What is Project Cost Estimate? How Accurate it Could Be? Why is it Required?

A couple of decades ago, I attempted to construct a house on a piece of land owned by me. The most important thing for me, to take a decision whether I should attempt to make it or not, was to know accurately how much it would cost me. Would the proposed construction ruin my finances and my dream by producing an unfinished work?

Many individuals and corporates face this dilemma. Planning a project implementation with limited finances is a big challenge. The question every one want to know in advance is whether the project could be completed within the estimated cost without over shooting the budget allocation.

How accurate is the project cost estimate? 

Successful Engineering Infrastructural Projects

(A city view from Malaysia) 

The answer to that question bluntly would be this. A cost estimate is an estimate and it can never be accurate!

Then any layman would be tempted to ask this. Then why do you want to have an estimate made?

A cost estimate for any project, not alone an engineering project, has some purpose. While it cannot be accurate, it still gives the decision maker the necessary facilitation for taking the decision.

Now let me come back to the story of my first house making project some three decades ago. I knew my income sources and my possible sources for mobilization of funds and eventually the budget I can safely earmark for my house building project. From the partly correct feedbacks from others who had ventured in to similar projects earlier, I could guess that my house project would take around two years to complete. Within this two years time, I could get some loans and other funds which totalled about Rs.500,000. And that was my maximum budget for my house project. My house project should cost less than this if I did not want to risk an imcomplete project!

Now my house design had to be planned in such a way that its completion cost would be within my budget. I being an engineer who had been  in the field of working out engineering projects costing several millions, a simple home architecture plan and cost estimation should not have been some thing very difficult. But as I had stated earlier, no engineering estimate or project estimate is accurate. Only prices are accurate, but not a cost estimate. An estimate becomes translated in to price or cost when money is actually transacted and the deal is settled. Estimate is before you settle the cost and price is after you settle the cost!

With all my engineering skills, my own cost estimate for my house project failed me. The result was an unfinished house and a finished budget!

Yet, it is possible for experienced professional engineers to make project cost estimates within certain limits of confidence levels and guide the project to be completed within the stipulated budgets. 

And that is indeed an art of professionalism. But it can never be some thing very accurate. In other words, a project can be predicted to be completed within say, plus minus 10 % of an estimated cost and that prediction could really be achieved. If a project is completed as predicted with regard to its costs, time of completion and usefulness (or returns) it is indeed a successful project.

Getting a project cost estimation within a reasonable limits of confidence is indeed an art. In the case of engineering projects, this could be done only by experienced engineers with multifaceted experience and expertise. On the other hand, any one can attempt to make a cost estimate. As the estimate is essentially a guess work fine tuned with experience and expertise, an estimate without the applying the latter would result only in a figure which might vary widely from the completion costs.

Experienced engineers keep tracking the market trends with regard to the costs of materials, labor , equipment , technology, etc and use that information while designing new engineering projects. Project cost estimates are required for the decision makers for taking decions for going ahead with the project and hence such estimates are required immediately. Due to this, often it would be necessary for the engineers to provide the estimate for a particular project for various options quickly. Reliable project cost estimates in such situations would be possible only by experienced engineers conversant with the scope and technology of the project concerned.

Hence, the decision makers, if they do not want to get a failed project in the future, should be very careful in assigning the task of project cost estimation including the project feasibility study reports. If these are assigned without ascertaining the professional competency of the engineer concerned or the group of engineers, the likelihood of future project failure increases.

When an engineering project cost estimate is prepared by an experienced engineer or an expert engineering group, it would be better not to debate over it much. It is not a good idea to debate over a judgement pronounced by a judge. If you do it, you are likely to open a pandora box  which will make things much difficult to arrive at any conclusion and you land in to much confusion. Similarly, for any cost estimate prepared by a professional engineer, either you accept it or reject it, but never debate over it. 

Experienced professional engineers do consider past prices and costs but never make those as the direct basis for their cost estimate. The basis of engineering cost estimate should be the experience of the engineer and it is not wise to dilute the engineers' experience and expertise with supporting documents such as price quotes or budgetary quotes or price lists. The engineer may consider such information for deriving his own estimate, but should never make such documents as the direct basis. If it is done, then it means that the engineer is not willing to take any responsibility on the cost estimate as prepared by him. The cost estimate sheet produced or worked out by a professional engineers should be accepted as the base document and it should never be based on other documents such as previous prices, price catalogues, vendor price lists, etc.

People who are not well conversant with the various complexities involved with engineering projects often make the mistake of neglecting or overruling the professional integrity of experienced engineers by casting aspersions or expressing doubts on the estimates prepared by professional engineers. Only incompetent engineers with no professional standing accept such an attack on their professional integrity and competence. Unfortunately, such lots are plenty now-a-days which actually causes degradation of engineers' work and role.

Cost estimates could be done mechanically by any one by or even using computers by multiplying unit costs with quantity involved and adding up the whole with further percentage additions on taxes, duties, contingencies, etc. However, such cost estimates lack the essence of experience of the engineer and hence, cannot be relied with assured confidence. It should be remembered that each and every engineering project is unique in some way and no two projects could be considered as equal. Every engineering project, even while looking similar on broader aspects are different when examined in detail.

Engineering, Procurement and Construction (EPC) contractors are often required to quote for engineering projects on a firmed up basis and their prices are often compared with the estimated costs for negotiations and price justifications. EPC contractors quoting prices much higher or lower than the estimated costs of the purchaser is quite common. This is because, the EPC contractors also do the cost estimations from their side based on their own assessment and assumptions. EPC conctractors bagging contracts after tough competition may lose money in the contract if they do not adopt proper micro planning in project management. Many EPC conctactors are forced to do unfair means for getting large engineering contracts when the prevalent market conditions are unprofessional.

Engineers are the key persons for ensuring success of any project. But when they are treated shabbily with least respect to their professional competence, shabby projects result. 

It is an important lesson I learnt long back. If you treat your cook or the person who prepare food for you with utter disrespect, it might result in you eating something which  you would not like even your enemies to have. The cook might not retaliate directly, but will do so indirectly at some opportunistic time! If that could happen with  a low level worker class, the higher worker class could do even worse!

So project cost estimates are useful and beneficial when they are made by experienced professional engineers who have professional integrity and also when such estimates are sought from them giving due respect to their professionalism. In such a case, the project cost estimate would serve as a right pointer for proper decision making.

If the engineering estimates are made with total disregard to the above, the result is some estimate which most likely misleads and cause a project failure if proceeded with.

Are you anyway connected with this topic? 

Could you enhance the idea with your thoughts?

Land Reforms: Some thing Most Important for India to Progress!

Some time ago, I wrote a blog article about the poor land owners' agitation in Odisha State of India against an ambitious private integrated steel plant (ISP) project promoted by the South Korean steel major POSCO with the active support of the state government. 

Post liberalization, the only state which might have implemented large scale private industrial projects in record time perhaps is Gujarat under the chief minister-ship of Shri Narendra Modi who is shortly to take the mantle of Indian government as the new Prime Minister. World renowned companies such as Reliance Industries or Adani Group  would not have become a reality without enough land to set up their large industrial manufacturing and service facilities.

Unfortunately, Asian countries such as India with their below average human development indices, have been markedly behind in effecting land reforms. This Wikipedia article gives an overview of land reforms in major continents in the recent past. 

In India, land reforms have not been in the agenda of the national government since its independence. Land reforms have been left voluntarily to the state governments. Only two states, West Bengal and Kerala, tried to do some thing regarding it during their initial years of existence. Later on, no political party got enough strength and wisdom to do some thing in this connection for the general good of all people. 

Just before its exit from power, the outgoing central government of India in 2013 enacted a law which is known as  The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013  [Get the pdf copy of the Act Here!] This law has now replaced the previous Land Acquisition Act of 1894 which has been a bone of contention between the land owners, the governments and the industry for many years in the recent years due to the manner in which the government authorities operated it. 

While the old law has given too much power to the government officials and had been considered as anti landowner,  the new law is believed to be anti industry. The new law perhaps burdens the private industry with too high costs towards land procurement. The new law apparently provides for high compensation for the land owners. However, it does not ensure future protection of a land owner who becomes landless when his land has been taken over for some industry or development project.

When a land owner's land is taken over for any project, he should not only get a fair compensation, but also get fair protection to live with dignity. All land owners whose houses have been taken over together with the land should be provided with decent housing before his property is physically taken possession by the project authority for whom the land is acquired. They should also be ensured of reasonable and steady future incomes as a compensation for disturbance of their traditional living.

On the other hand, it should also be necessary to protect the industry from incurring heavy initial costs on investment towards acquisition of land. With heavy land costs, many projects might become techno economically non-viable. On the other hand, large projects enhance overall economic activities in its vicinity. Many times it has been seen that when large projects come up and stabilize, the land costs in and around the project go up due to higher commercial opportunities.

This creates a peculiar situation of disadvantage for the people whose lands have been taken over at prevailing market rates. For example, in the rural areas of India where there is no activity other than rural agriculture, the land costs are low to the tune of say, Rs.10 per sq.ft. In the near vicinity of a large commercial project, the cost could be around Rs.200 per sq.ft or even as high as Rs.1000 per sq ft or more. 

Thus, the person whose land is acquired would feel as cheated even when he gets a price of 3 to 5 times more than the market rates due to the probability of the land prices shooting up many times more in the vicinity of any large project once the project becomes commercially operational. Such a situation often causes some people becoming reluctant to part with their land even when they are offered much higher price than the current market rates.

In the previous law, the government forcefully captured the land for any project declared as 'public interest' and paying the affected people prices as decided by them to be paid at the whims and fancies of the officials concerned. The new law is made to help the land owners, but its efficacy is yet to be seen. On the other hand many private entrepreneurs are not so happy about the new provisions of the land acquisition law.

Another problem that arises for any commercial or infrastructural project requiring land is the complex and vague rules that have emerged under the environmental protection acts and rules. Vague laws and rules give enough room for whims and fancies of some authorized persons to play havoc and unending litigation. No business man would like to land in to such complications under normal circumstances! A typical example of this type of a problem is the environmental definitions that are applied to the sloping lands of the western ghats of Kerala while similar situations in states like Himachal Pradesh are dealt with different yardsticks! Obviously, the definitions and yardsticks change from person to person!

The question is how India tackles such problems? As the PM designate Mr Narendra Modi keep telling: "Less government, more (better) governance" The idea is great, but the vast lot of people with high ambitions for getting a slot in some 'offices of profits' would not allow such a thing to happen. It can happen when people become honestly interested in doing good for the people and not for themselves!

So, land reforms in India is not difficult to be achieved, provided the people of India, high and low, are willing to keep the nation in front than their own individual priorities. 

Again the first principle to be remembered for all land acquisition is this: The individual land owner's willingness to part with his land possession is to be respected. The land owner should be treated with dignity. The government has to ensure that the land owner does not become landless and homeless when his or her land is taken over. Not only they are paid reasonably well for their lands, a portion of the land acquired should be utilized for creating a well planned and well designed housing colony for the displaced land owners. This should be in addition to the monetary remuneration paid.

All government officials involved with land acquisition should be sensitized by proper training so that they do their work efficiently in a time bound manner with out antagonizing the people. Concerned laws need to be amended if required. While laws are drafted, the government should also check the clauses with regard to their compatibility for good governance. The practice of passing laws for the sake of it should stop.

These are not difficult for any government if the people of the government are great visionaries and true leaders!

In any case, land reforms in the positive manner on an urgent manner is what India needs now for progress and development. The latter again should be for ensuring enhanced employment to the Indian youths and not for unjustified accumulation of wealth in the hands of a few.

What do you think? 

Understanding Project Life Cycle in Engineering Projects !

Buying a engineering project is different from buying an equipment or machinery. Generally, an engineering project is a fixed infrastructure having various kinds of interdisciplinary systems and works integrated in to one well defined system engineered and built at a specified location different from a pre-existing manufacturing facility. Engineering projects may or may not contain assemblies of various kinds of pre-fabricated equipment and manufactured machinery integrated with various kinds of constructions and erections in situ (on site). On the other hand, an equipment or machinery may be entirely manufactured by the supplier at his own manufacturing facility and supplied at the specified location of the purchaser either as a fully working and tested item or in parts to be assembled and tested at the purchaser's specified location.

Equipment and machinery involving complex engineering and  projects involving engineering may both cost millions of rupees and may take a few months to a couple of years for completion after placement of order or signing of contract.

In the case of high cost manufactured machinery, such as airplanes, locomotives, ships, switch gears, hospital equipment, etc the purchaser has to take decisions based on the design features and cost data as available from the manufacturers. In this case, the manufacturers are presumed to be more knowledgeable in the design and other technological details of the equipment and the purchasers are to take the decisions of procuring based on the usefulness, serviceability, initial cost and recurring costs, etc.In this case, the purchaser also has the options to know about the performance of similar machines elsewhere and also about the reputation of the manufacturer in meeting with the commitments.

However, in the case of engineering projects, this scenario is entirely different. For implementation of a project the following stages, called the Project Life Cycle (PLC), are involved:

1. Formulation of the Project which is Feasible:  This has to be undertaken by the investor either by himself or by a team of engineers on his behalf, generally called the Client's Consultants. The job involves the feasibility studies and putting the relevant information in the form of a report called the Techno-Economic Feasibility Report (TEFR). This phase is one of the most vital stages of any engineering project. A project proceeded without carrying out a proper feasibility study is likely to meet with failure during the course of implementation. Here, project failure means project not getting implemented in the pre-specified time or within the pre-determined cost or when the project does not yield the pre-determined benefits in totality. It is better to go a bit slow during the project formulation stage because hurries to get the project report made by the formulation engineers or to put pressure on them to get the report made quickly would make the feasibility report with many assumptions, some widely differing from actual realities. A well experienced team of experts could study the feasibility of a project and prepare the report in about 3-6 months provided they have access and facilities to gather all the relevant information in time. For certain kind of projects, the project formulation time period could be even longer. If a project is found techno-economically feasible, the facts have to be spelled out in the report in detail so that the project could be audited for success or failure later. THe TEFR forms the bench mark for project audit when money is spend for the project implementation. The role of the purchaser's engineering consultants is very vital at this stage. Any inexperience or lack of expertise on their part would pave a way for possible project failure.

2. Decisions for Making Investment in the Project : This has to be done by the investor or his authorized representative who is empowered to make capital investment decisions. It is presumed that the purchaser has made all efforts to understand the TEFR and all the salient points made by the project formulation engineers as reported in the TEFR. The TEFR also gives the purchaser the inputs to assess the confidence of the formulation engineers in the success of the project. Hence, it would be a good idea to have a detailed interaction with the formulation team before the project is proceeded with.

3. Preparation of the Tender Specifications for the Project: It is a good idea to specify the number of contract packages for a project in the TEFR with their assessed costs. It is also a good idea to discuss the overall scheme of the project with a few experts in responsible positions in a few such companies who have the requisite expertise in undertaking similar kind of projects with more or less similar engineering or technology. These interactions should positively be commanded by the engineering group leader from the purchaser's side who is well versed with all aspects of the purchaser's requirements and limitations. These interactions should provide the purchaser's side the key inputs with regard to the present market situation with regard to availability of key equipment, project mobilization issues, cost issues, logistics, lead time for manufacture of materials and equipment, etc. This would also help the purchaser's side to frame up the best contract packages so that the purchaser gets the best competitive prices and the best execution strategies. A time period of three to four months would be needed to complete this for a medium scale project involving a few hundred million rupees. The tender documents should preferably contain the eligibility criteria (EC) for the bidders who are desirous to participate in the tender for doing the work as the contractor for any specified package. This is required when the purchaser is a public authority responsible for public funds in any way. EC has to be made after a thorough preliminary evaluation of the available vendors and should be made in such a way that the best ones are qualified and those without the essential capabilities to organize, manage and execute the contract are not qualified. How to get the good EPC contractor and how to weed out the bad ones depends much on the manner in which EC is defined by the purchaser.

4. Tendering and Tender Evaluation: In project contracts involving multidisciplinary engineering and technology, it would not be possible to evaluate the techno-commercial aspects of the bids made by the bidders easily. If the technical specifications are made perfectly with enough technical guidance to the bidders and with little chances of much deviations after award of the work, there is not much necessity for having detailed interactions with the bidder at this stage. The bidders have to confirm the techno-commercial conditions of the purchaser as defined in the tender documents to be deemed as at par, provided the qualify the EC. In such a scenario, the tender can be finalized on the lowest price bid. However, in many cases, this does not happen this way. Most often, the tender documents as made by the purchaser give a chance for the bidders to rake up techno-commercial issues for much debate. If this happens, the finalization of the bids could become a lengthy process involving many months. It can also make substantial changes in the scope of the tender and the costs. Hence, this should be avoided by seeing that the tender documents and specifications are prepared with confidence and without gross technical errors or scope for better alternatives. A project tender after tendering should be finalized and contract awarded within the shortest period not exceeding about three months. If this cannot be done, there is all likelihood that the project may linger during execution proceeding towards failure.

5. Award of Contract : Normally, signing of the contract for the packages of a project in reality enforces the real commitment from the sides of the investor and the contractor both towards the implementation of the project as planned. The date of signing of the project contract is to be reckoned as the the zero date for actual implementation of a project. Once the contract agreement is legally signed, one can presume the project to commence activities towards completion. However, for poorly planned projects, this may not be so. In India, project completion as per contract agreement rarely happens in the public domain due to poor planning and formulation making ample opportunities for litigation and arbitration at a later stage. Bagging of contracts by bidders who are not actually eligible to undertake the work also makes things complicated as far as the project progress and quality are concerned.

6. Design and Engineering Stage: The details of the project actually getting implemented are reflected in the design and engineering drawings and documents prepared by the contractors tailored for the the specific project after the award of contract. The contractors could have their own concepts about the scope of the works involved because that was what helped them in negotiating the case during the tender stage. However, normally no work could actually be implemented at site unless the contractors get their design and engineering drawings of the project checked and approved by the purchaser or his engineering experts ( generally the purchaser's engineering consultants). At this stage, two engineering groups, one from the contractors' side and another from the purchaser's side are fully involved. While the contractor's side tries to create the project designs and its minutest details according to the overall goal of the project as per the contract agreement, the purchaser's side checks them for engineering soundness, conformity to scope as agreed, conformity to engineering standards and safety, etc. This stage is the real test of skills and expertize of  engineers from both sides. When both sides are skillful and competent there is all likelihood that the project as built would be sound and fit and would give satisfaction to both the the purchaser, the users and the contractors. Unfortunately, in India the importance of the engineering groups at the side of the EPC (engineering, procurement, construction) contractor and the purchaser (purchaser's engineering consultants) is not well understood by the decision makers at the top levels at both sides. Many so called EPC contractors do not have any competent engineering groups at their side and they try to manage the design and engineering by outsourcing the work to free lancers and other such groups who are ill prepared or incompetent do undertake such works. This in turn makes the work of the purchaser's consultants difficult and thankless making the latter blamed for the delays in getting the contractor's drawings approved. Incompetent engineers doing this work for the purchaser also makes things much complicated. While an  EPC contractor with a competent design engineering group could get his drawings approved at the initial submission itself, one depending on outsourcing the same to splinter groups could cause inordinate delays and also incur unnecessary costs due to excessive factors of engineering safety due to ignorance. The process of design and engineering is so complex that even many top technocrats do not understand it well unless they had previous experience in this line of engineering work. Incidentally, the best technocrats would be those who had a chance to get some years of experience in this kind of engineering work involving project formulation and project design and engineering ! Unfortunately, this breed of engineers are on a declining trend in India and migration from this field to other fields of engineering seldom takes place due to the ignorance of human resource planners in this field. Design and engineering can take as much as 25-40 % time of a project's overall time schedule. Almost all decisions involving the project features and quality aspects take place during design and engineering stage.

7. Civil Engineering : Most engineering projects involve many works of civil engineering. These are site surveys, site preparations, earth works, Reinforced Cement Concrete (RCC) works, piping and sewer works, construction of buildings, equipment foundations, roads, tanks, etc. These works are to be as per the approved civil engineering drawings of the project. Civil engineering also involves debris clearance, painting, and many other such works. Services of experienced civil construction engineers, supervisors and workmen are all required in making the civil works proceed in a sound manner. In India, now-a-days, there is acute shortage of well trained man power in this area in many regions causing uneven quality of civil works from place to place.

8. Procurement of Equipment and Machinery: Many engineering projects involve procurement of tailor-made equipment and machinery from various manufacturers. These could be process machinery such as pumps, valves, fans, compressors, blowers, motors, conveyors, crushers, filters, dust catchers, etc or equipment such as tanks, vessels, bins, pipelines, boilers, etc or electrical equipment such as switch gears, motor controls, cables, etc or instrumentation and automation equipment or any other such specialized equipment or machinery. These are to be procured to suit the specific purpose of the project scheme from specialized industrial equipment suppliers based on detailed specifications finalized during the design and engineering stage. Experienced engineers well versed in inspection, testing, erection and commissioning of these specialized equipment would determine the success of these machinery. Many times it would be necessary to organize training of the purchaser's personnel who are required to operate and maintain these equipment and machinery after the project is commissioned.

9. Erection of Equipment : Many activities at site go concurrently. Erection of equipment may go concurrently with the construction of the building or electrical cabling works or piping works. However, these have to be micro planned in such a way that no one activity is counter productive to another. Modern project management tools help the project managers and the site engineers in this regard. Now-a-days many software tools that make the Project Engineering Review Techniques (PERT) and Critical Path Methods (CPM) easier are available for those involved in engineering project implementation. However, in India, due to various reasons such professional tools are not fully utilized for taking real benefits in projects  in the public domain.

10. Testing and Commissioning : A well planned project would not be difficult to be tested and commissioned smoothly. However, most often much complications do take place at this stage which include  fatal accidents too. This reflects  poor project management with regard to quality of work. Often many equipment get to damaged conditions due to poor handling at site calling for emergency repairs even before the equipment gets into action. Proper sequencing of work is very important to ensure a trouble free testing and commissioning. Experienced testing and commissioning engineers also make much difference in this.

11. Performance Guarantee Tests and Handing Over : This is the stage at which the project is inspected finally for its overall fulfilment of agreed objectives and performances. The purchaser and contractor make documents recording the formal handing over and taking over of the new assets as created in the project. In a well managed project this is a happy occasion while those mismanaged projects it may not happen and lead to future litigation between the two sides.

12. Post Completion Audits : This exercise is not normally done by many. However, it is a good practice to do it and observe the projects performance, quality and such other objectives with what was speculated initially during the formulation stage. If the project is observed as fulfilling the feasibility stage objectives with regard to its functions, costs, quality, time of completion, etc then the engineering project could be considered as a success. This stage is the last of the Project Life Cycle.  The purchaser should also ensure archiving all records relating to the project from formulation stage to completion audit stage for the future references.

The above is the general activity sequence of any engineering project from concept to commissioning. However, depending on the actual scope and technical content this could have some differences. Again, each project life cycle stages would involve much more detailed activities involving several groups and individuals making a large scale engineering project much complex.

Engineering projects involve large scale transactions of money and have much bigger stakes for both the purchasers and the contractors. Engineering projects involve multidisciplinary skills and expertise. Project execution sites are like war zones which might cause fatalities if proceeded without ensuring proper care and safety norms. But in today's world, no development is possible without successful implementation of various kinds of projects involving multidisciplinary engineering.

Countries like India with high population and population growth, demand for more and more infrastructural facilities including production facilities keep growing and therefore there would be great demand for people who are well versed in all aspects of project formulation and implementation. It may not be in the interest of India to depend on foreign know-how and skills always in this context. [You may see this blog also in this context]

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 !

Project Cost Estimation and Turnkey Contracts : Some Important Considerations !

Many times it would be necessary for organizations to invest money for some projects involving multidisciplinary engineering and technology.

The organizations could be government departments, government funded autonomous institutions, Public Sector Undertakings, large private sector companies, Non-Governmental Organizations (NGO), etc.

The projects could be some thing of the following kind:

1. Implementation of a water treatment plant with or without the distribution pipe networks.

2. Implementation of a water supply project

3 Implementation of a waste water treatment facility

4 Implementation of a municipal or industrial waste handling and treatment facility

5 Implementation of a captive power plant project or power utility project

6 Development and construction of a township

7 Implementation of a Pollution Control Project for an existing industrial unit.

8 Implementation of a new processing plant with new technology.

9 Building a new multi-storey office complex

10. Implementation of a fire protection system or an Air Conditioning and Ventilation System.

There could be many more such projects. I have mentioned some common investments that keep arising for most of the organizations.

There is a notable thing in this kind of projects that may surprise a common man. That is the project cost.

Even when two projects resemble in their titles and the essential descriptions, their costs could be widely different.

This is because of the wide variety of engineering and technological design options that such projects can have.

For example, a waste water treatment project which I had formulated for my company about two decades ago was estimated by me as costing Rs. 14 Crores.

While this was tendered out for implementation on a turn-key contract basis, the costs as quoted by the various bidders ranged from Rs 12 to Rs 30 Crores.

The more the engineering and execution competency of the bidder, the more was their price.

In this case the purchaser naturally face a dilemma.

Suppose the purchaser make stringency in the eligibility criteria, he has to spend much more money than his estimate.

Again, in this case none of the bidders had any previous experience of implementing a project of similar nature, while all of them had experience in executing turnkey projects involving similar engineering of various scopes and costs.

Some of the bidders have a name and a reputation. While the others are lesser known.

While evaluating this case, I had the opportunity to study the methods used by the bidders in estimating their prices.

Cost estimation is important for both the purchaser and the bidders.

The techniques and assumptions used are all important.

For the bidders pricing is a policy based on the initial engineering estimates worked out.

Some bidders, especially the ones which are large companies, the costing is done by various engineers belonging to various engineering disciplines.

Some others add it arithmetically and add other costs like taxes, contingencies and profit margins to make the final price.

In countries like India, where bidding is the process by which pricing is finalised, it is extremely difficult to establish the cost of an equipment or system.

The various requirements of Earnest Money Deposits, Bank Guarantees, conditions for performance guarantees, payment schedules, etc make the cost of the project to go much higher than the reasonable cost at which a project could be implemented.

In India, both the purchasers and the bidders are pretty unaware of the principles of cost engineering.

Costing, estimation or other aspects related to investment appraisal etc are either handled by engineers who do not have much formal exposure in this field or by finance personnel who have some formal back ground in accountancy only.

Cost Engineering is not a common field of study in India. Indian purchasers or bidders normally  do not use cost engineering tools or softwares.

I remember some attempts made by some engineering  colleges in India, including the one where I studied, making some attempts to introduce this topic in the engineering curricula. As far I know these attempts did not succeed.

In  the developed nations, such as the US and some European countries, where engineering professionalism is statutorily protected and respected, cost engineering training and proficiency is considered as an essential pre-requisite for successful implementation of projects.

However, engineering professionalism could be a problem for those desiring to adopt whimsical project management.

The absence of such competencies, in my opinion, cause cost and time over runs for projects which is a very common thing in India.

How much the country collectively lose on account of this is a matter of debate !

I wonder why India is reluctant to learn certain things from the developed nations ! Cost engineering and contract management are two of such things !

Infrastructure in India : Talking Much and Doing Nothing !

Perhaps Atal Bihari Bajpayee was one such Prime Minister of India who openly admitted to the poor state of infrastructure in India and launched the visionary 'Golden Triangle Highway Project of India' with much fanfare.

Prior to that the young PM Rajiv Gandhi initiated the dream project named the 'Ganga Action Plan' to clean the River Ganga from pollution.

Unfortunately and most regrettably, it appears that the country has failed miserably in fulfilling even the dream projects announced by the top most political authority. 

It appears to the common man that the political authorities are only interested in gaining some cheap popularity by announcing mega projects and not at all interested in seeing that what they announce gets materialized ever !

On the other hand, starting from a similar back ground a quarter century ago, the neighbouring country China has progressed enviously as far as infrastructural development is concerned. It has become the number one in the world in many things during this period and is progressing forward surpassing even the glorious developed nations of the past.

Just a couple of days ago, I wanted to visit Bhilai, the steel city very near to Raipur, the capital of Chhattisgarh state, which is just a bit over 600 kilometers away from my present city of residence, Ranchi, the capital of Jharkhand.

The need was an urgent one and I had to spend hours together to formulate my plans to make the trip.

Both these cities, incidentally come under the steel corridor of India with the largest movement materials, both finished and unfinished. Both have airports and major railways stations. They are located on the so called trunk routes of India.

Yet there are no direct flights nor daily running trains with comfortable class of accommodation. The train journey takes hardly 8 hours provided there is a train with the accommodation and the reservation. Unfortunately there is none even after this country becoming an independent nation more than half a century ago. Incidentally the major railway infrastructure as existing are all developed by the British raj whom the Indians curse perpetually for their misrule !

So there was no choice for me except to make the travel to and fro by road which are prominently marked on the maps as national high ways.

If you search the google options you may find these two cities 'beautifully' connected by a number of roads most of them marked NH (the short name for National Highways !). Google may even suggest that you can perhaps make the trip by car within about 9 to 10 hours by travelling through a combination of NHs.

Believing google, I ventured to make the travel by an SUV and finished the up journey in about 16 hours. Trying a better combination of NH for the return journey using the prestigious NH-6, my luck was more miserable. It took me 22 hours ! Remember, the total time spend for taking some rest for each of the journey was not more than 2 hours ! Had the roads be of any reasonable standard, I could have accomplished my travel easily as suggested by Google ! But then Google doesnot maintain the Indian roads !

[Incidentally, this site Map my India is more practical. They had assessed the road conditions much more practically and predicted the time of travel at about 17 hours!]

These National Highways of India are only in the maps and physically they are just some barren spaces with some signs of paving by asphalt or concrete some time earlier for most of the stretches. These NHs of India pass through some regions which are geographically endowed with good natural beauty and not overcrowded. Perhaps these green regions actually showcase the natural abundance of India ! Had I been responsible for the administration of these highways, I would have seen that these highways are maintained properly always to make my fellow citizen take pride in the country. But thats' only a dream !

But I keep wondering. How can those fellows, who are entrusted with the upkeep of these National Highways which ought to be the symbols of pride for all Indians, can ever disregard their responsibilities to such an extent that they keep these highways a national disgrace ?

There are some more things I observed about these so-called national infrastructure roads called national highways which are obviously maintained so shabbily as national disgraces.

In most places, there are no sign boards. Even if they are there, they do not follow any standards. Especially of importance is the sign boards at the junctions of two or more roads. Sign boards to give proper direction to the motorists are practically absent. If you think that the GPRS navigation will help you, perhaps it could, provided the signals reach you properly. Again do not expect, the local people would be in a position to guide you always. If you take the wrong route, it could turn out to be hundreds of kilometers of extra travel. There are chances of you getting even totally lost for hours.

I noticed some sign boards that declare the same road differently with different NH numbering. Enough for a motorist who travel using the maps to get confused and lost !

If your car develops a snag, it could be the worst situation. There are no known help in the near vicinity. Neither are there any highway patrols who are entrusted to help the motorists. That is again the Indian way of managing things in this context.

I was feeling empathetic to those hundreds of drivers who drive their heavily loaded trucks through these routes, day in and day out, helping the rest of India with the supplies. Their vehicles are always at the risk of going out of balance in these poorly maintained national highways of India. They are also at the risk of untimely breakdowns due to the uneven road surfaces for such long stretches in hundreds of kilometers. Imagine the truck owners spending such huge sums for their vehicles whose life span gets shortened by a few years just because of these roads! Imagine the more fuel they spend on the roads for transporting the goods as the roads are not energy efficient !

The roads are no private property in India. The state and central governments are the sole custodians and managers of the roads. I need not to stress then who is to be blamed for this national shame.

A few decades ago, I remember the Indian roads in a much better condition than now. There were not toll tax collectors at every 15-20 kilometers as the road managers of India has made it to happen in some of the trunk routes now.

The road maintenance was entrusted to the Public Works Department (PWD) of either the state or the central governments. The roads prominently displayed the concerned PWD officer who was in charge of the particular section of the road concerned. At least the people could have known the fellow actually responsible for maintaining that part of the road. If you travel by road, you could see hundreds of workers keep working to maintain the roads. The PWD authorities kept surveying the road conditions regularly and kept doing things on a war footing that no part of the road is in such a shamefully shabby situation.

I do not know what has happened to the Indian PWD now. I do not have any idea about the authority or authorities who are responsible for maintaining the roads and NHs of India now.

The governments keep taxing the new vehicles substantially in the name of road tax. Then some short segments of  roads with heavy traffic are auctioned for maintenance by private players who are allowed to tax the vehicles for decades making much more money than they had spend in making and maintaining those roads. It is a disgrace that the authorities have allowed such privatisation of roads in some of the roads, that too in small patches that pass through the cities, just as the portion of NH-6 which passes through the city of Bhilai forcing even the local populace to pay on a daily basis to use these roads for routine commuting.

Regrettably, Indians have long forgotten to protest. Because they know that their protests no longer carry any weights. They also do not know with whom they should make their complaints or register their protests. The ruling political parties and the opposition political parties are all at par in understanding or not understanding the woes of the people. Neither they, nor those at important positions seem to be ignorant on fixing the responsibility for such sad state of affairs.

Then comes the so-called fourth estate of democracy, the media. In India, the major part of media space and time is devoted to reports of mudslinging and other mundane things not of any value to the people or the country. They prefer to do little research and provide any concrete suggestions. Media also fail miserably in highlighting the actual cause of failure of the governmental systems. They do not feel it comfortable to get to the root cause of the problems by actual pondering about an issue of national importance.

Had they been responsible, their space and time would have been filled with the stories of success, failures and other related matters concerning various developmental aspects of the country including such major issues such as about the roads and highways. There would have been regular media follow ups on such issues. Unfortunately the noted journalists of the country are paid for being in the company of noted politicians always to report and make commentaries on what they want to utter publicly, even when their private opinions could be just the opposite. I found people no more are interested in reading or listening to these stereotyped media reports. Unless the media takes up things responsibly, their days in the future might be numbered !

Are we a nation of wide mouth talkers with absolutely no regard to what we talk?

Are we a nation not interested in actions any more ?

Is it possible to create roads, bridges and other major infrastructure only by issuing plans and policies and doing nothing for their implementation?

Will it be possible to implement any project in time when experienced people are in short supply to do such activities?

Would it be possible to develop people of the right experience and expertise when there are long spells of non-activity ?

Would it be possible to do all these things just by wishful thinking without actual planning and plan implementation ?

Incidentally, I read in the news papers that the Bihar government has realized that their projects are not getting shape because they do not have experienced engineers to make the project proposals properly, including the basic engineering.

Similarly the Jharkhand government has an acute shortage of experienced clerical staff to make the reports typed in order and maintain the files properly.

If that is so, the situation in other states would be no different.

What has happened to all our responsible departments like the PWD and their experienced engineers?

Who butchered those departments ? Who butchered the expertize of India that the independent India kept acquiring all those initial years ?

Any answers ?

Any suggestions ?

EPC Services and Engineering Design Groups in India- Is there any HR crunch ?

I had earlier written a blog here highlighting the importance of engineering services departments for ensuring long term success of integrated steel plants of India. [You may read it Here !]

Engineering Services Departments (ESD) may be known in different names, but such a department is the key for ensuring success of capital project investments undertaken by the steel plants. Again success of the steel plants would invariably add to the economic progress of the country.

The same is applicable to other industries as well. For large process industries, existence of an ESD having a team of experienced and competent consulting engineers would be a great asset.

Some industries outsource the work of ESD to external engineering consultants. This is the only option for setting up a new industry. The following are some of the leading engineering consultancy service companies in India:

1. M. N. Dastur
2. MECON
3. Uhde
4. EIL
5. Tata Consulting Engineers
6. FP India
7. Fichtner India
8. DCPL
9. Libra Process
10. Linde Engineering
11. CECON Consultants Pvt Limited

But once the industry has come in to existence, its in house ESD should be in a position to look after its future needs with regard to all additions, modifications, replacements and even modernizations.

But ESD's alone cannot guarantee success of any project involving Engineering, Procurement and Construction (EPC). While ESDs are responsible for drawing the outline of the project formulation and the project estimation from the purchaser's side, reputed EPC contractors having the core competency in undertaking the detailed engineering, procurement and construction of the project upto  its successful testing and commissioning are also essential to ensure the completion of the project successfully.

In India companies or firms having full fledged infrastructure in executing EPC contracts are limited in number. As a result, whenever massive infrastructure investments are taken up by a number of investors both in the private and public sector almost simultaneously the essential capacities of the EPC contractors with regard to expert man power and related infrastructure gets overburdened creating a bottleneck for speedy implementation of projects.

The reason for this is because of the haphazard planning by the authorities. You just cannot spend billions of rupees in one or two year's time if you do not have that many experienced people to execute the projects even when you think of outsourcing the contracts to foreign EPC contractors. EPC involves group efforts by many teams of experienced engineers in various levels and disciplines capable of doing works like surveying, development of basic and detailed engineering drawings, construction at site, equipment sourcing, inspection , erection, testing and other such activities.

In India expertize in the field of surveying, design and drawing, which is essential for any EPC contract to be successful, has not seen much advancement in the last many years commensurate with the requirements.

It takes years of work experience for engineers to develop expertize in this field. When you do not have EPC projects not taking place for decades at a stretch, there is no chance that those engineers who are placed with EPC related work are getting experience that is required to be gained. Again, lack of adequate work in this field has caused many organizations, both in public and private sector, to curtail the strength of engineers in this field or altogether redeploy them to other areas of work.

Thus during the period from 1990 to 2005, there has been a big slump in EPC related work in India in many sectors. Many EPC contract companies who used to have a good name in the past have just got vanished from the scenes.

Later when decisions are taken for massive spending in EPC contracts, the purchasers are left with no option other than awarding contracts to any one without actually ascertaining their capacities to do the work in time. Even those who have managed to get contracts are running here and there in search of experienced engineers to do the job. Those who took voluntary retirements from the sinking organisations of yester years are in great demand now.

But those who think that such engineers would be of some help in doing the work might not be knowing fully well about the complexities of the work done by an experienced team of engineers.

An individual engineer, even when he is experienced would be a helpless person unless he has got the backup support system by way of his peers , subordinates and others who used to be his strength. Besides, in a new place he is without his back up knowledge !

There are a few EPC contractors who are surviving the slump of the last decade and are perhaps doing well now. Now the time is good for them as there are plenty of orders and opportunities. Their order books should be full.

Some of the leading Indian EPC firms are :
1. Larsen and Toubro
2. Punj Lloyd
3. Jaypee Associates
4. Lanco Infratech
5. Nagarjuna Constructions
6. IVRCL
7. Simplex Infrastructure
9. Gammon India
11.Tata Projects
12. Shapoorji Pallonji
13. GVK

14. Siemens 

15. MECON (Public Sector)

17. EIL (Public Sector)

18. Simon India

19. Usha Projects

20. Technip India
21. MBE 
22. Danieli Corus India

Whether it is an in-house ESD of a large industry or an engineering consultancy service company or an EPC service firm their efficacy and success depends on their ability to retain and develop engineering talent and expertise especially in the engineering design and consultancy field. This is indeed a difficult human resource development (HRD) task.

In engineering design and consultancy field every engineer from each of the specialized field of engineering discipline has to be with exemplary professional skills and knowledge. Without which the group cannot accomplish the challenges posed to it. Without having a steady inflow of assignments the group cannot gain experience. The group cannot expand to have more engineers to its fold, unless it has an assured income coming from engineering design and consultancy works.

EPC and engineering consultancy groups face this dilemma: to expand in manpower or not. Haphazard developments plans of the country is the biggest problem in this regard. EPC and consultancy groups are often compelled to play safe. They keep the man power at the minimum. Some consultancy companies that had grown too big in man power due to the work loads in the past decades had to adopt various means such as voluntary retirements to reduce its man power when work inputs reduced. This way a good chunk of their expertise in various areas got removed. Later when investment momentum began picking up, they faced human resource crunch which had its own effects in the quality of their engineering expertise and services. I would not like to name those groups because their managements officially would not like to highlight such drawbacks for obvious reasons.

The human resource vacuum that happened in India in core engineering fields with regard to real engineering experience, in all industries both in the public and private sectors, is the main reason why India is facing cost and time overruns in almost all infrastructural and industrial projects.

As engineering is a group activity, it would be very difficult to identify the areas of competency vacuums that exist in the various organizational hierarchy by statistical studies.

To identify this we need to adopt a different approach. The top authorities should open their eyes to recognize the ground realities in this important area that is critical to the country's future developments if at all progress is to be achieved in a reasonable time frame.

An open discussion by the people who are working in this area of EPC and engineering consultancy fields might be helpful.

It would be an interesting study if some one undertakes to find out the number of engineers working in design and engineering field in India and the details of their qualifications, experience, age, expertize, etc. I percieve a human resource (HR) inadequacy in this field. There is also a need to make this area an interesting career option for young and bright engineers. If the field does not attract them, progress of India would depend on foreign help perennially for ever.
I may be wrong in my perceptions.

Please correct me if I am.