Monday, December 3, 2012

Why do Project Contracts in India get Delayed Abnormally ? Any Solutions ?

Yesterday a friend of mine called me up and asked my opinions about the abnormal delays that do take place in most project contracts in India.

He is a GM (Projects) in a large PSU who is responsible for getting the projects, awarded by his company to various project vendors, completed successfully in the stipulated time as per the contract.

His responsibility starts after the company places the order and signs the project contract. He has to ensure that the project purchaser's obligations as per the contract are met and the contractors (usually another company, either in the private or public sector specializing in Engineering, Procurement and Construction  or  EPC ) are able to carry out the works as stipulated in the mutually agreed contract execution schedules.

But his experience shows that invariably the contract is not completed as per the agreed terms. Time delays of months or even years take place.

There are provisions in the contract which empower the purchaser to levy penalties as liquidated damages ( usually a percentage of the contract price which normally do not exceed 10 percent) if the project is delayed due to reasons attributable to the contractor.

Yet, abnormal delays are becoming a normal thing.

Is it some thing specific to his company or a usual phenomena on a pan India basis ? If so, what are the reasons ? My friend wants to know from me. Of course, he has found out his own reasons and opinions !

First things first. This is not a pan India phenomena. A good number of projects do get commissioned in time successfully as per the contract terms and conditions. However, in a majority of cases in this category, both the purchaser and the supplier are private sector entities.

In the PSU's too some projects get successfully implemented.

But time overrun is becoming a common thing in the recent years.

From the study of such cases, I feel that one of the major cause for such abnormal delays is due to the error committed during the formulation of the project and the contract.

Often, the project feasibility reports and the tender specifications are prepared by engineering consultants on behalf of the purchaser.

The consultants are supposed to evaluate and establish the technical and commercial feasibility of the project and provide recommendations to the purchaser for the investments to be incurred with proper justifications.

Often this kind of a study for a project proposal involving a few crores of rupees to be carried out by the engineers of the consultancy group or  by any one else , if it is to be done genuinely and honestly, takes considerable time ranging from a minimum of three months to a maximum of twelve months. For familiar projects with well known background conditions the time required for the study would be less. In cases where there are too many unknown factors, the time taken would be more.

Time taken for a project by the EPC contractors depends on various factors. Most important in this are:

1. Familiarity of the EPC contractor with the content or scope of the engineering works involved in the contract- the EPC contractor may be good in doing a type of work very well as he has the required expertize and infrastructure in this kind of work. But if the contract involves other kind of jobs which requires sub contracts or procurements from not so familiar vendors, the contractor is likely to face uncertainties. It might also happen that some vendors may refuse to supply certain equipment or services through this firm.

2. The time or location of the work to be implemented- The contractor might have implemented a project at a particular location successfully earlier. But this does not ensure success in another location or time. This is because of a number of factors, most important being the difficulty in getting the same human expertise mobilized for the subsequent cases.

3. The contractors' hands are full- the contractor, though a very good EPC company might be over burdened with so many contracts at different places to the extent that further resource mobilization is impractical.

4. Communication gaps- the tender specifications did not specify certain aspects categorically and the assumptions made by the contractor initially are not acceptable to the purchaser. This leads to considerable time to arrive at a mutually agreeable decision so that the contract work goes forward smoothly. This also involves mid term changes proposed from both sides which are not mutually acceptable without considerable interactions.

5. Impractical packaging of the contracts- this may cause unwilling partners to get tied up as consortium partners who participate in the bids for the contract under compelling circumstances. This can cause non-cooperation and infighting among the consortium partners which affect the contract implementation adversely.

Given the time and the opportunity, experienced engineering consultancy groups are capable of assessing all these and suggest the practical time frame for a project and the best suited contract packages. In reality,  the project formulation engineers are the only ones who can know all these before the project contract is awarded.

However, there is a disturbing trend that is happening in most places in India in the recent years.

It is the tendency among the various top decision making authorities to undermine the findings of the project formulators.

Either there is a tendency wherein the concerned authorities from the purchasers' side where their consultants are not allowed to study the project properly or they are forced to compromise on their projections of time, costs and packaging of the project.

For example, the practical time required for the consultant to prepare the feasibility study report (FR) or the detailed project report (DPR) or the various tender specifications (TS) are whimsically enforced to some abysmally low levels compelling the engineers of the consultants to assume things the way they like without any actual studies or interactions to assess the market conditions.

Even when the consultants prepares a well thought of FR with practical contract time schedules and packaging, they may be compelled to revise those with some other arbitrary schedules and packaging.

Professionally competent consulting engineers of the past used to resist this kind of interventions by some authorities. However, in the recent years there are indications that make it clear that such competencies are no more welcomed by the authorities. Pliability of the consulting engineers is what the authorities seem to welcome. This has caused the consultants to become practical with regard to the ground realities !

So, it can so happen that the project FR in the first place is with a time schedule that is not practical under the prevailing circumstances. The tender specifications may not be practical with regard to the packaging and the time schedule.

The EPC contractors do realize this. In earlier years, they used to point out such impractical things.

However, in the changed scenario, the customer is the king.

Any attempt to correct the customer might cause the EPC contractor losing his chance to win a contract.

So collectively they decide to accept the TS as floated by the purchaser in his tender enquiry and agrees for every thing and the contract is signed only to deviate to practical levels later.

As the situation was similar to all bidders, the penalty clause has become irrelevant.

Any way, in this kind of a situation, the purchaser is the ultimate loser.

He pays more for unsuccessful projects !

What is the way out ?

Simple. If the purchaser determines that such a thing should not happen, it will never happen.

Just allow the consultants to do their work professionally and honestly !

And then proceed as per the FR or DPR that the consultants have prepared honestly !

If the projects fail then, carry out a honest audit to find out the reasons and fixing the responsibilities.

Provide these feed backs to all those concerned.

If actions are required to be taken against those who committed deliberate acts of omissions and commissions, be firm in taking actions which could perhaps work as a deterrent to prevent future mistakes.

It all depends on the purchaser who spends money for the projects.

If the purchaser has a will, there is a way !

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