This article points out that many of the contractors performing public works in the country did not have an escalation clause in their contracts and did not count on the huge increases in construction costs that have been seen over the last year or so. Of course when this happens they just stop the work. We see it happen here on residential projects as well. In the end the one requesting the work will end up paying.
The question that needs to be asked and answered is what price contingencies do the canal contractors have in place to protect them. You can bet that any international company will be covering itself from increases in material costs over the time it takes to fulfill these contracts. I believe the canal had a 28% contingency plan for material increases. I don’t think that will be nearly enough.
The state authorized contracts for public works projects that had no contingency clauses.
Benjamin Colamarco, who was in charge of those contracts, now admits they will have to be revised.
Evidently neither the Ministerio de Obras Públicas (MOP) nor some of the businesses it contracted for various public works projects thought to include any contingency clauses in their agreements covering unforeseen cost increases, availability of materials, labor problems or construction delays.
With the steep rise in the price of oil and construction materials, coupled with shortages in labor and supplies, those contracts now have to be revised. Many projects will cost considerably more than first expected, and they are falling behind schedule.
“The original contracts didn’t include price adjustment clauses. As a consequence, in order to make those kinds of adjustments, you have to add addenda, and that is one of the factors causing delays in the completion of the work,” confirmed Benjamin Colamarco, head of the Ministerio de Obras Públicas (MOP).
Another factor is that the Panamanian construction sector can’t keep up with the real estate boom. “Between 2006 and 2007, the construction sector grew nearly 20 percent annually. That generated a lot of demand, and, since the existing operational ability of many businesses had already reached its limit, construction activity began to fall behind,” Colamarco acknowledged.
Because of these circumstances, many state contractors are having problems delivering their promised work on time and within budget.
“When a project is going to be done, evaluations are made at least a year before the order to proceed is given. So, if I give the order to proceed this month, the assessment that worked for [the terms and requirements of the contract] was done in June 2007, and the prices then are now completely out of date,” explained Colamarco. “In that time, oil, asphalt, cement, steel, and stone aggregate have increased markedly.
Officials from the MOP will meet with officials from the Contraloría General de la República and the Ministerio de Economía y Finanzas (MEF) próximamente to address the issue and try to come up with ideas for avoiding further delays in public works projects.
With respect to the request made by business groups to include price adjustment clauses in the contracts, Colamarco had no comment.