Future of Hong Kong’s construction industry: key implications for contractors

We discussed in our previous article some of the major upcoming opportunities for the Hong Kong SAR construction industry in the coming decades, including the Northern Metropolis Development Strategy and the Lantau Tomorrow Vision – but what are some of the challenges and risks that contractors should be aware of from as early as the project planning stage?

Labour shortages

Labour shortages were reportedly already evident as construction activities surged as the pandemic eased. Coupled with the existing labour shortage and ageing problem in Hong Kong SAR's construction industry, future large scale construction projects may be affected. Contractors must arrange for the required workforce in a timely fashion, and recruit the necessary types and numbers of construction workers according to the programmed works.

According to data from the Construction industry Council, as of 1 February 2023, of the currently 609,327 registered workers in Hong Kong SAR, 45.6% are aged 50 or above while only 21.3% of them are under 35 years old, and 60% of registered workers are general workers without specialised skills.

The overall shortage of skilled labour in the construction industry causes difficulties in recruiting suitable local workers. While labour can be imported from overseas, more time is required and spent on processing applications and recruiting.

Hong Kong SAR had experienced similar problem with the 10 major infrastructure projects previously announced in the administration’s 2007-08 policy address. Projects including the Hong Kong-Zhuhai-Macau Bridge project encountered problems recruiting suitable local workers, especially skilled labour. Although the importation of labour helped mitigate the problem, labour shortages still affected the progress of some of the works.

Construction of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL) by MTR Corporation Limited (MTRCL) is another evident example. Construction started in 2010 and was expected to be finished by 2015, but delays were announced in 2014 and the project eventually completed in 2018. Budget escalated from HK$65 billion when work began in 2010 to HK$84.4bn when it completed in 2018.

An independent expert panel formed to review the project found that the major cause of delay was the shortage of labour. It found that the XRL project and expansion of the Hong Kong rail network had been handicapped by a shortage of skilled labour and that the MTRCL and its other contractors were aware of this problem from the outset of the XRL project. The panel also highlighted an agreement reached across the MTRCL and consultants that the consequence of risk occurring in relation to shortage of labour was “major” with a potential financial impact of HK$100 million to HK$1bn.

A further independent report on XRL, found that MTRCL experienced an average of 20% labour shortages across five ongoing MTRCL projects, including XRL. A Legislative Council Select Committee also identified a general serious labour shortage and ageing problem across the construction industry. It considered lack of foresight of the impact of these shortage as the main problem with XRL’s delay, as multiple projects were being managed concurrently.

Construction safety personnel shortage

The generalised construction labour shortage also extends to qualified specialists, such as site safety personnel. Safety personnel are crucial to assist with the planning and implementation of site safety systems, monitoring works on site and providing training to staff. Given the high demand for safety personnel, there had been cases where multiple construction sites were under the responsibility of one safety officer, meaning that the safety officer was realistically unable to effectively supervise the workers on site.

Contractors in Hong Kong SAR are required to employ safety officers and safety supervisors in accordance with the Factories and Industrial Undertakings (Safety Officers and Safety Supervisors) Regulations Cap 59Z.

The importance of site safety cannot be overstated, and is becoming especially crucial as onsite accidents increase. According to the Labour Department, there were 23 fatalities in the construction industry in 2021, the highest in five years.

With the increasing role played by technology in improving safety at construction sites and the Hong Kong SAR administration’s encouragement in promoting the same, the construction industry in the Hong Kong SAR has been and should continue to deploy technology and expand the implementation of technology strategically. Examples include adopting wearable technology and artificial intelligence (AI) to help analyse real-time data and implement necessary preventative measures before accidents occur.

The construction industry and construction-related associations in Hong Kong SAR should also work closely together along with higher educational institutions to attract more talent into the field and to improve and increase training for safety personnel.

Supply chain risks

With a number of large-scale construction projects happening at the same time in the next 20-30 years, contractors must also take measures to ensure a stable and ready supply of construction materials and be prepared for the associated risks – especially with a significant amount of materials required for reclamation at various areas and reclamation for the artificial islands for the Lantau Tomorrow Vision over an expanded period of time.

We first discussed in 2019 the potential risks relating to the supply of materials arising out of these reclamation works and reminded contractors bidding for reclamation projects to carefully assess the risks while ensuring appropriate contractual mechanisms are in place.

When the Lantau Tomorrow Vision was announced in 2018, the Hong Kong Construction Materials Association also raised concerns over the costs and demand for reclamation materials, highlighting the increasing demand on marine sand used for reclamation from Asian countries and urging the government to plan ahead by signing longer term contracts with suppliers to stabilize the long-term costs of reclamation materials.

The administration clarified in October 2021 that the plan for the artificial islands for the Lantau Tomorrow Vision is to use inert construction waste from construction activities for about 50% of the reclamation materials and the rest mainly from manufactured sand instead of marine sand. While the administration stressed that many quarries in the Pearl River Delta area of the mainland can supply manufactured sand, contractors should nevertheless carefully assess the relevant risks with materials procurement over the long run and put in place appropriate protection mechanisms, secure the long-term supply of the appropriate reclamation materials from the relevant sources and be aware of the impact of any potential regulatory changes from the authorities affecting the supply and export of the materials.

At times, disruptions or market uncertainties can also increase the risk of the insolvency of companies within your supply chain. It is therefore important to implement effective monitoring process to identify issues early on, negotiating appropriate payment terms or securities, allowing for the opportunity to explore options and minimising loss.    

Projects in the Hong Kong section of the Hong Kong-Zhuhai-Macau Bridge (HKZMB) also faced materials shortage problems. The project was originally planned to be opened in 2016 but delayed to 2018. A substantial amount of backfilling materials and rockfill were required for reclamation works for the HKZMB project. The construction progress was heavily affected when the supply of the materials was either unstable or in shortage because of a combination of:

• longer time taken than expected to arrange for the export of sand fill from the mainland in 2012;
• stricter regulations by the Guangdong Provincial Government since late 2013 which adjusted the amount of rock that can be exploited from rock quarries and imposed regulations on some mainland rock quarries;
• change in export procedures for sand fill in the mainland in 2014; and
• bans by the mainland on the exploitation of sand in the vicinity of Nei Lingding Island at Pearl River Estuary in 2015.

Underestimation of construction costs

When a project’s final cost is much greater than the budget, contractors may face greater resistance from the employer to pay. Contractors must be careful when budgeting and planning cash flow. They must also ensure that they maintain sufficient and proper records as required during the construction works and that all required claim procedures are properly followed. 

Various organisations have already raised their concerns that the Hong Kong SAR administration has likely underestimated the cost of the artificial islands and reclamation works for Lantau Tomorrow Vision with factors such as the complexity behind creation of the artificial islands, inflation and interest being underestimated. Some have even considered the actual costs of the whole Lantau Tomorrow Vision may even reach HK$800bn to HK$950bn instead of the projected HK$624bn.

In recent years, mega infrastructure projects such as the XRL, West Kowloon Cultural District and the Hong Kong-Zhuhai-Macau Bridge have all come in seriously over budget.

Ground conditions

It is not uncommon for contractors to encounter adverse ground conditions during construction, especially for large scale projects such as the Northern Metropolis and Lantau Tomorrow. These complications can cause delay and cost overruns and must therefore be taken into account during the tender stage and contractual negotiation stage.

All necessary site investigations and geotechnical analyses should be carried out to obtain sufficient ground information. It is equally important to consider the balance of risk allocation in the relevant contracts and to ensure that all necessary measures are implemented to keep the required records and properly administer the contracts.

Environmental concerns

Increased public perception and pushback over the environmental impact of infrastructure works may also hinder progress of the works, especially when legal proceedings are involved. This issue could be more severe when multiple interconnected projects are happening at the same time. Contractors need to ensure all necessary environmental assessments are carried out and sufficient public consultation and public engagement take place to keep the public informed and engaged of all developments. 

For example, a judicial review on the Environmental Impact Assessment of the HKZMB delayed the completion date of the HKBCF and the Hong Kong Link Road and also led to increased expenditure.

Contractual issues

Given the potential risks involved with all the large-scale infrastructure projects happening concurrently in Hong Kong SAR, contractors involved in these projects should be familiar with their contractual obligations and the relevant contractual mechanisms that could have a significant impact on them.

In relation to materials:

• What are the contractor’s contractual obligations for delayed works caused by materials supply or changes to materials?
• If the option of exploring alternative materials is in play, what are the contractors’ contractual obligations and must any particular specifications be met?
• Is there any mechanism in the contract which allows for price adjustment for inflation such as secondary option X1 [Price adjustment for inflation] in the NEC4 contract? This is especially important where projects span a long period of time.
• Is there any mechanism in the contract which implements early contractor involvement in the project such as secondary option X22 [early contractor involvement (ECI)] in NEC4 Engineering and Construction Contract (ECC) contract? If so, what are the implications on cost and resourcing on the part of the contractor? It is also noteworthy that the ECI approach integrating the contractor in the early stages of a project can be seen as a challenge for commercial teams.

In relation to ground conditions:

• What are the contractor’s contractual obligations and the extent of these obligations in relation to inspecting the site and obtaining all necessary information on the ground conditions and associated risks?
• What are the required tests and the required standard for site inspection to be undertaken?
• What is the extent of any risks and potential liability that the contractor has to bear?

Insurance

A contractor may have little choice about the way in which all these risks are apportioned in the contract, especially for government projects and projects spanning an extended period. Therefore, they must ensure that appropriate insurance, besides the insurance coverage required under the law and the contracts, is in place to cover all project risk. 

Co-written by Cynthia Chan of Pinsent Masons.