Essay: The Indian Construction Industry

Overview
The construction scene in India must be studied before further investigating the influence of Indian construction companies abroad. The study of the characteristics of the Indian construction industry can help explain and provide pointers as to why Indian construction companies have a minimal presence in the global construction market. Hence, the following chapter discusses the nature of the construction industry in India; including the existing practices as well as a number of other relevant characteristics.
2.2 Change in construction sector over the years
The construction sector in India has been changing rapidly over time. India is also one of the fastest growing economies in the world, which has led to a tremendous increase in demand in the consumer market. This has placed an incredible amount of strain on the country’s infrastructure; which in turn also increases the demand for infrastructure. Spending on infrastructure also has a huge effect on the growth of an economy. This is because, infrastructure projects raise employment levels, while transportation systems such as roads and metros allow more people access to a number of jobs. Hence, it can be argued that due to the increase in infrastructure demand and the number of infrastructure projects that are being awarded, there is huge scope for growth domestically for companies in the Indian construction sector.
The increase in focus toward improving and building new infrastructure in India has also brought about some problems. Bharath and Pai (2013) argued that these changes have caused newer infrastructure projects to become increasingly large and complex. The increase in size, number and quality of such projects have brought about some issues such as delays and increased competition. Ramaswamy and Kalidindi (2009) suggested that the Indian construction industry is basically symbolized by its problems such as delays, overshooting cost constraints and a lack of skilled labour. Such problems need to be addressed before these companies can improve their reach globally. Therefore, due to such changes over the past few years, it is important to study the current climate of the construction sector in India.
2.3 Construction sector and the Indian economy
For the purpose of this study, it is important to note the impact that the construction sector has on the national economy. It has already been mentioned that India is one of the fastest growing economies in the world. The Gross Domestic Product growth rate had increased to 6.5% by the year 2006 and is expected to increase to at least 7% in the years following (Swarup, 2007). Swarup (2007) also found that the middleclass consumer market of the Indian construction industry has grown to over 350 million. This growth in the economy as well as the consumer market raises the requirements for new infrastructure, which in turn could potentially aid the growth of the construction industry in India.
The construction industry is only behind the agriculture industry, in terms of the largest industries in India. It has been proven by statistics that, in comparison with other sectors in India, the construction sector, in terms of economic activity, produces 4.7 times rise in income and 7.76 times rise in employment generation potentiality (Laskar and Murty, 2004). This clearly reinforces the thought that the construction industry has a crucial role in the economic growth of this country. Mallick and Mahalik (2008), on the other hand, claimed that the construction sector has significant connections to different sectors of the economy and that it indirectly affects the output of the economy. Hence, the expansion of the Indian construction industry could also aid the growth of other sectors of the Indian economy, thereby boosting the national economy as a whole.
2.4 Project Management in India
Indian companies have been found to be largely inefficient in terms of executing projects and completing them within the allotted time and cost. Based on data obtained from the government roughly each project suffers from an average of 20 to 25% cost and time overruns (Gupta et al. 2009). Such problems are generally management related. Auti and Skitmore (2014) explored the relevance and importance of implementing construction project management techniques in India in order to enable the construction industry to grow. They found that project management techniques were far more evident in construction in the private sector than the public sector. The implementation of effective project management techniques are very important in completing projects within time and cost constraints. Indian construction companies need to shift increase their focus on using these techniques, in order to improve their cost and cost management, especially on public sector projects. Sreepuram and Rao (2006) suggested that although project management has become increasingly widespread globally it is scarcely found in the Indian construction industry. A lack of sufficient project management practices also leads to inadequate planning, which in turn can create a variation in the scope of the project, resulting in a number of problems such as internal disputes and delays. Some projects are even planned beyond their scope. This directly affects the execution and delivery of projects. In order for Indian companies to expand their reach into the global construction market they must implement such project management techniques.
2.5 Risks involved in construction in India
Indian construction companies face a number of risks when working overseas. It is very important to identify the various risk factors and describe their relative importance in order to derive which ones should be tackled first. Subramanyan et.al. (2012) identified in their study that risks most widely faced in Indian construction are schedule related, brought about by poor planning in the preconstruction, planning and even the post construction phase. This again highlights the need for better management practices in the Indian construction sector. A primary risk assessment must be carried out before developing a strategy to carry out construction work. (Howes and Tah 2003). This would provide a general overview of the various risks that may be faced during the projects, as well as its’ probability of occurrence and its’ potential impact. The risk factors can vary from political to budgetary and business risk factors. Risk management techniques can be used in order to weigh the possible harmful effects brought about by a certain activity or course of action, to the benefits that it brings. Jha and Devaya (2008) used the interpretive structural modelling (ISM) method to structure risks faced by international construction companies looking to work in India. They identified and political instability, poor government responsiveness and weak legal system are among the most influential risk factors; and also found that poor project management was the key internal risk factor. The first three aspects are government related. Corruption is also a major government related problem that is present all over India. This can directly affect a number of processes including project sanctioning and the awarding of projects.
2.6 Labour
The construction industry in India employs over 31 million workers with roughly 10% of these workers being skilled (Nihas et al. 2013). The lack of skilled labour leads to the inefficient execution of construction projects. An increase in skilled labourers has also not been able to match the growth of the Indian construction industry and its’ infrastructure requirements. Additionally, current construction practices being applied in India are highly labour intensive (Auti and Skitmore, 2014). The required labour workforce for these practices may not be present when undertaking projects in foreign countries. Therefore a change in these construction practices may be required in order for Indian construction companies to compete globally. The lack of skilled labour, paired with the labour intensive nature of the Indian construction industry, makes the execution of construction projects largely inefficient; which in turn creates issues such as delays and budget overruns. Therefore, the characteristics of labour in the Indian construction industry could be one of the primary factors that hinder the performance of Indian construction industry.
The labour intensive nature of the construction industry also greatly hinders the implementation of modern project management techniques. This is because the implementation process would involve the training of a large number of employees within the company. Soham and Rajiv (2013) argued that the productivity of the labour workforce is one of the significant factors in determining the success of Indian construction companies; and that the labour productivity in India has dropped. The labour productivity is a significant factor because of the labour intensive nature of the industry. On the other hand, the drop in labour productivity can be traced down to the drop in the available skilled labour.
Wu et. al. (2014) suggested that there has been a rapid increase in labour costs in the global market which has affected the degree of business success of a number of construction companies. However, labour is cheap in India in comparison to countries in Europe. This, along with the aforementioned increase in the consumer market, have attracted foreign companies toward the Indian construction market. At the same time, the cost of labour outside India may be one of the main reasons why some Indian companies have chosen not to venture abroad.
2.7 Public Private Partnerships
As mentioned earlier, the demand for infrastructure has significantly increased over the years in India due to its’ rapid economic growth. The problem that exists now is that this increase in demand for infrastructure needs to be met. Lakshmanan (2008) argued that, in order to develop and improve the quality of Indian infrastructure, massive amounts of money needs to be pumped in, which the government may struggle to provide. Hence, Public Private Partnerships may need to be used in order to address the rise in demand. Sahasranaman and Kapoor (2014) found that India has been increasingly using PPPs in order to carry out urban infrastructure projects. However, Public Private Partnerships still contain a very small share of the overall infrastructure construction in India (Lakshmanan, 2008). Therefore, there is still significant room for growth in this area in India. Singla (2015) suggested that, using Public Private Partnerships for carrying out infrastructure projects can be one of the triggers for economic growth, thereby increasing the international influence of the country. Using Public Private Partnerships on infrastructure projects enables the government to share the costs of the project. At the same time, all the benefits that come about with developing infrastructure, such as employment opportunities, can be reaped. Therefore, PPPs, while still relatively uncommon in the Indian construction industry, can help enhance the development of infrastructure and in turn aid the country’s economic growth.
2.8 PROCUREMENT
The Indian construction industry has been found to be price based, as price is looked at as the single most important factor when searching for a vendor (Singh and Tiong, 2006). The approval process prior to the tendering phase has also been found to be long and tedious. This process can take up to as much as a year especially in the case of large infrastructure projects. Procurement practices play a big part in the development of the construction industry, when most of the construction work is procured by the government. Virmani (2004) stated that procurement practices in India have not changed since independence. Therefore, many companies try to improve on their existing procurement practices. However, this may be insufficient. The larger multinational companies make use of various techniques such as demand consolidation, new vendor development, preferred relationships through frame contracts, and joint cost reduction (Gupta et al. 2009). These tend to be more efficient than the existing procurement practices; and their usage in India is fairly limited. Therefore it can be concluded that a change in procurement strategies and practices may be required in order to speed up the process and to make it more efficient.
2.9 Innovation and Technology Adoption
The global construction industry is constantly progressing and coming up with new business strategies, innovations and technologies. Motawa et.al. (1998) argued that constant innovation provides a significant advantage over competitors in the construction industry. Therefore it can be argued that Indian construction companies need to continuously update their construction practices in order to compete globally. Auti and Skitmore (2014) suggested that there is very little use of up to date technologies in order to aid construction in India. The implementation of these technologies allows the construction process to continue at a much faster pace, thereby shortening the time required to complete different phases of the construction project. Adoption of these technologies would also allow construction companies in India to perform at a much higher efficiency. The lack of focus on innovation and use of updated technologies by local construction companies give foreign companies the competitive edge that they need when entering the Indian construction market. Similarly, Indian construction companies need to constantly innovate and develop their practices, both from managerial and construction perspectives, in order to compete overseas.
When carrying out a construction project it is vital that all project members communicate effectively. The adoption of ICT (Information Communication Technology) methods helps improve the clarity of communication (Ahuja et al. 2008). A crucial example of this is the implementation of BIM. BIM (Building Information Modelling) adoption has become widespread across the global construction industry, especially in the developed countries. It brings forth a number of crucial benefits such as the ease of information sharing, saving time and costs (in the long run as it requires considerable initial investment) and providing greater transparency to the entire construction process right from the planning phase. These are advantageous in a country like India where the construction industry suffers from a number issues, the most important of which are the conflicts between the various participants involved within a construction project. BIM encourages collaboration among architects, engineers, contractors and every other participant within the construction industry. BIM adoption in India has generally remained low (Sawhney 2014). BIM adoption is still in its early stages of implementation in India but is slowly gaining popularity. While some private sector companies have begun implementing BIM in certain projects, the idea of BIM adoption is still met with doubt and cynicism in vast regions of the country. Most BIM users in India stated that the greatest benefits of using BIM were increased collaboration and coordination, improved visualisation and a quicker construction cycle (Sawhney 2014). Therefore BIM could be viewed as one of the solutions for the planning and performance issues faced in the Indian construction industry, that were highlighted earlier in this chapter.
2.10 Summary
This literature review has revealed a number of characteristics of the Indian construction industry. It found that there has been a significant increase in infrastructure requirements and due to the growth of the national economy. The literature also revealed a lack of implementation of project management techniques especially in infrastructure projects which results in considerable financial losses. This would help companies reduce cost and maximize the value obtained from the product or project. The workforce in India has been found to be highly labour intensive compared to developed countries. The construction industry in India is found to be price based and the procurement strategies were found to be outdated. The literature also revealed that the use of PPPs for infrastructure projects have been limited in India. The use of modern construction technology is also found to be largely limited. The adoption of Information Communication Technology, Building Information Modelling in particular, to aid the planning and execution of projects has been found to be in the early stages.
Chapter 3: Performance of Construction companies and the factors that affect it
3.1 Overview
The following chapter looks at the importance of performance measurement in construction. It also reviews the factors that affect the performance of both Indian construction companies and construction companies in the global construction market.
3.2 Performance Measurement
In order for construction companies to thrive, especially on a global scale it must succeed. Arslan and Kivrak (2008) suggested that the need to succeed in construction arises from the intensely competitive nature of the industry. This is especially the case in a country like India which has a large number of contractors. The success of a company can be measured in terms of its overall performance as well is in terms of the construction projects it carries out. However, in order for a company to function successfully it must first ensure the success of the construction projects it undertakes. The idea of classifying a project as a success or a failure is established in order to set standards against which project outcomes are judged (Chan and Chan, 2004). A construction project can be deemed as a success or failure by analysing its’ time and cost performance with respect to the quality of the end product. The factors affecting Indian construction companies have to be identified and described, in order to appreciate what causes a construction project or company to fail or succeed in terms of cost, completion time and quality of the deliverable or project.
Performance measurement has been in use for as long as 60 years. It helps companies form a reasonable projection of their future. Ali and Rahmat (2010) defined performance measurement as a process of evaluating performance relative to a defined goal. Performance measurement is vital when running large construction companies as it provides an assessment of how well the companies are doing, when they apply different strategies. Therefore, in order to enhance the performance of the company appropriate strategies have to be employed at the right time (Latiffi 2012). The dimension which is to be measured must first be identified. Once it has been measured, the factors that affect this dimension (time, cost, quality) both positively and negatively should then be found. A strategy that best utilizes the positive factors can be fabricated to ensure the desired goal for that dimension is reached. Takim and Akintoye (2002) suggested that the main performance indicators included construction time, time predictability, construction cost, cost predictability, client satisfaction with the product and client satisfaction with the service (quality based). This clearly covers all three key dimensions in terms of cost, time and quality. Measuring the performance on the basis of these indicators can help in creating a structure of strategies that companies can use in order to improve performance. Hence, it can be concluded that performance measurement is an important tool that helps companies analyse their current standing (especially financially) and helps point out the reasons for it.
3.3 Factors that affect the performance of Indian construction companies
As the Indian construction industry is heavily price based the analysis of the factors that affect cost performance is very important. Iyer and Jha (2004) used questionnaires in order to identify the various success and failure factors that affected cost performance of completed construction projects in India. They first grouped success factors into categories such as project manager’s competence, top management’s support and coordination of project participants, and failure factors such as conflict among project participants, ignorance and lack of knowledge and presence of poor project specific attributes, and non-existence of cooperation. Based on the results they obtained it was found that the coordination, or lack of coordination between project participants, was the single most imperative aspect or attribute that influenced cost performance of the construction project. The lack of coordination between the projects’ members’ more or less ensures that the available resources over the course of a construction project would not be used efficiently, which would lead to unnecessary expenses. On the other hand proper coordination between project members would create a range of opportunities for cost savings. Baloi and Price (2001) found that cost overruns in the global construction industry were actually quite common leading to substantial financial losses for all parties involved within the project. Therefore this problem should be addressed with appropriately, especially when considering Indian companies on a global scale.
Schedule overruns or delays are a constant problem faced by Indian construction companies. Above 40% of Indian construction projects are looking at delays ranging from 1 to 252 months (Iyer and Jha 2005). Such delays need to be addressed if Indian companies are to be able to compete with foreign contractors in the global construction market. Doloi et al. (2011) investigated the different factors that contribute to projects being delayed in the Indian construction industry. The most important factor causing schedule delays was found to be a lack of commitment. The lack of commitment of employees leads to the inefficient execution and completion of work. It can also give rise to problems such as an increase in site accidents. Another key factor was found to be inefficient site management, which again builds on the need for implementation of effective project management practices. This leads to inefficient use of resources and the labour workforce which directly creates time delays in the construction process. The inefficient use of resources and workforce could also lead to significant financial losses. Labourers may have to be paid over a longer time span due to the delays caused and the resources wasted. Resource shortages can also have a significant impact on the duration of the construction process. This creates an additional time delay for the purpose of gathering the required resources. Iyer and jha (2005) conducted a survey for finding the important factors that created schedule overruns in Indian construction companies and the major factors were found to be commitment of the project participants, owner’s competence and conflict among project participants. It can also be noted that improving in these areas can enable a company or a project to run at a higher efficiency. Commitment of the project participants was identified as the key factor in both of the aforementioned research papers with respect to schedule performance. A lack of commitment of project partners could cause delays especially in the planning phase due to the uncertainty involved. These studies have given a vivid description of the factors that cause schedule delays. However there is no mention of a procedure that would enable a company to reduce or increase the impact of these factors on schedule performance.
Construction on a global scale has become more competitive based on the quality of the work provided. Quality is an important dimension when analysing the execution and delivery of construction projects. The quality of the project is one of the key attributes a client looks for when searching for a construction company. Delivering good quality projects also help construction companies retain their clients, thereby benefitting them in the long run. A construction company who delivers high quality end products generally has a better reputation than those that do not. Quality is generally looked at as meeting a clients’ requirement. In a large number of construction companies in India the focus is to satisfy a clients’ time and cost requirements. This often results in the deterioration of overall project quality. Patil et.al (2012) argued that one the main drivers for change in the Indian construction industry over the past few years has been the quality policy of the Indian government. This would suggest that there has been an increase in recognition nationwide, of the importance of quality in determining whether a project that was carried could be deemed a success. Iyer and Jha (2006) analysed the factors affecting quality performance in Indian construction companies in another research study. The factors which lead to success were found to include the project manager’s competence, top management support and their competence, and the interaction between project participants. It has been mentioned previously that the lack of coordination and conflict between project participants is one of the major factors causing time and cost overruns. This is also evident in the case of quality. Therefore, quality performance in some ways is directly affected by cost and time performance. A hostile socio-economic and climatic condition, and ignorance and lack of knowledge were also included in the failure factors. Bad climatic conditions could obviously have a detrimental effect on the final quality of the delivered construction project. A lack of knowledge regarding the various aspects of construction that affect project quality can prove problematic in the long run as it could deteriorate the quality of the executed construction work. This gives rise to the need for educating project participants on the importance of quality in the success of a project. Overall, it can be argued that management (top management) plays a crucial role in determining the level of quality of the delivered project. It has to be noted though that the main focus of this study was on the managerial factors that affect the performance of the construction company.
A number of other factors must also be studied in order to completely appreciate the overall impact specific factors have on the performance of construction companies. Gadekar and Pimplikar (2014) suggested that success and failure factors affecting Indian construction companies can be split into broader categories such as budgetary factors, managerial factors, macro-economic factors and other factors which included high employee turnover, inadequate sales etc. Macro-economic factors include economic conditions, bank policy, government policy and industry weakness, all of which may have a profound impact on the performance of construction companies. As explained earlier on, India is one of the fastest growing economies in the world. Therefore economic conditions are constantly changing which has an effect on all industries in India. The results of this survey showed that for ‘large size firms’, cash flow management, poor accounting system and insufficient capital were among the major factors that affected company performance. The primary factors as mentioned above are budgetary factors which links to the notion that the construction industry in India is largely price based. The results also suggest that factors such as government policy, estimating practices and inadequate sales, while not as important, still had a significant impact on the performance of the companies that were surveyed. Construction companies may have inadequate sales due to the poor quality of executed work or a lack of demand. This contradicts the finding in the previous chapter that there has been an increase in the Indian consumer market leading to a rise in demand. However, the aforementioned survey was carried out for a small geographical area. Therefore a larger and more comprehensive study could have yielded significantly different results.
3.4 Factors affecting the performance of international construction companies
In addition to the factors affecting Indian construction companies the factors affecting international construction should also be looked at. Gunhan and Arditi (2005) suggested that a company, wishing to go onto the international construction market, must find its’ company strengths in relation to the international activities. The data for this research was obtained from major American contractors working overseas. Among the various strengths that were mentioned were track record, specialist expertise, project management capability and technological advantage. The track record has been mentioned as the most significant factor. This clearly shows that the experience of a company matters a great deal when it comes to international construction. Zhi (1995) suggested that one of the primary sources of risk in international construction is the lack of overseas experience. This increased exposure to risk could also affect client perception regarding the potential performance of the construction company. A company that has experience in a particular field or service is also more likely to find an efficient solution to problems faced during construction. This may hinder Indian construction companies initially as a number of the larger contractors lack any significant experience in executing projects overseas. As mentioned earlier, effective and efficient project management is always an important factor. In international construction local construction firms may always provide cheaper construction options than foreign ones. However foreign countries can make up for this by introducing new technologies into the construction process. This is especially true in the case of developed countries. As mentioned earlier, Indian construction companies do not possess the technologies that would give them the upper hand over local contractors in developed countries.
Isik et al. (2010) argued that the resources and capabilities of a construction company have an enormous impact on its’ performance. Resources can vary from financial to technical, while intangible assets such as the innovation capability and the image of the company play a crucial role as well. A construction company that has huge financial resources has a number of advantages over smaller competing firms. It allows them to partake in high risk high reward projects without any significant pressure, which companies without the same financial capabilities cannot deal with. A company that has large financial resources also have a better reputation among clients as there is a sense that they will not fold under strenuous situations. Graafland (2004) suggested that having a good reputation is an important tangible asset. It is becoming increasingly important that companies should maintain a positive image to the targeted clients, as the construction industry is becoming increasingly competitive. It is important the clients are convinced that the contractor will satisfy their requirements in the most effective and efficient manner. Having a healthier image than your competitors always provides a competitive edge. The construction industry has also always been stagnant when it comes to the development and changing of methods of execution of work. However due to the globalization of the construction industry and a significant increase in competition the need for efficient and cheaper methods of construction has become very important in order to gain a competitive edge. Therefore it can be considered that the ability of a company to innovate and constantly come up with new technologies and methods to execute work, greatly aids its’ global growth in the construction sector.
3.5 Summary
From the literature review conducted, it has been observed that performance measurement is a useful tool that can be used as a base for improvement for construction companies. It has been found that the most significant factor affecting the cost, schedule and quality performance of Indian construction companies is the coordination of project participants. It has also been found that, in international construction, the major factors that affect the performance of construction companies are the experience in overseas construction and the financial resources available to the company.