L&T project costs up 25% on steel price hike

Project costs at Larsen and Toubro Ltd, the engineering and construction conglomerate, have gone up by 10-25 per cent due to the spiralling steel price in the last one year.

K V Rangaswami, senior vice president, L&T engineering construction contracts division, told Business Standard, "For construction, the steel and cement component in a project varies from 40 per cent to 60 per cent depending on whether it is concrete based or structural steel based. The increase in steel price has been most unprecedented. We estimate it to affect our profit by 2 to 4 per cent during the current year."

Reinforcement steel, used extensively in constructions, which had remained stable earlier, witnessed very violent fluctuations during the last one year. The construction industry consumes over 40 per cent of the total steel manufactured which is estimated to be around 18 million tonne per annum.

Most of L&T projects have a duration of 10 to 18 months. As the project costs were estimated much earlier and the price rise in steel particularly has been beyond anybody's imagination the impact is certainly adverse, he added.

The steel price have sharply increased by 30 per cent to 50 per cent in the last one year that the bottom lines of construction companies were seriously affected. Most construction contracts these days come at fixed price and do not allow escalation clauses, he said.

However, Rangaswami pointed out that even the projects with escalation clauses have not been able to recover even 50 per cent of the cost rise. "These clauses are based on RBI indices which do not cover this steep increase," he explained.

L&T has a backlog order worth about Rs 14, 000 crore to Rs 15,000 crore and has orders worth Rs 10,000 crore for the current financial year.

Efforts are on to convince the clients that this price increase could not be foreseen by anybody and therefore needs extraordinary treatment in the interest of the projects. "We are also striving to incorporate adequate escalation provisions in the contract," Rangaswami added.

To contain costs, the company is now deploying innovative work methods coupled with close performance monitoring.

To control the damages to the construction industry efforts are being made jointly and separately by Construction Industry Development Council (CIDC), Construction Federation of India (CFI), Builders Association of India(BAI) and other associate institutions of Construction Industry.