PETALING JAYA: With retail diesel prices now more than tripled, cost pressures on local construction players have intensified significantly, according to TA Research.
Contractors are fully exposed to fuel price movements, leading to higher transportation and operating costs.
“As a result, contractors face an increased risk of margin compression, particularly for fixed-price contracts where cost increases cannot be easily passed through or subject to timing delays,” TA Research said in a note yesterday.
Notably, diesel subsidies for tipper trucks were removed under the Sistem Kawalan Diesel Bersubsidi 2.0 framework.
TA Research said contractors have already been paying market rates for diesel due to the policy shift, and the latest spike has pushed operating costs higher and squeezed margins.
Retail diesel prices have surged more than 200%, rising from RM2.15 in early February 2026 to RM6.72 by mid‑April, driven by escalating geopolitical tensions that have disrupted global oil flows.
The US-Iran conflict, including strikes on Iranian infrastructure and subsequent restrictions on the Strait of Hormuz, a key route for about 20% of global oil and liquefied natural gas, triggered the sharp spike in fuel prices. With Malaysia being a net importer and reliant on Middle Eastern refinery feedstock, the economy remains exposed to such shocks.
TA Research said while diesel costs have risen sharply, building material prices have also trended higher, albeit more gradually.
As of March 2026, the average selling price of Ordinary Portland Cement rose 9.1% year‑on‑year, while ready‑mix concrete recorded a 7.9% increase, reflecting ongoing cost pass‑through from higher energy and transport inputs.
Steel‑bar prices, however, declined year‑on‑year due to China’s oversupply, while stable coking coal prices helped cushion production cost pressures.
The research house said mitigating factors such as variation orders (VOs), cost escalation clauses, bulk procurement and early price locking strategies could help cushion the impact.
Deputy Works Minister Datuk Seri Ahmad Maslan said a proposal to activate the variation‑of‑price (VOP) clause for construction materials will be submitted to the finance and economy ministries following reports of a 20% to 30% rise in material costs.
TA Research said the VOP mechanism could enable partial cost pass‑through for key materials, helping stabilise margins, particularly for contractors with higher exposure to fixed‑price, lump‑sum infrastructure contracts.
However, the extent of the impact will depend on government approval, the scope of coverage and the specific contractual terms governing individual projects.
Maslan also said no stop‑work measures will be permitted despite elevated cost pressures, ensuring continuity in project execution and preventing disruptions across the construction value chain.
Based on TA Research’s input cost estimates, a 10% increase in diesel and building material prices would raise total construction costs by 1.2% for contractors under its coverage, translating into net margin compression of 51 to 87 basis points.
Its assumptions are based on direct building materials accounting for 60% of total construction costs, diesel contributing 2% and an 80% cost pass‑through rate to clients – a level it views as achievable given that most contracts incorporate VO clauses or cost fluctuation provisions.
The research house said the government’s measures are primarily aimed at protecting margins during what may be a temporary period of volatility.
It viewed the developments as a margin protection tool rather than a catalyst for earnings upside, adding that while the measures may ease near‑term cost pressures, they are unlikely to drive meaningful earnings expansion without stronger margins, job replenishment or clearer policy support.
Contractors could also implement internal strategies to mitigate supply chain disruptions, including focusing on shorter duration jobs, tighter cost control and value engineering to reduce wastage.
Firms with diversified order books – particularly those with higher exposure to infrastructure projects – are better insulated due to more prevalent pass‑through mechanisms.
TA Research maintained its “overweight” stance on the construction sector, supported by sustained job rollouts from both the public and private sectors and continued project execution.
It favoured Gamuda Bhd
and IJM Corp Bhd, citing their lower exposure to cost volatility, stronger economies of scale and greater bargaining power with suppliers and subcontractors. Their diversified international order books and more favourable contract terms also enable them to better absorb short‑term cost fluctuations.
If Brent crude oil remains above US$100 per barrel and diesel and building material prices rise by 50%, contractors’ net margins could compress materially by 253 to 434 basis points.
This is based on assumptions that direct materials and diesel account for about 60% and 2% of total construction costs, respectively, with 20% of incremental costs unable to be passed through.
On the risk side, TA Research warned that the sharp rise in diesel and material prices could pose operational challenges for smaller players with weaker balance sheets and limited bargaining power.
The elevated‑cost environment raises the risk of project delays and exposure to liquidated ascertained damages for missed timelines. Prolonged cost pressures could ultimately dampen near‑term earnings visibility and slow overall construction sector activity.
From a broader perspective, sustained cost pressures risk delaying the rollout of large‑scale infrastructure and private residential projects, as both the government and developers adopt a more cautious stance.
