Though the construction industry, the second largest contributor to GDP, plays a significant role in the country’s economic growth, yet it faces several challenges in realizing its full potential. The Covid-19 pandemic has further compounded the challenges, particularly the ones related to finance and labour.
Over the recent years, the Construction Industry has made significant strides. Even more recently, in 2018, it regained its growth momentum with the output expanding by 8.8% in real terms. This was made possible by positive developments in economic conditions, and scaling up of investments in housing, transport infra and energy. In 2018, residential construction accounted for 30.6%, followed by energy utilization (27.1%), infra construction (23.3%), industrial construction (7.8%), commercial (7.6%), and institutional (3.6%). Today, there are a large number of private companies engaged in construction and even public-private partnerships are boosting construction activities for urban development.
Riding high on reforms and positive policy interventions, India’s Construction Industry was projected to become the third largest in the world, after China and America. The real estate and construction sector, which was valued at $126 billion in 2016, is expected to increase 7-fold by 2028. However, due to large scale disruption caused by Covid-19, their fortunes have been adversely impacted, with the survival of many companies at stake.
Even before the pandemic, the Construction Industry, being highly fragmented with a limited number of large companies and numerous small and medium sized sub-contractors, was seeing several companies going bust due to multiple challenges. These included capital crunch, time and cost overruns, shortage of skilled labour, inadequate project management, difficulty in land acquisition, fluctuating raw material prices, supply chain bottlenecks, poor cash flow planning, slow technology adoption, poor contract and stakeholder management, and flawed corporate governance leading to corruption and pilferage.
The ongoing stress and turmoil in the Middle East with the leading global construction company Arabtec shows that with the lowest price competitive tendering, inequitable risk allocation, low profit margins, uncertain pipeline, and late payments, can bring down the construction industry. A combination of internal and external factors is responsible for the plight. The biggest bane of the Construction Industry, according to Vikram Hosangady, Partner, KPMG, is its fragmented nature and the family-run businesses which have poor corporate governance and the inability to deal with either opportunities or threats.
Weak corporate governance is responsible for creating management related challenges. “Lack of broad basing of management, especially with regard to functions like Finance, IT and R&D has a lot to do with companies failing,” adds Hosangady. The absence of a smooth transition plan not only results in the loss of management talent and investor confidence, but also leads to failure of companies. Experts say that due to the fragmented nature of the industry, the collapse of a big company affects many sub-contractors.
According to Rishabh Sawansukha of Biz Street, a strategic business consultancy, an unsustainable business model lacking proper organizational and financial plan leads to failure of many companies. Moreover, considering that construction is a cost-intensive business, poorly planned cash flows for a project and liquidity crunch will affect the overall project performance parameters, leading to financial, legal and relationship challenges.
The expansion of companies beyond their capacity adds to their woes. “The capacity to manage large projects comes with time and experience, which is often ignored, and companies keep expanding beyond their capacity. This eventually results in falling short of expectations and delivery deadlines,” says Nimish Gupta.
How serious is this problem of delivery defaults by construction companies is evident from the latest statistics released by the Ministry of Statistics and Programme Implementation. As many as 412 infra projects have cost overruns of ₹4.11 lakh crore. “The average time overrun is 43.34 months and maximum time overrun is more than 60 months. The time and cost overuns affect the performance parameters,” says Gupta.
Affirms Anuj Puri, “Construction companies need to adapt new-age technological advancements like cost automation, sustainability, use of pre-fab materials, etc. Nagpur Metro Rail Corporation has successfully adopted 5D BIM technology for practical completion of the project and create Issue Based Information System (IBIS) for each phase of the project. In Amritsar, the Rapid Transit System was constructed using Virtual Design and Construction Technology. It is one of the first examples of the use of BIM technology in India.
Nimish Gupta also endorses a virtual construction programme like BIM for organized execution of a project to envisage the risks and to develop more efficient, sustainable and cost-effective solutions.
Gupta lists a few measures for construction companies in order to tackle the challenges. “A construction business should always have a robust risk management system for both the project and the organization. The absence of such a system has been seen to create problems in meeting contractual obligations with respect to time, cost, quality, health and safety of the project.” He adds that poor contract management, an overly risk-averse approach by the client, and transference of entire risks to the contractor leads to conflicts. Furthermore, the absence of a dispute avoidance/resolution mechanism, precipitates matters. Due to poor stakeholder management, a contractor gets sandwiched between the client’s over expectations and unwillingness to pay the right price. This leads to strained relationship between the client and contractor, and the resultant disputes lead to prolonged legal battles.
The government too needs to play an active role by way of enforcing policies that help construction companies survive tough times. In a recent relief, the government has put into effect a reduction in the performance security amount from the current 5-10% of a project cost to only 3%. Construction companies will now have to pay less upfront for a project and they will have more cash flow to carry out construction. The government through several stimuluses has also tried to meet the capital needs of the construction companies, especially SMEs. “However, the disbursals need to be expedited. Moreover, banks and lending institutions are still wary of lending. This, together with the issues relating to wavering cost of raw materials, and shortage of skilled labour, needs to be tackled urgently to minimize the current impact of the pandemic,” says Anuj Puri.
Adds Sawansukha, “The government should reduce the capital cost and construction companies should be allowed to float IPOs through international finance centres. The hyper inflationary land pricing should be checked. Land should be made available for development along with rail, road, and water grids by the government. Taxation should not impact cash flows, and stages of growth and financing should be aligned with taxation. Old arbitration matters should be sorted out to unlock cash flow. There should be an effective dispute resolution with focus on mediation.”
The writer is Editor, PropTOQ, a real estate magazine