Implementation of New Procurement Methods in India

The construction industry in India is complex, challenging and unique. Selecting appropriate procurement method is a critical feature. In India even today traditional procurement methods are used. The options of adapting new procurement methods are open but there are various challenges in implementing them. This study will identify the barriers and difficulties which restrict the implementation of new procurement methods in India.

The literature review investigated characteristics of new procurement methods. It highlighted the nature and types of projects in India. It emphasizes on structures and trends in the Indian construction Industry. It gives an insight on procurement methods used in developed economies.

The chapter on characterization focuses on issues specific to Indian construction Industry such as demographics, socio-economic concerns, economical advantages, rapid growth of the industry etc. It highlights the typical procurement methods used for different types of projects in India and the regulations and administration within the construction Industry. This study gives us the nature and character of the Indian Construction Industry.

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Further, the study analyzes various issues, and draws attention to challenges in implementing new procurement methods. In the light of the characterization, issues and challenges this study identifies and concludes with the barriers and difficulties which restrict the implementation of new procurement methods.

The worldwide construction industry includes projects of dramatically different types, size and complexity and requires extensive professional and trade skills (Groak, 1994). A construction project can refer to any building activity that includes building, repair, erection, demolition, maintenance, land clearing, earth moving, excavating, trenching, digging, boring, drilling, blasting, concreting, installation etc. (Housing Grants, Construction and Regeneration Act, 1996). All these activities involve a considerable number of goods and services as well as large number of transactions to support a project. Most significantly, goods and services should be procured at the best possible cost to meet the needs in terms of quality, quantity, time and location (Weeley, 2010).

However, construction industry is a significant contributor to a nation’s economy. Internationally, construction industry accounts for approximately 8-10 percent of gross domestic product GDP. Currently, in India construction industry accounts 8 percent of GDP. Furthermore, main construction sectors in India are Infrastructure, housing and commercial developments.

In India by 2014 the second phase of infrastructure development will be started. This will provide additional boost to the construction industry. Owing to numerous projects the significance of procurement will be very important. Considerably, a well procured construction project is completed in time with desirable quality and within estimated cost.

Internationally, plentiful construction procurement methods are practiced. Worldwide effectively used, key procurement methods are Design and Build, Management Contracting, Construction Management, Build Operate Transfer, Public Private Partnerships, Strategic Partnership, Joint ventures etc. Generally, in developed economies procurement methods such as Design and Build, Construction Management and Management Contracting are widely used, due to the maturity of the industry.

However, in India mainly traditional construction procurement methods are practiced. Construction industry consists of large number of scattered small firms. The professionals prefer to operate within their silos. As a result, they remain in their comfort zone of using traditional methods.

Nowadays trends are changing particularly in infrastructure and large scale projects management. This is due to the increased number, size of projects and capital invested in the projects. Mainly the upcoming procurement methods are Build Operate and Transfer and Public Private Partnerships. However, these are restricted to only a few projects. Still a large number of projects are carried out in a traditional manner. Major obstacle to implement new procurement methods are large population (1.2 billion approximately) large inclusive demand, large demand spread across the country, many small projects, traditional outlook of construction professionals, segregated industry, numerous small firms, enormous unskilled work force. Other barriers include considerable number of regional languages, excess availability of skilled professionals in one part of the country and scarcity in the other parts, no standard terms of contracts, different legislation in different states, local suppliers, monopoly of manufactures in a region etc.

As a consequence it is increasingly important to explore the reasons why new procurement methods cannot be implemented in India. Some key interdependent and inter-linked issues to be investigated are economic issues, management issues, technical issues, legal issues and cultural issues. Research outcomes will be inferred by careful observation of challenges and study of difficulties for implementation of new procurement methods.

1.2 Research Aim

The aim of the research is to identify the barriers and difficulties that restrict the implementation of new procurement methods in India.

1.3 Research Objectives

The research objectives will include the following

1) To investigate the issues, namely economic issues, management issues, legal issues and cultural issues which act as barriers for the implementation of new procurement methods in India.

2) To investigate procurement methods such as Design and Build, Management Contracting and Construction Management and relate it to the traditional Indian procurement method, to understand the challenges of the implementation of new procurement methods in India.

3) Identifying the barriers which act as hindrances for implementation of new procurement methods in the Indian construction industry.

1.4 Scope of Study

This study of identification of barriers and difficulties that restrict the implementation of new procurement methods is confined to the Indian construction industry. The data is collected from secondary sources. The main sources were U.N views on India, U.K Trade and Investment and other secondary data. It outlines various difficulties and barriers which are already present in the Indian construction industry which in turn affects the implementation of new procurement methods.

This study restricts itself in identifying difficulties and barriers from the nature and character of the Indian Construction Industry. As moving into detail of all issues was not possible, it explores largely economic issues, management issues, legal issues and cultural issues and finds the barriers which prevent the implementation of new procurement methods.

This study will also mainly look into procurement methods such as Design and Build, Management Contracting and Construction Management and compare it with the traditional Indian procurement method to find the challenges in implementation of new procurement methods.

1.5 Structure of Dissertation

Chapter 1) This chapter gives an introduction to the topic and gives the idea about how the study will be carried out. It gives an idea of a fast developing Indian construction Industry and the need to adapt new procurement methods. It states the research aim, objectives and scope of study and also discusses the structure of the dissertation

Chapter 2) This chapter reviews the literature associated with the study. It looks into new procurement methods, projects in India, Indian construction industry and important factors affecting the construction industry in India.

Chapter 3) This chapter describes the research methodology adapted within the scope of the dissertation. Secondary data, semi-structured interviews with the experts and academicians were employed to address the objectives.

Chapter 4) This chapter characterizes India. It describes the nature and the character of the Indian construction industry. It gives an insight into the Indian construction Industry and its approaches.

Chapter 5) This chapter looks at the barriers and the difficulties that restrict implementation of new procurement methods in India. It identifies various issues and challenges in implementation of new procurement methods in India. It looks at the present construction Industry in India and its characterization and identifies the barriers and difficulties that restrict implementation of new procurement methods in India.

Chapter 6) This chapter presents the conclusions and direction for further research in this area.

CHAPTER 2: LITERATURE REVIEW

2.0 Procurement Methods Introduction

Around the world procurement methods are developed through the years as per needs. The selection of the most appropriate procurement method is critical for both the client and other project participants as it is an important factor that contributes to the overall client’s satisfaction and project success. This selection will be dependent upon a number of factors such as cost, time and quality which are widely considered as being the most fundamental criteria for clients seeking to achieve their end product ‘at the highest quality, at the lowest cost and in the shortest time’ (Hackett et al. 2007).

The type of procurement method adopted mainly depends upon the type of project, type of ownership, nature of construction industry in that particular country and the maturity of the industry. The selection of the procurement path is much more than simply establishing a contractual relationship (Newcombe, 1992), inspite of the continuing search for maximum value for money. In the developed economies such as USA, UK, Australia, Sweden etc. procurement methods such as Design and Build, Management Contracting and Construction Management are used from a long time. This is because the construction industry is developed, the projects are needed to be delivered efficiently and the clients demand the delivery of projects within budget and in least possible time. In this dissertation the study is limited to procurement methods such as Design and Build, Management Contracting and Construction Management.

2.1 Design and Build

Design-build is a method to deliver a project in which the design and construction services are contracted by a single entity known as the design-builder or design-build contractor. Design-build relies on a single point of responsibility contract and is used to minimize risks for the project owner and to reduce the delivery schedule by overlapping the design phase and construction phase of a project. “Design and Build with its single point responsibility carries the clearest contractual remedies for the clients because the DB contractor will be responsible for all of the work on the project, regardless of the nature of the fault” (John Murdoch and Will Hughes 2007).

The Design-Build Institute of America (DBIA) takes the position that design-build can be led by a contractor, a designer, a developer or a joint venture, as long as a the design-build entity holds a single contract for both design and construction. The main contractor takes responsibility for both design and construction and will use either in-house designers or employ consultants to carry out the design. Most of the construction work will be carried out by specialist or sub-contractors.

The contractor tenders against a client brief and will often follow an initial concept design prepared by consultants appointed to advise the client. The design will be developed by the contractor and the works will be completed, usually for a fixed price. Tendering is more expensive so it carries more risk for the contractor than the traditional approach. This is because the contractor has to develop an outline design and a detailed price. Tender lists will probably be shorter than for traditional contracts.

However, the client commits to the cost of construction, as well as the cost of design, much earlier than with the traditional approach. Changes made by the client during design can be expensive, because they affect the whole of the Design-Build contract, rather than just the design team costs.

This strategy is a low-risk option for clients who wish to minimize their exposure to the risks of overspend delays or design failure. However, the exposure to risk will increase where the design phase is rushed, where unreasonable time targets are set or where the tender documents are not fully completed.

2.1.1 Characteristics of Design and Build

It provides single point of responsibility so that in event of a failure the contractor is solely responsible. There is no ambiguity between the designer and the contractor. The clients’ interests are safeguarded in this respect.

When the client adopts Design and Build method he knows his total financial commitment early in a project. The client has direct contact with the contractor. This improves the lines of communication and enables the contractor to respond and adapt to the client’s needs more promptly.

In Design and Build contractor is responsible for design, planning and control. This gives him a better control over the activities and can concurrently carry out the activities which are not generally possible using traditional procurement methods.

The contractor can purchase, obtain planning permission and arrange his finance simultaneously which helps him to give a better deal to the client. He can also benefit himself and the client by making use of proprietary modular designs which reduces design time and time required for approval.

The contractor can start the work as soon as the approvals are obtained and sufficient information regarding the site operations is available. The design does not need to be finalized before some, at least, of the work may be commenced.

The Design and Build proposals ensure economical tenders and alternate design concepts which can benefit the client. The nature of Design and Build procurement system promotes the creation of integrated design and construction team.

In some countries using Design and Build system relaxes the architects’ code of practice, which encourages them to become full partners in design and build firms. The closer involvement of architects leads to more aesthetically pleasing buildings and leads to designs which have a greater appreciation.

By using Design and Build method time and cost savings are achieved, which benefits the client. The total project completion period is also reduced. Design and Build reduces the employers financing charges, inflation has less effect and the building is operational sooner which commercially produces an early return on the capital invested.

The Design and Build method facilitates novation of design with the consultants to the contractor which provides advantages to the client. The advantage of Design and Build is that the contractor has some control over the design and is able to introduce components, materials and systems which are beneficial and which he knows are more economical to construct.

2.1.2 Critique of Design and Build

Design and Build is not suitable for complex projects. The traditional method of construction procurement dissociates the designers from the contractors’ interests, design-build does not.

The contractor decides on the design issues as well as issues related to cost, profits and time exigencies, which may be the matter of concern in some situations.

The client is required to commit to a concept design at an early stage and often before the detailed designs is completed.

There is no design overview unless separate consultants are appointed. And there is no one appointed from clients’ side to manage the works or act as clients’ agent. If client changes the scope of the project, this can be expensive. Design-build does not make use of competitive bidding where prospective builders bid on the same design.

In Design and Build the criteria to select contractor is subjective and difficult to evaluate and to justify later.

2.2 Management Contracting

In management contracting the client appoints the designers and a management contractor separately and pays the contractor a fee for managing the construction works. Payment to the management contractor is done on the basis of cost of the works packages plus agreed fees. The main benefits of management contracting are the time required for design and construction is shorter. There is an early involvement of managing contractor during design phase, in which his expertise can be used.

The management contractor has the responsibility to manage the project. The sub-contractors are appointed by the management contractor, thus reducing the day to day administrative responsibilities of the client. The management contractor has major role in directing the project. The lines of communications are improved. As there is a direct relation between the management contractor and the client changes and variations can be done in a project. The main advantage is that the project is completed in time as the management contractor manages the works. Because of this the client gets possession quickly and the return on investment starts.

The client normally appoints the management contractor to take an active role in the project at an early stage and the client can benefit from the contractors expertise. The overall design is the responsibility of the client’s consultants, but the management contractor is normally responsible for defining packages of work and then for managing the carrying out of those work packages through separate trades or works contracts.

The management contractor can sometimes not be employed to undertake the work but is employed to manage the process. All the work is subcontracted to works contractors who are directly employed by the management contractor. The client usually needs to be given the opportunity to approve the terms and conditions of the trades or works contracts before the packages are subcontracted.

The management contract will usually include both a pre-construction phase and the construction phase. The management contractor is responsible for the administration and operation of the works contractors. However, the management contractor is not liable for the consequences of any default by a works contractor so long as the management contractor has complied with the particular requirements of the management contract.

2.2.1 Characteristics of Management Contracting

Clients and contractors adapt this system once they gain experience, which suggests that it has merits. It is generally recognized that its adoption requires mutual trust.

The management contractor is appointed much earlier. He is able to become a member of design team and contribute his expertise and mainly his management expertise. Management Contracting is an effective method for the client retaining control of the design whilst drawing on the experience of a construction specialist as part of the Professional Team.

The Management Contractor is paid a fee for its services as well as enters into contract with the client for work packages, generally separate works contractors are appointed to carry out work packages under the management contractor. This type of arrangement tends to be used on complex projects where early input from a construction specialist is required.

Decisions regarding appointment of subcontractors are made jointly by designers and management contractor thus making use of wider experience. Specialists’ contractors and subcontractors compete at second stage ensuring economical tenders which benefits the client.

Lines of communication are shorter between management contractor and client than with the traditional procurement method.

The client has direct control over the management contractor, who is the main contractor, so that the project is completed in a better way and in shorter time. The total project completion period is reduced by parallel working. A reduced project completion period produces a corresponding reduction in financing charges and interim payments to the contractors. Inflation has less effect. The client takes the delivery of the building more quickly and obtains returns on his investment more quickly.

The main functions of the management contractor may include acting as principal contractor, cost planning and cost control, consenting for works contracts, coordinating and managing works contracts, coordinating commissioning, collating pre construction information and construction phase plan, monitoring key performances and managing the site.

2.2.2 Critique of Management Contracting

The client is usually given an approximate estimate of the final project cost by the management contractor early in the project life but the client does not know the final project cost until the last sub contract is entered into. On other projects he is given a guaranteed maximum cost.

The architect may have less time to develop the design because he is under greater pressure from the client and contractor. The design may suffer as a result.

The client should provide a good design brief as the design will not be completed until the client has committed significant resources to the project.

The strategy relies on quality committed team or it may just become a mere reporting system in some cases. Management contracting is not suitable for inexperienced clients. It is less suitable for clients wanting to pass the complete risk to the contractors.

Specialist contractors frequently prefer to be in contract with client rather than the management contractor appointed by the client because interim payments are usually made promptly when paid directly.

2.3 Construction Management

In construction management the client appoints a construction manager for a fee to manage, programme and coordinate the design and construction activities. The client does not allocate risk and responsibility to a single main contractor. Construction work is carried out by trade contractors through direct contracts with the client for various packages. The client takes the risk. The construction manager supervises the construction process and coordinates the design team.

The construction manager has no contractual links with the design team and contractors. He only provides professional expertise without assuming financial risks. On appointment the construction manager takes over any preliminary scheduling and costing information and draw up detail programme accordingly. In this method the client should have administrative or project management staff with the ability to assess the recommendation of construction manager and take actions.

Adapting construction management reduces the time required for the project. This occurs because the contract strategy, construction and design can overlap. A construction manager should have a good track record in cost forecasting and cost management, as the time can be reduced but the price certainty is not achieved unless the design and construction have advanced to the extent that all the work packages have been let.

This method puts so much emphasis on the role of client, if the client is experienced, with the help of construction manager he can control the project effectively. The clients continue to use construction management to their advantage, for example, the cultivation of direct, long-term relationships with trade contractors helps to secure many of the benefits more often associated with partnering. Furthermore, by employing a construction manager who is able to focus on the interests of the project, rather than on its own risk management, the client can be confident that its project objectives will be shared by the rest of the team.

Construction management is distinguished by the influence of the client’s and construction manager’s management and leadership skills on the success of the project. By adapting construction management method the client can have greater influence over the project and can have more flexibility over the contractor selection and so on.

2.3.1 Characteristics of Construction Management

Construction management offers relative time saving potential for overall project duration due to overlapping of various activities.

The roles, risks and relationships are clear for all the participants during most of the situations. In some situations changes in design can be accommodated later than some other strategies, without paying a premium.

In construction management method the client has direct contracts with the contractors and pays them directly. This helps the contractors as they are paid promptly and there is evidence that this results in lower prices because of improved cash flow certainty.

The client has direct involvement in the project as compared to most of the traditional methods. As the client is directly involved he is enabled to make prompt decisions which can be implemented without delay. This also makes possible a prompt response by the client to unforeseen site problems and also makes possible a prompt response by the contractor to changes required by the client.

In this type the construction manager acts as an agent of the contractor. This benefits the contractor in managing the works. This also excludes the client for keeping his own staff for overlooking the issues which are looked by the construction manager. The central role of the construction manager is managing the project and providing administrative support to the employer. In this there is no single point of responsibility related to the delivery of the project.

2.3.2 Critique of Construction Management

In construction management price certainty is not achieved until the last works packages have been let. Budgeting primarily depends heavily on design team estimates.

The client should be pro-active and must provide a quality design brief to the design team in order to complete the design. The strategy relies upon the client selecting a good quality and committed team.

In construction management the client has to manage and administer many contracts as there is no single contractor, all the works contracts are directly between the works contractors and the client.

The client has to manage coordinate with the design team appropriately or else there increased likelihood of design change. There is a high degree of client ownership of risks associated with design including impacts of late or incomplete and uncoordinated design.

In construction management the client has exposure to performance risk and exposure to consequential loss associated with trade contractor default.

In construction management method there is increased administration role for the client. Construction manager owes duty of care liability only. The client is at the center of management and requires decision making capabilities. The client has to rely on management capability of construction manager.

2.4 Indian Construction Industry and Economy

Indian economy has been growing from last two decades at an unprecedented rate. This is mainly because of industrialization and service sector growth. The main reason for India’s growth is its huge internal demand. In recent years particularly after the global recession in 2008 the Indian economy has shown signs of slowing down. In 2011-12 due to the current global economic scenario India found itself in the heart of managing growth and stabilizing prices.

The Indian economy is grown by 6.9 per cent in 2011-12, after having grown at the rate of 8.4 per cent in each of the two preceding years. This indicates a slowdown compared not just to the previous two years but 2003 to 2011 (except 2008-09). At the same time, sight must not be lost of the fact that, by any cross country comparison, India remains among the front-runners.

The Gross Domestic Product (nominal) of India is $ 1.848 trillion (Indiabudget, 2011). The Gross Domestic Product (Purchasing power parity) of India is $ 4.457 trillion (Indiabudget, 2011). The annual expenditure budget of India is Rs.1490925.29 Crores (Indiabudget, 2011). Over the years, more than half of the expenditure budget is spent on civil engineering, construction and related activities. The construction industry sets in motion the process of economical growth in the country, investment in this sector contributes 6.5% of Gross Domestic Product (GDP) growth.

The construction industry in India is large and scattered. Today in India there is a massive demand in housing and infrastructure. The construction industry is the second largest industry of the country after agriculture. It makes a significant contribution to the national economy and provides employment to large number of people. The use of various new technologies and deployment of project management strategies have started to gain importance. In its path of advancement, the industry has to overcome a number of challenges. However, the industry is still faced with some major challenges, including housing, disaster resistant construction, water management and mass transportation. Recent experiences of several new mega-projects and large demand are clear indicators that the industry is poised for a bright future. It is the second homecoming of the construction profession to the forefront amongst all professions in the country.

Every Re.1 investment in the construction industry causes an Rs.0.80 increment in GDP as against Rs.0.20 and Rs.0.14 in the fields of agriculture and manufacturing industry, respectively. Statistics over the period have shown that compared to other sectors, this sector of economic activity generally creates 4.7 times increase in incomes and 7.76 times increase in employment generation potentiality (Economicsurvey, 2011). Despite of the challenges in the construction industry there will be a continuous rise of the construction sector in the country, with over 4 Crore persons employed in it.

2.5 Projects in India

The construction industry in India is large and diverse. In India majority of the projects are procured locally and are small in size. In recent years there is a demand for large projects such as large housing schemes, rural and urban and infrastructure projects but still there are large numbers of small projects.

The projects include residential complexes, shopping centers, industrial development projects, urban roads, rural roads, water supply systems, sewerage systems and infrastructure projects such as highways, power stations, rapid mass transport systems, airports up gradation and new and ports. These projects are not concentrated in one part of the country, they are spread over the length and the breadth of the country. Except some few high profile and prestigious projects majority of the projects are due to local needs and demands.

In India the metropolitan cities are experiencing a rapid growth of 25-30% in residential construction activity every year and the other non-major cities are experiencing 15-25%. The top 15 cities in India account for 18% of the total construction activity in India with Mumbai and Bangalore leading the pack.

In India cities are classified as Tier I, Tier II, Tier III and Tier IV cities. Tier I cities consist of Bangalore, Chennai, Delhi, Hyderabad, Kolkata and Mumbai. Tier II cities consist of comparatively smaller cities as Ahmedabad, Jaipur, Kanpur, Pune, Surat etc. Tier III cities consists of even smaller cities and large towns such as Indore, Cochin, Jamshedpur etc. Tier IV consist of smaller towns.

Approximately there are 35 cities in India with a po