Time and Cost Overrun in Construction Projects in India. Does an investment in technology be worthy?

My recent research on the Construction projects in India reveals that the major issue is time and cost overrun. Depending upon the budget and nature (residential, commercial, infrastructure, etc.) of the project the % of overrun varies. I always had this question of why construction company is least to adapt technologies?  Recently One of my colleagues shared a report from Mckinsey


Source: http://www.mckinsey.com/industries/infrastructure/our-insights/imagining-constructions-digital-future

The above data clearly shows that Construction industry is among the least digitized. We know the amount of money that get transacted in every construction project. In spite of huge budget for the majority of the projects, this industry is very reluctant to invest money in technology.

For a moment let's keep this thought aside and look into some real data


A recent article published by times of India revealed a shocking report on pending infrastructure projects for the year 2016. It says that more than 61% of Infrastructure projects are affected by cost and time overrun
Please find the snapshot of the article

Table 1: Time and Cost Overrun % of Infrastructure Projects

Source:   http://economictimes.indiatimes.com/news/economy/infrastructure/241-infra-projects-report-cost-overrun-of-rs-1-5-lakh-crore/articleshow/53211133.cms

The above data clearly shows that more than 61% of the projects are affected by Cost and Time overruns.

Table 2: Cost Overrun % of Infrastructure Projects

Overall cost overrun of 12.5% of Original Cost.
The reasons for time overruns as reported by the ministry is

1. Delays in land acquisition
2. Forest clearance
3. Supply of equipment

Let's look into some common causes of both time and cost overruns in the construction industry.
A research paper “Analysis of Cost and Schedule Overrun in Construction Projects" reveals the top reasons for time and cost overruns in the construction industry. Please find the reasons in descending order

1. Raising of fund
2. Revision in drawing
3. Material Escalation
4. Unskilled labor
5. Slow decision-making

Source: http://ijiset.com/vol3/v3s1/IJISET_V3_I1_51.pdf

When we look into the above reasons for cost and time overruns, 4/5 issues are due to poor project management (Slow Decision Making, Revision in Drawing, Unskilled Labor, Material Escalation)

What does it say?

It shows that, if we improve our project management process, we can drastically bring down the cost overrun %

Even an efficiency of 1% makes a big difference right? (Given the humongous budget of construction projects)

Let me analyze some data,

The above infrastructure projects average around INR 1151 crore per project and cost overrun averages around INR 144 Crore per project. Did we realize the outcome of these overruns? Any time and cost overrun will always reduce the profit margin of Construction contractors. Given this constraint, the execution will get worse and further affect the quality of construction.

Now coming back to our earlier thoughts on investment in technologies by construction companies.  Why can’t the construction companies or the contractors invest in project management technologies or any other technologies to fill this gap?

Let's look into how much they have to invest and how much benefit they will get out of it?

To Generalize our analysis, let me consider only projects on the level of INR 10 Crore – INR 100 Crore budgets

I have considered a profit margin % values of 5%, 10%, 15% and cost overrun % values of 1% 3% 5% 10%

Table 3: Profit margin and Cost Overrun %

Source: Assumption and calculated by self for explanatory purpose

For a 100-crore project, profit margin ranges from 5 Crore to 15 Crore. If the same project affected by a cost overrun of 1 Crore to 10 Crore, it drastically reduces the profit margin

What if an investment in improving the project management process through some methodologies or software would have resulted?

Even an improvement of 1% efficiency would have saved one crore, which is not a small amount. Any project management software costs around INR 10 lakhs – INR 20 Lakhs/ year. Such an investment can bring more efficiency and drastically reduces the cost overrun %. The efficiency can range from 1% - 30% or even more, based on the usage. It is not for a single project; you can scale it up for all the projects. Think about the ROI of the software, you can’t even imagine based on the efficiency it brings to the project and amount of money you save. (Same case applicable to 10 Crore projects as well)

Extra investment is not extra cost. Right investment on right things will give good ROI and improves the productivity, increases efficiency, increases your profit margin and definitely on quality.

Your views and insights are welcome to understand the current construction industry situations in better way

Note: The infrastructure projects data and the research data quoted above are just for analysis purposes. Though the sample data is small, I have used it for the purpose of understanding the current situation in the construction industry.

Note: Blog originally posted in my another blog https://neewly.wordpress.com/2017/04/02/time-and-cost-overrun-in-construction-projects-in-india-does-an-investment-in-technology-be-worthy/