The Implementation Of New Procurement Methods In India
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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.
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.
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.
Design and Build Contractor
Figure 2.1 - Design and Build Process.
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.
Figure 2.2 - Management Contracting Process.
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.
Figure 2.3 - Construction Management Process.
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 population of more than 1 million, all put together nearly 108 million people live in these centers. Rising population in the urban centers shows a need for improved infrastructure. Totally, 300 million Indians live in urban centers and the rest 800 million are still rural dwellers (Economicsurvey, 2011). Hence, there is an utmost need for a lot of construction activity in India with regards to residential, commercial and industrial construction. The types and the nature of such projects is discussed in detail in the characterization chapter.
2.6 What works in India; Structures and Trends.
India is a democratic republic. It consists of 28 states and 7 union territories. Each state has its own language. The political structure of India is also very complex as its cultural diversity. The states are powerful and also have different policies and regulations, this affects planning and implementation throughout the country.
The construction industry in India is driven by local demand. The quantum of work is enormous but scattered and the construction professionals mainly operate individually in these areas. As there are large number of small firms there are various problems associated with this. The main problems are cash flow, payments, availability of workers etc. The mindset of the industry as a whole is also one of the major challenges, which mainly focuses only on lowest price.
2.6.1 Political Structure and trends
India is a democratic republic with parliamentary system of government. It consists of 28 states and 7 union territories. The Prime Minister is the head of the council of ministers. The parliament consists of Lok Sabha (House of the people) and Rajya Sabha (Council of states). MPs are elected by the people and sent into Lok Sabha. President is elected by the members from both the houses and is the constitutional head of the country but the real power lies with the Prime Minister. At state level, Chief Minister is the head of the state. States consists of Legislative Assembly and Legislative Council.
The parliament has the right to make laws and regulations for the whole country. The states have the power to make laws and regulations for themselves. Who should decide which legislation to be implied on the states, is always a cause of dispute. This is mainly due to multi-party democracy and local parties. Even if a particular political party is in majority at the center and has a government same is not true in the states. The states are powerful and have their own regulations. They make rules and regulation according to their needs. This is mainly because of local pressures and compulsions.
Along with democracy comes bureaucracy, with bureaucracy comes red tape. Construction industry in India has to follow various rules and regulations and obtain various clearances. Even after liberalization in the early 1990s the rules are still stringent. A client or a contractor has to obtain various planning permissions and clearances from various departments of the government. It also sometimes leads to corruption and other malpractices.
There is also political bias; it may be on wide range on issues. There is bias on fund allocation, subsidies, administrative decisions etc. States and the center often are not on the same side. The political system is not completely centralized in which states obey the central government. This affects planning, implementation, regulations and standardization throughout the country. This encourages non uniformity throughout the country.
2.6.2 Construction Industry; Structure and Trends
The construction industry, particularly the medium and small sized projects, is dominated by local demands in various pockets of the country. These pockets are the cities and towns which have seen an unprecedented growth in last decade. Before this the construction activities were sluggish and were carried out on a small scale. Rural regions have also seen growth, particularly in residential sector and infrastructure sector. But still as described above there are large numbers of small projects. The overall quantum of construction works is enormous but it mainly driven by individual and local needs. This makes construction projects scattered around the economic and social activities and makes planning and standardization more complex.
Most of the contractors in India fall under the small and the medium category. They too operate in their own ways. The contractors have to carry out the works with the available resources. The works they tender for are generally small or medium sized public sector projects and residential and commercial projects in urban and rural areas. In some sectors the contractors are simply awarded the works on the basis of relationships. This is based on their relationships with the clients and the consultants. Because of their organizations size they have to face many problems.
The supply chain is also traditional. They operate on the basis of the relationships with the client and the contractors. Mainly the suppliers are local traders. The procurement method used in such circumstances is traditional. In India majority of the projects are carried out using traditional methods of procurement. The construction industry still operates in various silos. Traditionally independent professionals such as architects, engineers are appointed by the client to complete design work and the client enters into a separate contract with a contractor to carry out the work. The contractor then carries out the work or may sublet his work to sub-contractors. This is due to the independent nature of the professionals, fragmentation of construction industry and large number of construction companies, large local demand in parts and no standardization. Although there are some exceptions in large projects where new procurement routes such as collaboration, strategic partnering are used. But mainly for large number of projects traditional methods of procurement are used.
The construction industry due to its traditional nature cannot cope up or modernize to its own rapid rate of development. The developments in the Indian construction industry have gained momentum only in last two decades. The various people involved in the industry and the methods are still not completely changed to adapt to the current scenario. As described above due to the nature of the construction industry, the industry is reluctant to change. The construction industry is in the growth phase of the maturity curve.
In India because of the nature of the industry and the size of the organizations in the industry, cash flow is very important. If there is no proper cash flow as per required, everything comes to a standstill. The organizations depend on the clients' money for purchasing and payments. Managing cash flow is a priority over other things. Due to large public sector projects, broken down into small contracts and large number of small clients, getting paid accordingly and on time is a key issue.
In India the main objective and focus is only on the lowest price. This mainly developed with the rise of public sector contracts. Due to the nature of the public sector in India, the public sector contracts are awarded only to the lowest bidder! This culture gradually spread to the private sector. Most of the works today are awarded on the basis of the lowest price. Completion time and quality naturally is compromised and comes second.
2.7 Procurement in the Developed Economies
The developed economies are those countries which have economic security, industrialization, growth, matured industries, advanced and liberalized markets and higher standard of living. Increasingly other non-economic factors include Human Development Index, health and safety, literacy etc. These include countries such as USA, Canada, Western European countries such as UK, Germany, France and Northern European countries. These countries mainly have developed markets and matured industries.
In these countries the overall construction industry is developed. All the systems and routes are defined and are backed up by strong legislation. The industry has to deliver projects efficiently. Everyone involved in the industry understands efficiency, time, budget, safety and profitability. And the customer or client expects quality. In these countries the institutions responsible, right from the government, legislations to the various construction sector bodies do not show sign of institutional weakness. This leads to the use of procurement methods which are nontraditional, innovative, effective, proven and which are suitable for the project.
The industry, the construction firms, governments, professional bodies, consultants, markets, etc. play an important role in shaping procurement methods. The industry itself is considered as an exogenous influence on shaping procurement methods in practice. The analyses of the industry offer the set of knowledge for understanding the environment in which procurement methods are developed and enacted. Such industrial analyses include the overall economic conditions (e.g. fiscal issues, interest rates, etc.), the state of the industry itself (e.g. output, number and size of firms, professional institutions), and the nature of construction demands (e.g. public housing, infrastructure orders) (Larsen et al. 2006). All these factors are favorable in the developed economies. In-depth understanding of procurement developments cannot be achieved without having an over-arching understanding of developments within the industry.
The construction firm also plays a crucial role in how procurement is enacted in practice as it is a service provider. "It is proposed that firms operate, in relation to procurement, somewhere upon a sliding scale. At one end of that hypothetical scale firms would be completely passive accepting developments in procurement as they occur. However, at the other end of the scale firms would take a proactive role in shaping and developing future procurement methods with their clients and others." (Larsen et al. 2006). It is this involvement, perception and enacted that will, together with the other knowledge sources helps in shaping a better procurement method.
The interrelation between industry changes and procurement developments is the main consideration along with the influence of firms. The industry, the firms, the clients, the consultants, the supply chain, regulatory bodies etc. are well established and are developed in the developed economies, thus there are various procurement methods other than traditional methods used in such countries.
For example in the US many procurement methods are used, mainly public private partnerships in public sector procurement and design and build in the private sector procurement. Project delivery methods and more generally the procurement policies, are currently driven by government procurement policies. The historical evolution of government procurement policies of facilities indicates a wide variety of strategies including a dual-track procurement strategy that used a combination of different delivery methods and, in many instances, private financing. "The methods ranged from the combined procurement of the design, construction, operation and maintenance of a facility, such as Design-Build-Operate (DBO) and Design-Build-Finance-Operate (known outside the US as 'BOT'), to the separate procurement of these services, such as Design-Bid-Building (DBB) and Design-Build (DB). In the last 50 years, there has been a shift toward the exclusive reliance on separate procurement such as DBB and the use of private and public funding." (Pietroforte and Miller, 2010).
In US it is seen that the industry in relied on range of systems in procuring, operating and maintaining facilities, depending on the type of programme, technology, and economic and social situation. The current slowdown of the economy has created ubiquitous and complex administrative procedures. The delivery method is segmented. Economic factors and statutory changes have changed the trends of clients to use DB, DBO and BOT methods. In the present economic situation project delivery, financing methods, managing overall costs and meeting the needs is the top priority in the US construction industry.
In the UK current practices shows different approaches to the procurement of building projects. "A classification of these approaches is extremely complex because there are not clear and universally accepted definitions of what a particular procurement method is. This raises a major issue in that if there is no accepted definition of what comprises a particular procurement route, the possibility of establishing criteria to achieve specific objectives is problematic, if not remote." (Hibberd and Djebarni 2002). McCanlis (1967) pointed out the problems with the traditional descriptors of contractual arrangements but notwithstanding the acknowledged problems, ELSIE (1990) computer system and Masterman (1992) have defined the various procurement routes. If the characteristics of a procurement route can be identified and the impact of these characteristics upon performance can be measured, then and only then can the selection of a specific procurement path serve a purpose.
"The importance of procurement in a project cannot be underestimated. 87 percent believes good procurement to be synonymous with a successful project." (A report exploring procurement in the construction industry, CIOB, 2010). The report places even further emphasis on ensuring the procurement method chosen and advice given to clients is entirely relevant to the needs of the project. In this sense, partnering has an important part to play in ensuring good procurement is always associated with successful project, as each party learns from mistakes and issues arising in previous projects to achieve the highest standards.
In UK on projects below 5 million GBP traditional methods of procurement is used, for projects between 5 million GBP to 50 million GBP Design and Build is seen as most suitable and for projects over 50 million GBP partnering is seen as most suitable. On projects up to 5 million GBP traditional methods are still used because these are relative simple to understand and preferred by clients on low value projects.
On projects between 5 million GBP to 50 million GBP Design and Build is seen as most suitable followed by partnering because the industry is used to carry out moderate risk projects with Design and Build and all the advantages of Design and Build procurement method suits the current industry atmosphere. On projects more than 50 million GBP partnering is viewed more efficient and suitable, this is due to the fact that collaborative working practices and relationships associated with partnering are well regarded on high value high risk projects.
This is also because using traditional procurement methods for high value projects have been failed in the past. The most recent high profile example is of Wembley stadium. In case of Wembley stadium, the traditional route allowed little freedom to adapt to changes that arose in the design stage, leading to the project coming in heavily over-budget and outside its time frame.
E:\Construction Management\Dissertation\Scans procurment\2012_09_02\IMG_00021.jpg
Figure 2.4 - Procurement method used for projects between 5 million to 50 million GBP (Source: Procurement in the Construction Industry, CIOB, 2010).
E:\Construction Management\Dissertation\Scans procurment\2012_09_02\sc0000.bmp
Figure 2.5 - Procurement methods used for projects above 50 million GBP. (Source: Procurement in the Construction Industry, CIOB, 2010).
This chapter will give the brief idea about the research method which has been used to collect the data for the dissertation. Mainly secondary data is used. The data obtained was mainly from semi-structured interviews, personal conversations with the experts and academicians and secondary data such as observations and statistics. Aim and objectives of the dissertation will also be discussed and how the secondary data is collected to fulfill the objectives will be discussed.
3.2 Research Aim and Method of Data Collection
The aim of the research is to identify the barriers, difficulties and gaps that restrict the implementation of new procurement methods in India. Its objectives are 1) To investigate the issues, namely economic issues, technical 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 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.
Secondary data used mainly consist of semi-structured interviews and personal conversations with the experts and academicians, observations and statistics. The secondary data is obtained from both quantitative and qualitative strands such as census, socio economic statistics, industry statistics, semi-structured interviews and personal conversations.
Secondary data is used because collecting and analyzing quality data is not possible in the given span. Benefit of using secondary data is that much of the background work is done and data is accurately available. This also gives benefit of using personal contacts to get valuable information. The secondary data has wealth of background, which means that it has a pre-established degree of validity and reliability which need not be re-examined. It is rightly said that "secondary analysis, good documentation cannot be underestimated as it provides necessary background and much needed context both of which make re-use a more worthwhile and systematic endeavor" ( Bishop, L. 2007).
3.3 Evaluation of Data
The statistics are used to understand the socio- economic scenario in India. It helps to understand the various factors such as GDP, population, number of construction firms, size of construction firms, economic parameters, industry output etc. which helps to find out the peculiarity of the Indian construction industry. The semi- structured talks and observations helps to find out economic issues, cultural issues, technical issues, legal issues and management issues. The observations and statistics also help us to understand the various procurement methods used in the world today. The semi-structured talks with the experts give the valuable information regarding various issues and the types of procurement methods used in the developed economies.
After analyzing this obtained data we get the economic issues, cultural issues, legal issues and management issues which are present in the current Indian construction industry and this data in turn helps us to obtain the barriers which act as hindrances for implementation of new procurement methods in the Indian construction industry. The data helps us to relate to the traditional Indian procurement method with the procurement systems used in the developed economies and helps us to understand the challenges of the implementation of new procurement methods in India. All this assists us to fulfill the research objectives.
CHARACTERIZATION OF INDIA
With over 1.2 billion people, India accounts for nearly one-sixth of global population. While the rate of growth of population has consistently declined, India's population increased by nearly 180 million persons during 2001-11 (the highest in the world in absolute terms).
However, India is also passing through a phase when its dependency ratio will decline from an estimated 74.8 in 2001 to 55.6 in 2026 (Asiaconstruct, 2010) with a corresponding increase in the share of persons in working-age group. With labor being a key factor of production, a demographic dividend is a clear positive for growth. It has, however, been pointed out that much of the growth in population will occur in states that are currently poor. Therefore, for this dividend to accrue, it will be necessary to build human capital in adequate measure. This means more attention should be paid on workforce education, health and safety and human resource development. Traditionally in Indian construction industry these were the last priorities.
4.1.1 Social Indicators (UN Social Indicators, 2010)
Population growth rate (average annual %) (2010-2015)- 1.3
Urban population growth rate (average annual %) (2010-2015)- 2.4
Rural population growth rate (average annual %) (2010-2015)- 0.8
Urban population (%) 2010- 30.0
Population aged 0-14 years (%) 2010- 30.8
Population aged 60+ years (females and males, % of total) 2010- 8.2/7.0
Sex ratio (males per 100 females) 2010- 106.8
Life expectancy at birth (females and males, years) (2010-2015)- 66.9/63.7
Religions- According to the 2001 census, out of the total population of 1,028 million in the Country, Hindus constituted the majority with 80.5%, Muslims came second at 13.4%, followed by Christians, Sikhs, Buddhists, Jains, and others.
Languages- There are 22 different languages that have been recognized by the Constitution of India, of which Hindi is an Official Language. Article 343(3) empowered Parliament to provide by law for continued use of English for official purposes.
Literacy- According to the provisional results of the census, the literacy rate in the Country stands at 74.04 per cent, 82.14% for males and 65.46% for females (UN Social Indicators, 2010).
4.1.2 Human Capital
In a country with a large population as India human capital plays a vital role. Construction industry also benefits from this human capital. Improving the facilities for this human capital and enhancing the potential is the most important factor. India has the youngest workforce in the world. India has some 22 million graduates, 6 million science graduates, 1.2 million engineering graduates and 6,00,000 doctors (Asiaconstruct, 2010).
Employments for additional 71 million people have to be created in next five years. Working age population is likely to be 800 million by 2016 (Asiaconstruct, 2010). This will pose enormous challenge in providing appropriate education and employment opportunities. The main problem is to catch up with the pace. The pace of change possesses significant adjustment costs and risks to the economy, particularly within the given fiscal constraints.
4.2 Economic Characterization
India's economy traditionally was agriculture based, from the past two to three decades the economy shifted from agriculture to industries. Now it encompasses a wide range of modern industries, modern agriculture and a multitude of support services & industries. Production, trade, and investment reforms have provided new opportunities. India has an estimated 400 million middle class consumers (Indiabudget, 2011).
India is the second fastest growing economy of the world at present. India has recorded one of the highest growth rates from 1990 to 2012. India's services sector growth of 10% over the last decade. India is a young country with median age of population being 24.6 years & one-third of the population is below 14 years of age (Indiabudget, 2011).
Long run GDP growth from mid 1990s has now stepped up to 6.8%, reaching at the peak of 8.4%, from an average of 5% two decade ago and less than 3% three decades ago (Indiabudget, 2011). In spite of global economic slowdown the average annual growth rate for the next few years is expected to be 7% to 7.5% (Indiabudget, 2011). The opportunities unfolding in India is as a result of reforms enacted from early 1990s as well as a result of India's increasing competitiveness & confidence. India has the third largest investor base in the world.
A unique feature of the transition of the Indian economy has been high growth with stability. India is the 3rd largest economy in terms of purchasing power parity. It has seen steady economic growth over 50 years. Increasingly transparent & open policies to access, investment, location, choice of technology, import and export has created positive atmosphere in the economy. After liberalization government is rapidly moving out of ownership / Management of commercial enterprises by a process of disinvestment of existing Government-owned businesses.
There is a positive outlook to international investments & trade policies. Fiscal incentives & Central Government & States support in physical & social infrastructure development. The main advantages of Indian economy are very large pool of educated and trained & skilled manpower. Rapidly developing R&D, infrastructure, technical and marketing services, agricultural self-sufficiency, rich mineral base and abundance of other natural resources, large, diversified and geographically well distributed manufacturing capability, diversified infrastructure facilities available and which are under development.
The other advantages are, sound banking system with a network of 70,000 branches, among the largest in the world supported by national and state level financial institutions, leading International Banks entrenched and expanding, vibrant capital market comprising 23 stock exchanges with over 9000 listed companies, large Coastline with easy access to South Asian markets (Asiaconstruct, 2010).
4.3 Construction Industry
As described above, the construction industry in India is large and scattered, it involves large number of people and the firms involved in construction industry are mainly SMEs. The other important factors which should be considered are geographic extent of India, number of states, number of languages spoken, parliamentary democracy, large stringent bureaucracy, multi window clearance and planning system for obtaining permissions, no formal training for unskilled workers, supply chain based on relationships and personal contacts, sudden acceleration in the growth, financing sources for projects, taxation, inflation, banking for construction projects, managing cash flow, timely payments etc. Combining all factors create a complex and peculiar nature of the Indian construction Industry.
4.3.1 Types of Projects
Presently in India numerous projects are carried out in the residential sector, industrial sector and infrastructure sector. We will discuss the demand in these sectors and emphasize on the uniqueness of these projects in India and general procurement route adopted. Every project goes through planning stage, execution stage and completion stage. India has several different challenges in all these stages. They arise because of the location of project, type of project, permissions needed for the project, legal issues, selected route of procurement, labour issues and people related issues. Mostly projects are started because of the local needs. Considering the above factors along with their disadvantages combined together affect, in fact completely change, the method of selecting the right procurement method.
220.127.116.11 Residential projects
There is ever increasing demand of new residential projects. India currently has a housing shortage of 20-30 million units which calls for large scale residential construction (Richard Ellis and JLL, 2010). Residential construction activity in India is estimated to be at 364.4 million sq. mt. (Richard Ellis and JLL, 2010). India has more than 192 million households (2007) of which urban dwellings comprise 28%. It is estimated that by 2030, India will need up to 10 million new households every year. From the residential construction activity happening in India, 40% of the total urban households are economical projects, another 45% are midsized projects and the remaining 15% are high end (Richard Ellis and JLL, 2010). Some projects are high rise residential apartments which are found mostly in the cities like Mumbai and other major metros and are being built. The construction of individual buildings is concentrated in Tier II, Tier III and other smaller cities. High rise buildings are more in vogue in Tier I cities. In rural areas also there is 10 percent increase in residential construction activities. This type of activity was never seen in India for many decades.
The main reasons for demand are large local needs, sudden growth, large population, increase in per capita income, migration of people, increase in the disposable income, large return on investments etc.
These residential projects are small and medium in size and scattered, most of the cities are unplanned. Construction professionals like fitter, welder, brick layer etc. are not formally trained. Several small traders sell all construction materials and machinery. These new buildings are constructed in a very congested locality where supporting infrastructure in minimum.
The general traditional procurement route adopted is as follows, the client appoints the architect, the architect prepares the drawings and consultants are appointed by the client sometimes for a small project only one consultant is appointed, tender documents are prepared and contractor is selected by architect with the consent of the client. The contractor carries out the work himself and appoints sub-contractors only for selected work.
18.104.22.168 Commercial Projects
The UNDP estimates the degree of urbanization to grow at over 40% by 2030 which implies that the urban population will grow over 2.5% per annum in the next 25 years. India is the prime destination for skilled workers and given the demand estimates, India in the next 5 years needs an extra office space of 55 million sq. mt. (Richard Ellis and JLL, 2010) (One of the main factors for such a demand is the services outsourcing component which is revving up the demand. With highly skilled work force and English speaking work force there is a rise in the IT and software development industry also. This industry is growing at 25-30 percent and has recorded revenues of 35 billion GBP (Richard Ellis and JLL, 2010). Nowadays due to growing cost of living, office expenses, rentals and infrastructure inconveniences there is a new trend of these companies to move to Tier II and Tier III cities, the commercial construction market therefore is growing tremendously in these cities. Local businesses are also growing rapidly generally they prefer small offices spaces near their markets and locality.
The retail sector market in India is more than 110 billion GBP (Richard Ellis and JLL, 2010). The majority of the market is unorganized except in the few cities. The retail sector is growing at 25 percent. It is estimated that more than 700 malls will be required, out of which more than 40 percent will be in small cities. In Tier II and Tier III cities only more than 200 million sq. ft. of retail space will be required and because of this they are going to experience lot of retail construction activity (Richard Ellis and JLL, 2010).
The reasons for such large demands and uniqueness of such c
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