Are major Infrastructure Projects in India being delayed & impacted due to flawed Methodology of administration & execution?


How many times have we come across some News article related to major Infrastructure Projects in India getting delayed beyond comprehension? Probably more than in any other developed or speedily developing Nation. Moreover, in most of these instances, the News article would further mention the additional financial burden to the exchequer due to Price escalations, claims & reduced ROI because of these avoidable delays.

While there is certainly more than one reason for these delays, one of the most avoidable one is the way the Construction Contracts are administered in India. The Contractors for executing the major Infrastructure Projects are usually selected through a Single Stage Two Envelopes or Two Stage Bidding Process and the Work is awarded to whosoever wins the Bid according to the applicable rules & procedures. However, since the Technical Prequalification norms are so complicated & confusing, usually only very huge Companies with dedicated legal & financial departments as well as financial muscle successfully go through the Technical Qualification phase. Consequently, the race during the Financial Bids is open to only a limited number of Companies which reduces the Competition and enables the Companies to transact in a monopolistic environment. Because of this, the final prices at which the Contracts are awarded are quite high in comparison to the prevailing Market Prices for the same items of Works. Here the plea given by the Companies is that since the Work is complicated, the timelines are tight, the quality norms are stringent and money in the form of Security Deposits (For Defect Liability) & Performance Guarantee is at stake, they do not have an option but to quote high Prices.

However, what happens after the award of the Contract is usually quite shocking and ridiculous at the same time. Let us look at an example over here to understand how it works. Suppose, Company A wins the Bid and enters into a Contract with the Government to execute the Works. Now this Company will start looking for Sub- Contractors to take care of the execution either on a complete Back- to- back basis or in different Packages split- up according to the Sub Contractors’ appetite & financial/ technical capability. Usually the Prices at which these Sub Contracts are signed are 25- 40 Percent & sometimes even 50% lower than the Prices mentioned in the original Contract. Once the Sub Contracts have been awarded, these Sub Contractors further start looking for down the line Sub Contractors on a ‘With Material’ or ‘Labour Only’ basis. Usually, the final Sub Contractors at the end of the chain get Prices which have further been lowered by 10- 15 %. Consequently, the landed Prices for the Sub Contractors at the bottom of the rung are somewhere between 50- 65 % of the original Prices. So, how do these statistics impact the overall performance of the Contract and the end result? Let’s have a look into this:

  1. The Management of works in terms of quality, schedule and scope gets seriously impacted as longer the chain of commands, the more difficult it becomes for the communication to percolate down to the execution level in a smooth manner
  2. As more and more stakeholders try to squeeze out their share of profits, the quality takes a back seat & is prone to get severely compromised
  3. Payments to the last Sub Contractor in the chain get delayed because of the time taken in downwards percolation and as they are the ones who are executing the work on the ground, the whole cycle of work gets impacted
  4. There are a lot of ‘passing the buck’ episodes & a rise in the number of disputes & litigations having a negative effect on the health of the Project
  5. Usually when the Companies higher up in the chain try tough negotiation techniques while selecting the Sub Contractors, reputed Vendors prefer to stay away and only those who are either desperate or with dubious reputation enter into the fray and enter into a Sub Contract. This leads to an assemblage of Vendors who are not very professional, competent & matching the original Prequalification requirements desired by the Client
  6. Change of Sub Contractors becomes a recurring phenomenon & every such replacement during the currency of the Contract leads to a loss of time and creates legal complications

Therefore, it is quite evident that the very manner in which this process of award of works is handled needs a serious review and subsequent amendments. There is no doubt that reputed Companies with a proven track record should only be entrusted to execute the Infrastructure Works of National importance but what is the use of paying them 25- 40 % more when the Work is finally going to be handled by Sub Contractors at highly impractical & abysmally low Prices.  While there is no doubt that Sub Contracting has been an integral part of the Construction Industry since ages, the point is that the Sub Contractors should not be exploited and there should be some checks & regulations to ensure that they get fair Prices for their share of the Work.

That way, we will attract better performers and reputed Sub Contractors who will be able to contribute more professionally and with proper Technical competence. The Projects will get completed in time, with better quality and it will be a win- win situation for the Government, Public, the Main Contractors & the Sub Contractors.

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