coming years not only due to the cost of living, but also due to the large-scale “Rail Baltic” project. This mega-project will attract such large resources of construction specialists that the rest will have to fight bitterly for those available.

Already, we often encounter the fact that the general contractor finds it difficult to find subcontractors. There is simply no one working, and construction rates are falling due to understaffing. At the same time, we see that medium and also small entrepreneurs have become more selective: they want correct relations, timely payments, understandable working conditions. It is true, studies of the shadow economy show that small construction companies are more often in the “shadow” than large ones, and they seem to be satisfied with this situation. And it also happens that general contractors only manage to find subcontractors after a long time who are able to qualify for the necessary work and are sufficiently honest.

However, highly qualified specialists know their price, and if there is an opportunity to work honestly, they do so. Why work in Latvia in uncertain conditions, when in Norway, Finland or Denmark you can not only receive three to four times higher salary, but also work in a more favorable environment? Therefore, we can only congratulate the industry’s general agreement on increasing the minimum wage in construction to 930 euros from January 1, 2024.

Although we feel this partially temporarily – it is difficult for a construction company to win in public sector procurements, which has a significant part of its business “hidden”, this is prevented, for example, by the requirement for electronic timekeeping in large objects, but we hope that in the long term the influence of the shadow economy in the construction industry will decrease. For our part, we are considering expanding the qualification requirements for professional specialists in construction procurement, thereby increasing competition and giving additional motivation to companies that take care of employees and do not “sit in the shadows”.