Post on 27-May-2020
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CHAPTER V
PERFORMANCE EVALUATION OF CONSTRUCTION
INDUSTRIAL UNITS IN KERALA
Controlling the cost and finances of the construction operations and
avoiding financial losses at the job site are of prime importance to the
survival, growth and expansion of a construction organization. Any
discussion on financial management or any other functional area begins
with a reference to the business objectives of the organization. Objectives
are the business plans or goals of the organization. The plans should say
what the business organization is going to do and what are expected to be
the results to benefit the organization itself as a wealth-providing entity,
its shareholders, as individual investors, its employers and the society in
which it operates, now and later. The plans have to match the financial
resources available. It may be noted that while the business objectives of
the organization will guide the management of its financial resources,
only the good financial results of its operations will ensure an efficient
pursuit of the objectives.
The objectives are generally bifurcated into long-term or strategic
objectives and short-term or tactical objectives. The top management
concentrates on the former while departmental managers concentrate on
the latter.
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The general objectives are outlined below:
1. The organization’s market position in the construction industry
and its order level.
The organization‟s market position is a status to be created by the quality
of performance and professionalism in conduct.
While discussing the orderlevel, the size of operation and the cycle
of operation are the two points to be considered.
For a construction organization the ideal size is the achievement of
annual turnover equal to eight times the shareholder‟s fund.
Operating cycle is the period from the start to the finish of
execution of the whole contract. In heavy industrial construction, it is
2 1/2 years average. Therefore, to be able to achieve a turnover 8 times
the owned funds, 8x2 1/2 =20 times should be the ideal order level. This
level should be maintained on a revolving period. (Joy, 2008)1.
2. Return on Net worth
The organization shall endeavour to earn sufficient after tax return on net
worth.
3. Business growth
The organization‟s policy shall always be to attain a balanced and healthy
growth.
4. Employees’ growth
Generally the employees shall be provided with the compensation for
their efforts. They shall be encouraged and supported for individual
growth and development, be given a co-operative atmosphere of working
and provided with social security benefits.
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5. Strength to face changes in construction technology
To be able to survive in the competitive industrial field, the organization
should keep abreast of the latest materials, equipments and erection
technology and skill of that time. There should be reasonable measures of
Research and Development, training, information service, collaboration
and /or understanding with leaders in the industry in the more advanced
parts of the world. These measures of innovation should be part of a
going concern‟s preparation to adapt to changes.
6. Strength to face other environmental changes
Environment has several facts. They are: economic, social, ecological
cultural, political, legal, technological and market competition. The
organization has to continuously strengthen itself to face all manner of
changes in all facets.
7. Diversification
Financial resources management will play an important role in the
organization‟s business diversification plans in later years when it would
find that the particular class/ types of jobs undertaken is no longer paying.
8. Social contributions and environmental considerations.
The society in which the organization operates would expect certain
contributions from it. The organization and the community around it are
interwoven and interdependent. It is necessary to emphasize that in all its
plans and polices the organization has to consider social good. It has to
serve the society by doing excellent quality work, earning good profit,
and paying substantial amount of taxes to Government as a major part of
social contribution. There should be concern for the health, hygiene and
welfare of the community around its working. It must cause minimal
damage to the environment.
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9. Profit
Profit is the prominent objective of a construction organization. This is
because the organization can survive only when it makes sufficient profit
to provide the necessary financial support to the other objectives. Every
decision that it makes should aim at a profit. This objective is classified
into short term as well as a long term because profit is to be earned from
the current operations. Every part of performance should earn the
proportionate profit. No management can ever think of a compromise on
this. The profit earnings have to be reasonable. After providing for
employers‟ long term benefit funds, depreciation on assets, all interest
charges and income tax, the net earning should leave sufficient balance to
pay dividend to shareholders at comparable rate and retain a reasonable
amount to finance the organization‟s growth.
The objectives mentioned above serve as a benchmark to measure
the efficiency, effectiveness or otherwise of the operations undertaken by
construction organizations all over the world. But before attempting to
make such a detailed analysis, certain aspects peculiar to construction
industry are worth noting. The conditions in the construction are entirely
different from other industrial or commercial activities having fixed place
of business, standardized methods, practices, inputs and outputs and
above all fixed overheads. Most construction projects are located in
isolated areas. Only the vital and crucial functions are performed by the
core group of regular employees. A major portion of the supervisory and
administrative personnel and majority of the workers are temporary and
migratory. Further, a number of anticipated modifications and adverse
site conditions require spurts of additional staff and labour resources at
short notice which may be very expensive. Thus, it is not possible to
consider the construction industry as similar to manufacturing or other
service sector.
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Continuous increases in the prices of construction materials as well
as the cost of labour are posing serious questions on the efficiency of
works contracts. Variations in the costs of these inputs have become
increasingly unpredictable. Contractors are no longer willing to submit
fixed price bids as they are unable to estimate, with reasonable accuracy,
the likely increases in the prices of materials, equipment and labour and
thus provide in their quotations for anticipated cost increases due to these
items.
The frame work to evaluate the working of any system has to
include economic, commercial as well as social and ethical criteria.
It has been empirically proved that sustainable construction
activities will bring about all round economic development. It is also
noted that economic development brings about healthy and ethical
construction practices. Thus the relationship between the two seems to be
symbiotic.
The following questions are to be asked to in order to evaluate the
working of the construction industrial units:-
1. Whether construction business entities find the most productive
investment?
2. Do the units revalue their assets and liabilities in response to the changed
circumstances?
3. Whether the units facilitate the management of risk by making available
the means to insure and diversify risks.
4. Is there any institutional framework that monitor the performance of the
various units, and discipline those not making proper and effective use of
their resources?
5. How effective is the legal, regulatory, supervisory and judicial structures?
6. Whether construction participants (firms) publish consistent and
transparent information?
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Construction aims at adding value to the quality of life. A new house or a
new residential complex, a new commercial or infrastructural project, all
these can and should enhance the quality of life of the people associated
with it directly or indirectly.
However, one must admit that there is less transparency in the
dealings and there is a uniform reluctance on the part of the construction
participants in sharing the statistical data and their experience. As we find
in many business activities, in construction business too it is customary to
have two sets of accounts, one for the revenue authorities and the other
for one‟s own use.
The atmosphere of corruption and dishonesty that envelops the
administrative apparatus currently found in several countries, is in many
respect, a genuine problem. Paradoxically, it must be seen as a price that
has to be paid to promote economic expansion in the underdeveloped
areas. (Bhagavathi, 1987)2.
In spite of the important position of the residential construction
sector in Kerala, it continues to be a non-formalized one. Even at the
national level, the number of small firms is so large that the construction
is called a non- formal sector of the economy. In construction, there are
no licensing conditions or other regulations as they exist in the
manufacturing sector. As most work is tendered out with advances given
by the owner, the capital required for setting up a firm is small. Thus
entry into the industry is easy and it calls for no special skills.
Although residential construction registered an average annual
increase of 25-30 percent, the sector faces a number of problems.
Tackling the problems effectively calls for a better understanding of its
present structure and working. The industry has its presence all over the
state. An attempt is made in this chapter to study the working of the
industry based on a stratified sample of construction participants that are
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spread over (three) regions, namely, Northern, Central and Southern of
the state.
Location of building construction industrial units
The important factors which influence the location of the factories
in the organized manufacturing sector are not wholly applicable in the
case of construction firms. In fact, it is the demand for construction
products that will determine the level and volume of construction activity
undertaken in a particular area.
An analysis of the location of the selected units revealed that 70
per cent of the units have an urban or semi-urban location. Since
manufacturing and associated modern services are concentrated in Kochi
and its surrounding region, it is also the centre of the construction
industry in the state. There are certain corridors that reflect high
investment potential locations around Kochi, including Aluva and
Nedumbassery, like Thrippunithara, Thiruvankulam, Chottanikkara,
Aroor, Vypeen, Kadungalloor and North Paravur.
Kochi is where the largest proportion of Kerala‟s upper an middle
class live as indicated by the city‟s average per capita income, the
number of taxpayers resident and the amount of taxes collected from
here. The growing middle-class wants better-quality housing and is
benefitting from ready access to home loans through a more sophisticated
banking sector. One property developer estimates that the private sector is
building upto 20,000 homes a year but this is not enough to meet demand.
Kozhikode and Thiruvananthapuram, the two other big cities of the
state follow Kochi. Besides big cities and suburbs, smaller ones like
Thrissur, Kottayam and Kollam, and Towns like Thiruvalla,
Changanassery, Pala, Chengannore Guruvayoor, Irinjalakuda,
Kodungalloour and Chalakudy are also witnessing tremendous
construction activity.
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Construction industry is wide spread in its reach. Hence, primary
data is collected from each of the main participants of the industry
namely, the builders, the contractors, the input suppliers and the workers.
Year of establishment
More than 80 percent of the selected units were set up after 1980.
Ownership pattern
There are 33 major builders having their presence all over Kerala.
40 per cent of them have projects (on going or finished) all over the
country. 20 per cent of them have overseas assignments. Of the 33 major
builders, 23 were contacted and details were collected from them. Only
12 firms were ready to share financial data. Of the 23 major builders
contacted, 2 are public companies, 8 are private limited companies, 9 are
partnership firms, 3 are proprietorship concerns and 1 belongs to the other
category. Besides, 40 local builders (area of operation one district) were
contacted ; of these 10 per cent are private limited companies, 75 per cent
are partnerships and 15 per cent are proprietorship concerns.
There are 16 major contracting having their presence all over
Kerala. Of these 11 firms were contacted and data available from 9 of
them. Of the 9 contractors 4 are private limited company 4 partnership
concern and one is a proprietary concern. Besides the major contractors,
there are numerous general and specialty contractor working at the local
level. 40 such contractors were contacted and 33 of them are partnerships
and 7 proprietary concerns.
80 per cent of the 24 input suppliers contacted are partnership concerns
and or the remaining proprietary concerns. All of them are located in
cities or towns.
The construction labour market is a heterogeneous one. From highly
skilled (professional engineers, architects etc) to unskilled workers
constitute it. Most of the administrative and middle level management is
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performed by employees recruited from Kerala whereas on an average
20-30 percent of the low end or manual work is performed by migrant
labourers.
STUDY METHODOLOGY
The data for this study was collected through questionnaires,
structured face –to- face and telephone interviews. The sample consisted
of 12 major builders and 9 major contractors having presence all over the
state. Besides, 40 local builders and 40 local contractors were contacted.
They belong to the central region of Kerala namely Ernakulam and
Thrissur districts. Of the 24 input suppliers contacted, 9 firms have
outlets in all the three regions.
Table – 5.1
Profile of sample –Annual turnover of firms, Typical value of
projects tendered for and tender success Rate
(Builders and contractors)
Category Frequency ( per cent)
Annual Turnover
Less than Rs. 1 million
Rs. 1 million- Rs. 20 million
Rs. 20 million- Rs. 40 million
Rs. 40 million –Rs. 60 million
Above Rs. 60 million
6.00
40.62
26.26
7.11
20.01
Typical value of projects tendered for
Less than Rs. 5 lakh
Rs. 5 lakh- Rs. 15 lakh
Rs. 15 lakh- Rs. 25 lakh
Rs. 25 lakh- Rs. 35 lakh
Above Rs. 35 lakh
28
38
16
8
10
Tender success Rate
Less than 5 per cent
6-10 per cent
11-20 per cent
21-30 per cent
Above 30 per cent
14
43
14
14
14
Source : Computed from consultations with experts.
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Workers numbering 200 were contacted of these administrative
staff consisted of 30, Engineers 20, architects 8 and construction
labourers 142. All these are taken form the central region. The residents
numbering 50 contacted are mainly located in Thrissur district especially
Guruvayoor.
Firms’ objectives
Respondents were asked to indicate the relative significance of
economic as well as non-economic objectives on a scale ranging from the
least important to the most important.
Table - 5.2
Ranking of firms’ objectives
(Builders & contractors)
Firm’s objectives Rank
Economic objectives
Profit earnings per share
Return on investments
Turnover
Market share
1
3
6
7
Non- economic objectives
Customer satisfaction
Quality
Performance relative to competitors
Technology leadership
2
4
5
8
Source : Survey.
There is considerable overlapping in the functions undertaken by
builders and contractors. There are generally three categories namely a)
Exclusive builders b) Exclusive contractors, and c) acting as both builders
and contractors. The above two tables are compiled combining the survey
results in respect of both the builders and contractors.
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Table- 5.3
Composition of fixed capital of the sample units (Builders ) during the
period 1991-00 to 2008-09
(Rs. Crores)
Year Land Buildings Vehicle Total
1999-00 4 6 1 11
2000-01 5 8 1 14
2001-02 6 10 2 18
2002-03 7 11 2 20
2003-04 8.5 13.5 2 24
2004-05 26.0 19.0 3 48
2005-06 51.0 25.0 5 81
2006-07 60.0 33 7 100
2007-08 70 32 9 111
2008-2009 68 49 11 128
Source: Survey.
Table – 5.4
Composition of the fixed capital of the sample units (contractors) during
the period 1991-00 to 2008-09.
(Rs. Crores)
Year Land and
Buildings
Plant and
Machinery
Vehicles Total
1999-00 2.5 39.5 .5 42.5
2000-00 3.0 42.0 .5 45.5
2001-02 4.0 50.25 .75 55.0
2002-03 10.50 58.50 1.50 70.5
2003-04 11.25 70.00 1.75 83.0
2004-05 19.00 80.00 1.50 100.5
2005-06 20.00 117.50 2.50 140.0
2006-07 25.50 151.50 3.00 180.0
2007-08 30.00 161.50 3.50 195.0
2008-09 31.00 165.50 7.50 204.0
Source: Survey
1
2
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Table-5.5
Composition of physical working capital (PWC) and working capital (WC) of the sample units (Builders )
during 1999-00 to 2008-09
(Rs. Crores)
Year Materials Semi finished
products
Finished
product
Total physical
WC Cash R-P
WC
(5+6+7)
1991-00 4 25 14 43 12.0 5.50 60.5
2000-01 6 27.5 17.5 51 17.5 8.50 77.0
2001-02 8.5 35.0 28.5 72 20.5 9.50 102.0
2002-03 11.5 37.5 31.0 80 24.0 11.50 115.5
2003-04 22.5 38.5 35.0 96 28.5 13.0 137.5
2004-05 49.0 73.0 70.0 192 48.0 20.5 260.5
2005-06 97.5 126.5 100.0 324 64.0 29.0 417.0
2006-07 104.0 146.0 150.0 400 80.0 38.0 518.0
2007-08 105.0 150.0 189.0 444 88.0 40.0 572.0
2008-09 140.0 172.0 200.0 512 91.0 44.0 647.0
Source: Survey.
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Table – 5.6
Composition of physical workings capital and working capital of the sample units (contractors) during the period
1999-00 to 2008-09
(Rs. Crores)
Year Materials Semi finished
products
Finished
product
Total physical
WC
Cash R-P WC
(5+6+7)
1991-00 30 21.25 55.0 106.25 25.5 10.0 141.75
2000-01 32.5 22.50 60.0 115.00 28.75 12.75 156.50
2001-02 45.0 33.00 87.00 165.00 38.00 17.00 220.00
2002-03 60.0 42.50 110.00 212.50 80.00 34.00 326.50
2003-04 85.0 53.50 141.50 280.00 110.00 60.00 450.00
2004-05 147.5 90.00 212.50 450.00 180.00 95.00 725.00
2005-06 187.5 125.00 317.50 630.00 200.00 105.00 935.00
2006-07 245.00 180.00 475.00 900.00 233.00 120.00 1253.00
2007-08 285.00 195.00 490.00 970.00 235.25 125.00 1330.25
2008-09 270.00 180.00 450.00 900.00 231.50 115.00 1246.50
Source: Survey
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There is inter firm inconsistency in the financial management
practices reported to by builders and contractors. Viewed from the
technical angle, there is a marked difference in their composition of
fixed capital and working capital. Exclusive builders generally have
less investments in plant and machinery while exclusive contractors
have a very high investment in plant and machinery. There is also
difference in the current ratios with former having an average current
ratio of 5:1.5 while the latter having an average of 1.2:1. The presence
of a very high unsecured loans in their balance sheets points to an
unhealthy practice in raising funds. The capital base is poor even in
the case of large firms while the small firms manage with very small
amount of capital. This raises the question of sustainability of
construction activities undertaken by these firms.
Orgnisation’s market position
Over the years major builders and contractors in the state have
acquired a somewhat unassailable position in the market. Almost 70-
80 per cent of the residential construction work takes place in urban
and semi urban areas. The market here is dominated by large firms. 80
per cent of the work in urban and semi-urban areas is under taken by
large firms. The rural market is characterised by a slow and steady
demand for construction products and the same is met by medium to
small players. With the internal dynamics getting saturated in urban
areas, large players have started ventures in rural areas. Of late, even
big players have started undertaking projects in the outskirts of town
and rural areas.
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Figure 5.1
Classification of firms undertaking construction activity
in rural areas
Figure 5.2
Classification of firms undertaking construction activity
in urban areas
20%
80%
Large firm
Small firm
10%
90%
Small firm
Large firm
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Return on Net worth
Investment in construction normally provides a fair return on net
worth. Going by the samples, the urban players could garner a higher
return on net worth than their rural counterparts. The formula for return
on net worth is
= capitaluppaidTotal
incometaxAfter
Table - 5.7
Return on Net worth (Builders)
(Rs. Crores)
Year Total paid up
capital
After tax income per cent
2004-05 12 1.68 14
2005-06 20 4.32 21.6
2006-07 25 5.96 23.84
2007-08 28 8.12 29.0
2008-09 32 7.6 23.75
Source : Survey
Table – 5.8
Return on Net worth (contractors)
(Rs. Crores)
Year Total paid up
capital
After tax
income
per cent
2004-05 20 1.6 8
2005-06 26 3.9 15
2006-07 36 4.5 12.50
2007-08 39 6.98 17.89
2008-09 40 5.60 14.00
Source : Survey
There is considerable difference in the return on net worth enjoyed
with builders having a range of 5-40 per cent while contracting firms
have a range of 8-18 per cent. The average return on net worth enjoyed
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by the builders for the last five years comes to 22.44 per cent while that
of the contractors it comes to 13.48 per cent. The global economic melt
down has affected the builders and contractors of the state with the
decline in return in the year 2008-09.
Business Growth
Growth presupposes the existence of opportunities on the one hand and
the organisation‟s ability to capitalize on such opportunities. The
construction organizations in urban and semi-urban areas are
experiencing a high rate of growth based on increase in the annual
turnover, acquisition of new fixed assets and rate of profit. The large
players have registered 20-40 per cent average annual growth rate over
the past 5 years. However, in rural areas, business growth has not been
much impressive.
Table – 5.9
Business Growth during 2004-09 (Builders and contractors)
Particulars Frequency (per cent)
Less than 10 per cent 22
10 per cent-20 per cent 38
Above 20 per cent 40
Source : Computed from survey.
Table – 5.10
Average Growth Rates of Builders and contractors in Kerala for the
period 2004 to 2009 in Rural and Urban areas.
Category Frequency (per cent)
Less than 0 R
U
8
3
0-10 per cent R
U
3
10
10 per cent-20 per cent R
U
7
19
Above 20 per cent R
U
10
40
Source : Computed from survey. (R= Rural, U= Urban)
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Local
Migrant
The failure of certain construction organizations in both rural and
urban areas can be attributed to their own mismanagement rather than
outright competition. It is also to be noted that the growth of business has
not been uniform throughout Kerala. While the central districts showed a
very high growth rate, establishments in northern and southern districts
showed average to high growth rates.
Employee growth
Construction labour force consists of both white and blue collars.
90 per cent of the administrative and 80 per cent of the technical (mainly
engineering) work is undertaken by employees recruited locally. On the
other hand 20-60 per cent of the manual work especially low and jobs are
entrusted to migrant labour force.
Figure 5.3
Estimated share of local and migrant labour force in the
construction activity
The labour management in construction industry is far from
satisfactory. Barring a few employees at the top and middle level, no
other category has any type of job security, let alone other facilities.
Since 85 per cent of the labour are recruited temporarily, the mutual
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contractual obligations between the firms and the workers come to an
end with the completion of the project on hand. Workers are not given
much training. Here individual growth and development are more a
matter of chance than any deliberate attempt on the part of the
employer. 90 percent of the manual work is characterized by learning
by doing approach. Barring one or two construction organizations, the
construction labour force is treated in the same manner irrespective of
the size of the firm. Human relations are better attended to in rural
projects undertaken by local firms. But they too are disappearing now
–a-days.
Technology upgradation
Technology up gradation focusing on productivity enhancement is
yet another factor determining the performance of construction
industrial units. Here also large firms are better poised to introduce
latest construction technology. But they too are a little bit hesitant in
introducing changes.
Table- 5.11
Adoption of new construction Technology
Category Adopted Ready
to adopt
Not
decided
Not to
adopt
Total
Large builders
and
contractors
6 10 5 - 21
Medium &
small
8 40 18 14 80
Source : Survey
While construction materials are easily accepted, construction technology
continues to be traditional, especially, in rural areas. Technology up
gradation calls for investment in plant and machinery and human
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resources. Large firms have the resources and they introduce changes.
The local firms continue to follow the traditional methods. There is also
lack of skilled labour force. Construction firms in Kerala are yet to realize
the importance attached to adoption of new construction technology.
There are R&D sections attached to some firms, but most of them are
only ornamental. Some Non-Governmental Organizations (NGOs) have
come up with novel ideas, but the market is yet to respond to these
initiatives positively.
Managing change
Today‟s ever hanging business environment calls for continuous
appraisal of strength and weakness on the part of construction
organizations. These appraisals consist of internal as well as external
appraisals. Generally the methods of internal appraisal usually followed
by world class construction firms include, but not limited to the
following:
1. Employee performance appraisals.
2. Customer surveys; and
3. Skills analysis
Similarly, methods of external appraisals are:
1. Economical
2. Technological
3. Political; and
4. Social
Based on the internal as well as external appraisal results, firms usually re
define their corporate objectives. Then efforts to develop and implement
strategic plans begin. Generally, the planning tools are:
1. Financial projections
2. Formal business plans
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3. Growth projections
4. Vision statements
5. Market segmentation
6. SWOT analysis; and
7. Core competencies
Going by the sample, majority of the Kerala builders and contractors,
especially the local ones, are not in the habit of conducting regular
internal and external appraisals. Large firms which belong to the
corporate sector are in the habit of designing a strategy for themselves
and they usually make comprehensive plans for the future.
Construction market in Kerala is actually charactersied by what we
call „random walk‟. There is not much homework or project formulation
techniques undertaken before taking a decision to launch a new project.
Selecting the auspicious day and time for the foundation ceremony of a
new project, generally solemnized by a celebrity, „bhoomipooja‟ and
other things associated with it are done with much fanfare. Faith and
rituals play a very important role in construction industry. One cannot
deny the fact that construction has a strong positive linkage with
superstition.
Construction markets move upward and downward which cannot
be justified by rationally formed expectations. The market speculation
multiplies several fold the effect of underlying variability in the value of
materials and labour. Given the turbulent nature of the environment, firms
are usually in a rush to finish the projects on hand. Thus modern methods
of strategic planning have not yet found favour with many construction
organizations in the state.
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Diversification
Business diversification is supposed to be one of the main
corporate strategies usually adopted by successful construction
organizations the world over. The market for luxury housing has
considerably increased in India especially in mega cities. This applies to
Kerala too. A lot of people desire to live in a posh locality to add their
stature in the society. Urbanization and heavier pockets have made it
possible for the people to quality living.
However, the global economic meltdown has affected the builders
of our state in such a way that some of them have started thinking of
undertaking “ affordable housing projects”. These projects are generally
meant for medium and low income groups. Some prefer flats in the city
and villas in the outskirts of the town. The ability to redesign strategy and
design products that are capable of satisfying the customer expectations
calls for the ability for diversification. What is required is „out of box‟
thinking which should replace the „herd mentality‟ hitherto followed by
many construction firms. Several firms have started undertaking low cost
residential projects in the light of the global economic meltdown. But it
must be admitted that the builders and contractors in the state are yet to
realize the importance of designing multiple investment opportunities.
Social contributions and environmental considerations
The framework to evaluate the working of any system must include
economic, commercial as well as social and ethical criteria. The concept
of corporate social responsibility is gradually gaining ground among the
construction participants of the state. How effectively the organization is
capable of safeguarding the interests of the stakeholders will determine
the degree of importance it attaches to corporate social responsibility.
Quality, productivity and environmental considerations are the
three aspects associated with social responsibility. The two important
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criteria attached to the above aspects are ISO 9000 and ISO 14000
certification.
Table-5.12
Popularity of ISO 9000 certification among construction firms in
Kerala
Category Obtained
ISO-9000
Certificate
Applied
for
Not
decided
Not
aware
Large firms 17 4 - -
Medium&
small firms
2 - 30 48
Source : Survey
Table 5 -12 shows the popularity of ISO-9000 certification among
the construction firms of Kerala. Accordingly, majority of the large firms
have already obtained ISO 9000 certification. Majority of the local
builders are not aware of such a certification. Some of them are also
reluctant in applying for the same lest it should curtail their freedom.
Table-5.13
Popularity of ISO 14000 certification among construction firms in
Kerala
Category Obtained
ISO-14000
Applied
for
Not
decided
Not
aware
Large firms 2 1 8 10
Medium & small local - - 6 75
Source : Survey
ISO 14000 is much more comprehensive where as ISO 9000 is
market driven. ISO 14000 is driven by the stakeholders, the community
and the regulators. Majority of the large, medium and small firms are
unaware of the system of ISO 14000 certification.
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Other profitability aspects
As already stated, profit is one of the prominent objectives of any
business organizations. Profit and longevity of individual and institution
are the prime considerations of an entrepreneur. Accordingly every bit of
performance should earn the proportionate profit. There is close linkage
between profitability and productivity on the one hand and waste
management on the other. Productivity measurements are not done
scientifically by majority of the firms. Due to the complex nature of the
industry, there is no clear understanding of the productivity and the
methods of measuring it. Majority of the large builders follow some
methods of measuring productivity. But even among them there is no
agreed or definite format. Local builders and contractors are way behind
their urban corporate counter parts. There is no systematic measurement
of productivity enhancement efforts on the part of management. Closely
associated with productivity enhancement is waste management. In their
eagerness to finish the project on time, very often little attention is given
to waste management. This is the case with majority of the construction
participants irrespective of their size. Waste management is a multi-
disciplinary activity involving engineering principles and management
techniques, to minimize the overall wastages of the system under
consideration.
Operational efficiency
Construction is primarily a contracting business. In recent years,
the construction industry has seen a visible shift from “ owner managed
construction projects” to EPC (Engineering, Procurement and
Construction ) projects with inter-dependent and co-ordinated disciplines
of construction. The different types of contracts are as given below.
Engineering, Procurement and construction (EPC)3
- Complete single point responsibility
156
- Fixed time- fixed price contracts, heavy penalties for non-
performance.
- Escalation possible by mutual consent
- Most popular for power projects
Lump-sum Turnkey (LSTK)
- EPC with no scope for escalation
- Preferred for power and industrial projects
Engineering procurement construction Management
- Responsibility for placement of order for equipment and payment
lies with the promoters
- Fixed time-Fixed Price contracts
- Lower penalties relative to EPC for non- performance
- Preferred for very large projects
Turn key
- Responsibility to implement complete project
- Fixed price as well as cost plus contracts are possible
- Contractor need not have financial capability
- Preferred for medium and small projects.
Engineered package Route
- Promoter breaks up the project into packages
- Turnkey supply of packages
- Promoter is responsible for project co-ordination
Item rate contract
- This is the most prevalent contractual mechanism in which:
- The owner through an appointed consultancy organization does the
engineering.
- Bill of quantities are furnished and the tenderer is required to
quote the price item-wise
- The contractor need not have large financial capacity in this case.
157
- It is practised in subcontract packages.
- Most favoured by Government regulations
- As a consequence of cost and time overruns, possibilities for
disputes are more.
A large project may have a prime contractor who will appoint sub-
contractors for different work packages. A sub- contractor, in turn, may
have his own contractors for various jobs i.e, brick layers, concreters,
painters, tile layers, electricians, carpenters etc. The prime contractor
does the co ordination work. Short –term employment, job tenure lasting
for the project duration only and piece rate system of payment are the
major features of contracting. This system was evolved gradually with the
promoters starting to assume only business risks leaving non-business
risks to other specialists.
Cost components
A typical building construction project has the following cost components
Table 5.14
Cost components
Sl No Account Head Percentage
1 Survey and soil investigation 0.08
2 Tendering and Design 4.67
3 Personnel
Labour 15.0
Staff and officers 2.5
Labour colonies 2.25
Mobilization 3.00 22.75
4 Material 43.00
5 Plant and equipment 7.00
6 Insurance, Bank interest and capital servicing 9.00
7 Project office 0.80
8 Travel 1.30
9 Head office expenses 1.40
10 Miscellaneous (including Agency conclusion) 10.00
100.00
Source: Computed form consultation with experts.
158
The base was created on the basis of discussions with experts in the
field.
The position of the structural aspects of the cost components are as
follows:
Table 5.15
Structural aspects of cost components
Sl.
No
Structural aspects Percentage
1 Design and Technical services 5.00
2 Foundations upto plinth 14.00
3 Columns, Beams, Walling and Roofing 31.00
4 Flooring 4.00
5 Plastering, Painting and Finishing 9.00
6 Water supply and sanitary works 6.00
7 Internal electrification 4.00
8 Doors, windows and Timber items 17.00
9 Miscellaneous 10.00
Total 100.00
Source: Computed from field survey
Materials
Building materials play a crucial role in the construction of housing
stock. They constitute the bulk of the construction cost. Depending upon
the type of a housing project, building materials account for 40 to 60
percent of the total project construction cost (the remaining 33 percent
being the labour cost)
Components of material cost incurred for a representative single
story house has been worked out as follows:
159
Thus, building materials are the major single cost item in the total
construction cost of housing projects.
Table 5.16
Components of material cost
Sl.
No
Item Percentage
1 Cement 17
2 Steel 9
3 Brick / Blocks 13
4 Timber 10
5 Sand 8
6 Aggregates 5
7 Rubbles 5
Total 67
Source: Computed from survey
Apart from the rising costs, non availability and shortages of
materials have created bottlenecks in large construction programmes.
River sand has become a very costly item now a days because of
restrictions imposed by the authorities on river sand mining. One of the
few alternatives before the industry is the manufactured sand or M. sand,
which can replace the river sand.
Environmentalist are of the opinion that there should be enough
precautions to prevent any further pollution from the extensive use of
M. Sand.
A movement for the use of mud in building construction is gaining
ground in Kerala. Building with mud is nothing new. “ Almost 50 percent
160
of the people all over the world live in houses made of mud” says
architect Eugene Pandala. The use of mud implies the applications of
traditional technology which is sure to strengthen the centripetal linkages
of the industry in the state. So far, the role of mud in major construction
projects has not been significant.
Baker, Laurie A. (1993)4 stressed the need for building simple low
cost, eco-friendly houses using even discarded objects used as
construction material. He said that “All building is 10 to 15 per cent
technical know how, and the rest, common sense”.
The use of Ready Mix Concrete (RMC) is slowly gaining ground
in the country. Bangalore is the hub of construction activities using RMC.
There is only 2 percent penetration in Kerala.
It has been observed that the overall potential for cost reduction of
a representative housing unit ranges from 21.5 to 37.5 percent as shown
below.
Table : 5.17
Potential for cost reduction
Sl No. Item Percentage
Range
1 Cement 20-40
2 Steel 30-45
3 Brick / Blocks 30-50
4 Timber 40-50
5 Sand 10-15
6 Aggregates 20-25
7 Rubbles and miscellaneous 15-25
Source: Opinion of construction experts complied by NICMAR (2003)
161
Productivity measures
Construction cost reduction is achieved in several ways. These
include avoiding wastages, adopting appropriate technology, evolving
innovative designs, achieving efficient construction management,
effective programming of works, improving labour skills, on-line
monitoring etc. These techniques are collectively called “ productivity
measures”.
There is no unanimity among the authorities on construction as to
the meaning and definition of productivity in construction. But the
general definition of input-output ratio with a time period with due
consideration for quality is applicable in the case of construction industry
also.
Productivity= )Quality(Inputs
)Quality(Outputs
(Within a time period, quality considered )
The formula indicates that productivity can be improved by i)
increasing outputs with the same inputs, ii) by decreasing inputs but
manufacturing the same output, or iii) by increasing outputs and
decreasing inputs to change the ratio favourably.
Total factor productivity combines various inputs to arrive at a
composite output. Productivity implies effectiveness and efficiency in
individual and organizational performance. Effectiveness is the
achievement of the ends with the least amount of resources.
The highest site productivity is obtained by producing the required
quantity of construction of the specified quality, within the budgeted time
and by the best and the cheapest method.
But this is seldom achieved due to several reasons some of which are
listed below:
a) Changes in the design after the work has started
162
b) Use of unsuitable plant, equipment and tools.
c) Bad sequencing of operations
d) Delay in procurement of materials
e) Too much of material and labour wastage
f) Lack of finance
Material wastage in construction industry
Wastage is the negative variance between the estimated
consumption and actual consumption of inputs for a fixed quantity of
output. Standard wastage is the ± tolerances which are stated in the rule
book issued by the competent authority. It is expressed as follows
W= E1- (1+Tm) x EO
Where,
W = wastage
E1 = Actual consumption of inputs
EO = Estimated consumption derived form final drawings at pre-start
stage
Tm = Factor of tolerance for estimate, allowable wastage
Material wastage Indices (MWI) constitutes the instrument to
monitor consumption of construction materials and labour. Existence of
Building Materials Price Indices (BMPI), Labour Rate Indices (LRI) and
Construction Cost Indices (CCI) is essential to the effective and
meaningful use of MWI. In India, neither of the three BMPI, LRI and
CCI exist (Vaid, 2003)5.
In practice, the extent and quantity of wastages are not exactly
measurable as there is scarcity of records on the one hand and supply of
doctored data making it less authentic on the other. However, a NICMAR
study group headed by Dr. K. N. Vaid has come out with the following
results.
163
Table : 5.18
Composition of cost of wastage
Material Assumed share
in construction
Actual
average
wastage
per cent
Share of
wastage in
construction
Percentage
share
Cement 13.00 9.58 1.24 33.60
Steel 12.00 8.14 0.98 26.56
Sand 6.00 16.28 0.98 26.56
Metal 3.00 6.10 0.18 4.88
Bricks 2.00 12.43 0.25 6.78
Blocks 2.00 2.93 0.06 1.62
Total 36-38 3.69 100.00
Source : Management and Labour in the Indian Construction Industry. K.N Vaid
(2003)
It may be noted from the above table that category „A‟ material
which constituted 36 to 38 percent of total construction cost had a
wastage of 3.69 percent. In other words, the wastage was about 10
percent of the total construction cost. Further column 4 brings out that
cement, steel and sand were the major items whose wastages escalated
the cost of construction significantly (Vaid, 2003)6.
Assuming the average of Rs. 1000 per square foot as the cost of
„B‟ class construction, the wastage was (10 per cent) Rs. 100. For a one
room kitchen unit of 400 sq.ft. area, wastage would be Rs. 40000, and
Rs. 80000 for an 800 sq.ft. housing unit.
Very little efforts are made by the residential construction units in
Kerala in applying scientific methods of Material Requirement Planning
(MRP), working out of Economic order quantity (EOQ), determination of
lot size etc. in any of the projects undertaken by them.
Regarding productivity and quality in construction, organizations
are found to behave almost like bureaucratic organizations that are
164
characterized by underspecification of ends (goals and values) and over
specification of means and by greater emphasis on control and close
supervision rather than autonomy and commitment. In the absence of any
reliable measurements of input- output relationships, the management
process tends to be expressed in terms of input elements only and there
are few measures to achieve the outputs.
Employment of labour in construction
With a very few exceptions, construction labour is supplied by
labour contractors in all housing projects. Where total job is split into
numerous work packages and tendered out to sub-contractors and
specialty contractors, the latter bring labour to execute the contracts. As
such, maintenance of labour records is considered not critical except for
compliance of provisions of various labour laws. These labour records, if
any, are maintained by sub- contractors and specialty contractors who
directly pay labour wages. In practice, the client or builder, though
responsible for the maintenance of labour records, had no such records.
The records are supposedly maintained by contractors who go away on
completion of their respective contracts. As a result, meaningful research
on construction labour is very difficult, if not impossible, as there is little
access to labour data in construction projects; even though its reliability is
often questionable. It needs to be understood that data pertaining to
labour costs and rates would always remain near approximation except in
projects that are executed by big contractors of repute. Another option is
to directly enquire from workers engaged on project work, which is not
possible for completed projects, or go by the prevailing market rates at
the time. One can expect only a limited success in this matter.
Authoritative serial data on the size of construction work force and
its distribution by skill are not available. However, NICMAR studies
bring out the following picture.
165
Table : 5.19
Employment by categories (Projections for 2004-05)
Categories Percentage
Engineers 8.47
Technicians 4.43
Clerical 4.40
Skilled workers 27.62
Unskilled workers 55.08
Total 100
Source: Computed by the NICMAR study group. Taken from
Management and Labour in the Indian Construction Industry –
K.N Vaid (2003)
The distribution of manpower requirements by trades in various
sections was expected to be as under
Table : 5.20
Distribution of manpower requirements by trades in various sectors
( projection for 2004-05)
Trade Percentage
Unskilled workers 54.43
Masons 30.42
Carpenters 7.94
Plumbers 0.32
Electricians 0.47
Others 6.42
100.00
Source: Computed the NICMAR study group, taken from Management
and Labour in the Indian Construction Industry- K.N Vaid
(2003)
166
Generally, in building construction industry, labour is categorized
into skilled, semi-skilled and unskilled.
Figure 5.4
Category of construction labour force on the basis of work and
responsibilities
category Nature of work /trade Responsibility of
reporting to
Skilled Masons, carpenters,
Blacksmiths, stone-cutters,
mechanics, Drivers and clerks
Engineers and senior
level Technical
personnel
Semi- skilled Second class skilled workers
working under first class skilled
workers
First class skilled
workers (Supervisors)
Unskilled
workers
Earth work, stone breaking and
crushing, digging,
transshipment, load carrying and
similar work, include watchmen,
water carriers etc.
The immediate boss
under whom the
person is working
Courtesy : Management and Labour in the Indian Construction Industry-
K.N Vaid (2003)
167
Figure 5.5
The work organization
The line hierarchy of a construction company is as shown below:-
(Courtesy: Management and labour in the Indian construction industry.
K.N. Vaid(2003))
Figure 5.6
The constituents of a work group at the
construction site are as follows:
Come from Report to
Technical pool Engineers
Skilled
Labour pool Semiskilled Gang leader
Unskilled
Clerks
Staff Pool Accounts officer
(Courtesy: Management and labour in the Indian Construction Industry,
K.N Vaid (2003)
Company
Agent/ Director
Sub- contractors Technical personnel, Engineers etc
Staff personnel, accounts, liason etc.
Skilled
workers
Leader of the
unskilled labour force
Clerks
Semi –skilled workers
Unskilled workers
168
Occupation
The majority of the employed construction workers belonged to the
agricultural sector. The construction sector engages 14 types of workers
including brick workers, mason, carpenters, blacksmiths, plumbers and
painters. Out of the 142 samples selected, 40 percent are helpers in the
construction sector followed by masons. Since only workers in the
building construction industry are taken, all the 14 trades cannot be traced
in the sample
Table : 5.21
Classification of construction workers by occupation
Sl No. Type of work No. Percentage
1 Brick worker 10 7.02
2 Mason 25 17.82
3 Carpenter 15 10.54
4 Black smith 7 4.90
5 Plumber 6 4.20
6 Painter 10 7.02
7 Helper 51 35.88
8 Electrician 9 6.31
9 Marble worker 9 6.31
142 100.00
Source: Field survey
Sex Ratio
Majority of the construction workers are males. However, with the
concept of family employment gaining ground, the number of women
workers has started rising in construction sites.
169
Table : 5.22
Classification of construction workers by sex
Sex No Percentage
Male 88 61.97
Female 54 38.03
Total 142 100.00
Source : Field survey
Age composition
Majority of the workers are in the age group of 35-45, followed by
persons belonging to 45-55
Table 5.23
Age composition of construction workers
Age Group No Percentage
18-35 29 20.42
35-45 57 40.14
45-55 48 33.80
>55 8 5.64
Total 142 100.00
Source: Field survey
Experience in construction work by year
Although construction activity forms part of the unorganized
sector, workers usually stick to their work because of the high wage rate
prevalent there. Among the sample workers, 82 percent have experience
of more than 10 years, and 5 percent of more than 40 years in the
construction sector
170
Table : 5.24
Experience in construction work by year groups
Years of
experience
No. of workers
Percentage Male Female Total
0.5 6 2 8 5.65
5-10 12 5 17 11.97
10-20 18 10 28 19.71
20-30 23 19 42 29.57
30-40 25 15 40 28.17
More than 40 4 3 7 4.93
Total 88 54 142 100.00
Source: Field survey.
The number of workers in the 0-5 years category comes only to
5.65 percent. This finding implies that the new generation seldom enters
this field.
Marital status
Among the 142 sample workers, 86 per cent are married 6 per cent
are unmarried, 5 per cent are widowed and 3 per cent are divorced and
separated
Table : 5.25
Marital status of construction workers
Type No Percentage
Married 122 85.91
Unmarried 9 6.33
Widowed 7 4.92
Divorced / separated 4 2.84
Total 142 100.00
Source: Field survey.
171
Community status
Majority of the construction workers belonged to other backward
community, followed by scheduled castes and then forward community.
Scheduled Tribes are absent in the sample selected for study.
Table : 5.26
Classification of construction workers by community
Social group No Percentage
Scheduled caste 36 25.35
Scheduled tribe 0 0
Forward community 28 19.73
Other backward
community
78 54.92
Total 142 100.00
Source: Field survey.
Educational status of construction workers
In the sample studied almost 10 per cent are illiterates. Majority of
the construction workers in the sample have got upper primary education
(28.87 per cent). Graduates numbering 5 and one postgraduate are found
in the study. Those who got professional education were absent in the
sample selected.
172
Table : 5.27
Educational status of construction workers
Educational status No Percentage
Illiterate 14 9.85
Lower primary
education
36 25.35
Upper primary
education
41 28.87
Secondary education 31 21.83
Higher secondary
education
14 9.85
Graduates 5 3.52
Post Graduates 1 0.73
Professional education 0 0
Total 142 100.00
Source Field survey
Participation in political activities and association with trade unions
People in Kerala are, in general, politically active and construction
workers are not an exception. Although construction workers are found
to have membership in one or other trade unions, they are not active as is
seen in other sectors. Perhaps the reason for this is that construction
belongs to the unorganized sector of the economy. Although there is a
positive correlation between active participation in political activities
and active participation in trade union activities, the same is not strong
in the construction sector.
173
Table : 5.28
Politics and trade union activities among construction workers
Nature of association Political parties Trade unions
No Percentage No Percentage
Active membership 38 26.76 18 12.67
Passive membership 68 47.88 112 78.87
No membership 36 25.36 12 8.46
Total 142 100.00 142 100.00
Source: Field survey
Work availability for construction workers
Construction work is essentially temporary, outdoor and piece rate.
Since the tenure of employment is purely temporary, one cannot view his
job beyond the contract period. There occurs constant change in the
workplace, and of the employers for most of the workers. Therefore,
work availability is an important issue among construction workers.
Majority of the workers got an average of 10 to 15 days work per month
(40 per cent) 30 percent of the workers in the sample got 15 to 20 days
work and 22 percent of the workers got 20 to 25 days of work on an
average in a month.
Table : 5.29
Work availability for construction workers
Average number of days per month No Percentage
0 to 10 12 8.45
10 to 15 57 40.14
15 to 20 43 30.28
20 to 25 30 21.13
>25 0 0
Total 142 100.00
Source: Field survey
174
It is to be noted that health factors, household responsibilities and
alternative employment opportunities are sometimes found to be the
reason for short period construction workers.
Daily wage Rates
In Kerala, unlike the other states in the country, construction
workers get high wage rates. It can also be noted that the wage rates
existing in the construction sector are one of the highest in the
unorganized sector.
Table : 5.30
Daily wage Rates of construction workers
Sl.
No.
Construction worker Daily wages (Rs)
Rural Urban
1 Mason first class 325 360
2 Mason second class 300 325
3 Carpenter first class 350 375
4 Carpenter Second class 275 300
5 Brick worker First class 350 370
6 Brick worker second class 280 320
7 Blacksmith 300 320
8 Plumber 225 240
9 Painter 285 310
10 Electrician 200 240
11 Helpers:-
Unskilled Male labour
Unskilled Female labour
250
175
275
200
12 Marble worker 320 350
Source: Field survey
175
The recruitment of construction workers is usually done by labour
recruitment agencies spread all over Kerala. These agencies are
responsible for hiring labour, retaining them during the contract period
and bringing them back when the company has a new contract. In North
India, labour recruitment is done through the institution of Jamadari and
peshgi systems. Jamadar recruits workers by paying them an advance
money called peshgi. A worker pledges his labour in return for peshgi
(Vaid, 2003)7. This practice is not prevalent in Kerala. The Jamadar, in
addition to the income from the employer will also have collections from
the workers. Majority of the migrant labour force from the Northern
parts of India engaged in the building construction sites are recruited in
this manner.
In Kerala also regular deductions from the daily wages paid to the
construction workers are not uncommon. But the plight of the local
workers engaged here is far better than their northern counterparts.
Over the last one and a half decade, Kerala has witnessed an
inward migration of workers from states as far as Bihar, Orissa, West
Bengal and Assam besides from the neighbouring states of Tamil Nadu
and Andhra Pradesh.
Migrant workers are employed in tile and brick manufacturing
units in several parts of Kerala. These workers are brought by labour
contractors. There are large number of migratory workers employed in
the construction sector. Their main concentration is in urban centres and
towns. Most of them are seasonal workers. They generally return home
soon after their work. Very few stay back here. Visiting the sites and
taking their number along with the type of work done by them is the only
option available. The situation in the migrant labour colonies is far from
satisfactory. Lack of basic facilities like drinking water, washing and
toilet facilities make their exclusive settlements away from the
176
mainstream. There are several migrant labour settlements across the
cities and towns of Kerala. There are migrant labour settlements in areas
such as Kallekad, Kalmandapam and Sundharam colonies in Palakkad.
The phenomenon of job migration is bringing with it a host of
problems as well. The authorities take a myopic approach towards
migrant workers and as such the implementation of the Inter-state
Migrant Act, has been tardy (Prabhakaran and Santhosh, 2007)8.
In this chapter, an attempt is made to measure the overall
performance of the construction sector, especially the residential
construction sector in Kerala. The results of the study point to a much
more concerted efforts on the part of all stakeholders for achieving higher
performance levels by the various construction firms. The lack of
uniformity in business practices is the main road- block in drafting a
comprehensive policy. The general approach should be to upgrade the
techniques and reduce wastage in construction. Along with this, socially
responsible real estate practices need to be put in place to achieve
enduring solutions.
LINKAGES IN THE CONSTRUCTION INDUSTRY – A
HYPOTHETICAL EXAMPLE
Construction is a hybrid of both manufacturing and service
activities. Investment in construction naturally leads to additional
investments in both the manufacturing and service sectors.
Let us take a hypothetical example of construction of 1 lakh sq. ft.
buildings with 100 housing units in rural and urban areas of Kerala
separately in order to measure the extent of linkages.
In Kerala, the land values differ in rural and urban areas with the
latter having a value of 4 times the value of the former. Let us assume
that, on an average, the land value in rural area is Rs. 50,000 per cent
where as it is Rs. 2 lakhs in urban areas. For the construction of 1 lakh
177
sq. feet of building, we require 1 acre of land which will cost Rs. 50 lakhs
in rural areas and Rs. 200 lakhs in urban areas.
Let us also assume that the project cost comes to Rs. 12 crores
(excluding land value). There is no marked distinction in the cost of
construction between rural and urban areas. The material carrying cost to
the site is more in rural areas. But this is offset by a higher labour cost in
urban areas.
It is also assumed that 20 to 30 per cent of the material cost and 5
to 10 percent of service costs find outlets in the form of additional
investments in the allied sectors of the state economy.
The period for finishing the project is estimated to be 2 years. A
total of 5 years from the date of inception of the project is taken for
consideration. The first two years demonstrate the impact of backward
linkages and the next three years that of forward linkages. Forward
linkages are predominantly in the form of service sector linkages, the
outcome of which is not exactly measurable. But, in this example, it is
assumed that additional investment in the service sector is to the tune of 5
to 10 per cent of any fresh investment in the construction sector.
In backward linkages, the ratio of additional sectoral investments
between manufacturing and service sector is assumed to be 2:1. In
forward linkages, it is assumed to be 1:2.
The project work begins on 1st January 2001 and the construction
work is finished on 31st December 2002. The maintenance and other
service costs begin from 1st January, 2003. It is assumed that the cost
incurred in the subsequent stages of production is 1 per cent of the total
construction cost in the first year, 3 per cent in the second year and 5 per
cent in the third year.
178
Apart from estimating and analyzing fresh investments and
additional investments separately for rural and urban areas, the example
is based on two different assumptions:-
(1) The material, labour and other inputs are made available from the
state itself; and
(2) The materials (excluding land and sand), labour (excluding 40 per
cent being provided locally), and all other inputs are brought from
outside the state.
The break up cost is estimated as follows:
Table 5.31
The estimated break up cost of the projects
(Rs. In lakhs)
Item First
Year
Second
Year
Third
Year
Fourth
Year
Fifth
Year
R U R U R U R U R U
Land 50 200 - - - - - - - -
Construction
Cost
400 350 800 850 12.5 14.0 37.5 42.5 62.5 70.0
Total 450 550 800 850 12.5 14.0 37.5 42.5 62.5 70.0
(Source : Survey)
R = Rural
U = Urban
3
4
5
6
7
8
179
Table 5.32
Analysis of construction cost in respect of a rural project in the first year of the project and estimation of Additional
Investment in Allied Sectors in the next four years under assumption No. 1. (Rs. In lakhs)
Sl. No. Item Fresh Investment
(2001)
Additional Investments
Percentage Value 2002 2003 2004 2005
1 Land 11.11 50 15.00 4.50 5.85 7.60
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
4.63 20.85 2.08 0.20 0.23 0.25
3 Personnel :
Labour 14.20
Staff and Officers 2.31
Labour Colonies 2.31
Mobilisation 2.78
21.60
97.21
9.72
0.97
1.07
1.17
4 Materials 39.84 179.30 53.79 16.13 20.97 27.26
5 Plant Equipment 6.48 29.20 8.76 2.62 3.41 4.43
6 Insurance and bank interest 7.42 33.34 3.33 0.33 0.37 0.41
7 Miscellaneous
(Project office, Travel, Head office
expenses including agency
commission)
8.92 40.10 4.01 0.40 0.44 0.48
Total 100.00 450.00 96.69 26.20 32.34 41.60
Source : Survey.
180
Table 5.33
Analysis of Construction cost in respect of a rural project in the Second Year and Estimation of additional
investments in the next three years. (Rs. In lakhs)
Sl.
No.
Item Fresh Investment
(2002)
Additional Investments
Percentage Value 2003 2004 2005
1 Land - - - - -
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
- - - - -
3 Personnel :
Labour 16.85
Staff and Officers 2.74
Labour Colonies 2.74
Mobilisation 3.30
25.63
205.04
20.50
2.05
2.25
4 Materials 47.30 378.40 113.52 34.05 44.27
5 Plant Equipment 7.70 61.60 18.48 5.54 7.20
6 Insurance and bank interest 8.80 70.40 7.04 0.70 0.77
7 Miscellaneous
(Project office, Travel, Head office
expenses including agency commission)
10.57 84.56 8.45 0.85 0.93
Total 100.00 800.00 167.99 43.19 55.42
Source : Survey.
181
Table 5.34
Analysis of cost of maintenance and service in respect of a rural
project after construction and estimation of additional investments in
subsequent years of construction.
(Rs. In lakhs)
Fresh
Investments
(Year)
Rs.
(lakhs)
Additional Investment
2004 2005
2003 12.5 1.25 1.37
2004 37.5 - 3.75
2005 62.5 - -
Total 112.5 1.25 5.12
(Source : Survey)
According to the above tables 5.32 and 5.33, the total construction
cost incurred (Rural Project) in the first two years i.e., 2001 and 2002 is
Rs. 1250 lakhs, The total of additional investment estimated for the 4
years i.e. 2002, 2003, 2004 and 2005 comes to Rs. 463.23 lakhs. 2/3 of
this will be 308.82 lakhs takes place in the manufacturing sector and the
balance Rs. 154.41 lakhs takes place in the service sector.
Fresh investment in respect of cost of maintenance and service for
three years (Table 5.34) i.e., 2003, 2004 and 2005 comes to Rs. 112.5
lakhs which will lead to an additional investment of Rs. 6.37 lakhs for
2004 and 2005. It is estimated that of this, 2/3 i.e. Rs. 4.24 lakhs of
additional investment takes place in the service sector and the balance Rs.
2.12 lakhs happens in the manufacturing sector.
182
Table – 5.35
Analysis of construction cost in respect of an urban project in the first year and estimation of additional investments
in the next four years. (Rs. In lakhs)
Sl. No. Item Fresh Investment
(2001)
Additional Investments
Percentage Value 2002 2003 2004 2005
1 Land 36.36 200 60.00 18.00 23.40 30.42
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
3.05 16.76 1.67 0.16 0.18 0.20
3 Personnel :
Labour 12.58
Staff and Officers 1.85
Labour Colonies 1.85
Mobilisation 2.22
18.50
101.74
10.18
01.02
01.12
01.23
4 Materials 28.13 154.70 46.69 14.00 18.20 23.67
5 Plant Equipment 4.44 24.19 7.26 2.17 2.83 3.67
6 Insurance and bank interest 5.17 28.42 2.84 .28 .31 .34
7 Miscellaneous
(Project office, Travel, Head office
expenses including agency
commission)
4.44 24.19 2.42 .24 .26 .29
Total 100.00 550.00 131.06 35.87 46.30 59.82
Source : Survey.
183
Table – 5.36
Analysis of Construction cost of an urban project in the second year and the estimation of additional investment in
the next three years
(Rs. In lakhs)
Sl.
No.
Items Fresh Investment
(2002)
Additional Investments
Percentage Value 2003 2004 2005
1 Land - - - - -
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
- - - - -
3 Personnel :
Labour 20.73
Staff and Officers 3.05
Labour Colonies 3.05
Mobilisation 3.66
30.49
259.17
25.92
2.59
2.85
4 Materials 46.34 393.89 118.17 35.45 46.08
5 Plant Equipment 7.32 62.22 18.66 5.59 7.27
6 Insurance and bank interest 8.53 72.50 7.25 .73 .79
7 Miscellaneous
(Project office, Travel, Head office
expenses including agency commission)
7.32
62.22
6.22
.62
.68
Total 100.00 850.00 176.22 44.98 57.67
(Source : Survey)
184
Table – 5.37
Analysis of cost of maintenance and services in respect of an urban
project after construction and estimation of additional investment in
the subsequent years
Fresh
Investments
(Year)
Rs. In lakhs Additional Investments
2004 2005
2003 14.00 1.4 1.54
2004 42.00 - 4.20
2005 70.00 - -
Total 126.00 1.4 5.74
(Source : Survey)
According to the above Table 5.35 and 5.36 the total construction
cost incurred (Urban Project) in the first two years i.e., 2001 and 2002 is
Rs. 1,400 lakhs. The total of additional investment estimated for the four
years i.e., 2002, 2003, 2004 and 2005 comes to Rs. 551.92 lakhs. Of this
2/3 i.e. Rs. 367.94 is invested in the manufacturing sector and the balance
Rs. 183.97 lakhs in the service sector.
Fresh investment in respect of cost of maintenance and service for
three years i.e., 2003, 2004 and 2005 (Table 5.37) comes to Rs. 126.00
lakhs which will lead to an additional investment of Rs. 7.14 lakhs in the
years 2004 and 2005. Of this, Rs. 4.76 lakhs worth of investments
happen in the service sector and the balance Rs. 2.38 lakhs in the
manufacturing sector.
Alternative Situation under Second Assumption
An alternative situation is worked out under the second
assumption. In this situation, only land, sand and 40 per cent of the
personnel are available from within the state. All other material inputs
185
including plant and equipment services are brought from outside the state.
This will reduce the funds available with the construction participants for
additional investment. In the case of materials (except sand), the
additional investments will be 6 per cent of the fresh investments. In the
case of survey, soil investigation etc. it is only 2 per cent. Additional
investments from local labour would be 10 per cent but it is only 5 per
cent in the case of migrant labour cost. In the case plant and equipment
services, insurance and banking services and miscellaneous expenditure
the additional investment will be restricted to 2 per cent of any fresh
investment in the construction sector.
There may not be any marked variation in the investment
behaviour in respect of service and maintenance activities as a major part
of these activities are provided locally.
186
Table – 5.38
Analysis of construction cost in respect of rural project in the first year and estimation of additional investment in
the next four years
(Rs. In lakhs)
Sl. No. Item Fresh Investment
(2001)
Additional Investments
Percentage Value 2002 2003 2004 2005
1 Land 11.11 50.00 15.00 4.50 5.85 7.60
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
4.63
20.85
.42
.04
.05
.05
3 Personnel
Migrant 12.96 58.22 2.91 .14 .15 .16
Local 8.64 38.88 3.89 .39 .42 .47
4 Materials 37.55 168.79 10.13 3.95 4.22 5.49
5 Plant Equipment 6.42 29.20 0.58 0.06 0.07 0.07
6 Sand 2.39 10.75 3.22 0.96 1.25 1.63
7 Insurance and bank interest 7.40 33.31 0.66 0.07 0.08 0.08
8 Miscellaneous
(Project office, Travel, Head office
expenses including agency
commission)
8.90 40.00 0.80 0.08 0.09 0.09
Total 100.00 450.00 37.61 10.19 11.98 15.64
Source : Survey.
187
Table – 5.39
Analysis of Construction cost in respect of a rural project in the second year and estimation of additional
investments in the next three years.
(Rs. In lakhs)
Sl.
No.
Items Fresh Investment
(2002)
Additional Investments
Percentage Value 2003 2004 2005
1 Land - - - - -
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
- - - - -
3 Personnel :
Migrant 15.38 123.00 6.15 0.31 0.32
Local 10.25 82.00 8.20 0.82 0.90
4 Materials 44.46 356.80 21.40 6.42 8.34
5. Sand 2.84 22.70 6.82 2.04 2.66
6 Plant Equipment 7.70 60.60 1.23 0.12 0.13
7 Insurance and bank interest 8.80 70.40 1.40 0.14 0.15
8 Miscellaneous
(Project office, Travel, Head office
expenses including agency commission)
10.57 84.50 1.69 0.17 0.18
Total 100.00 800.00 47.89 10.02 12.68
Source : Survey.
188
Table – 5.40
Analysis of construction cost in respect of urban project in the first year and estimation of additional investments in
the next four years
(Rs. In lakhs)
Sl. No. Item Fresh Investment
(2001)
Additional Investments
Percentage Value 2002 2003 2004 2005
1 Land 36.36 200.00 60.00 18.00 23.40 30.42
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
3.05 16.76 0.33 0.03 0.03 0.04
3 Personnel
Migrant 11.10 61.05 3.05 0.15 0.16 0.17
Local 7.40 40.69 4.07 0.41 0.44 0.49
4 Materials 26.45 145.46 8.72 2.60 3.40 4.41
5. Sand 1.68 9.23 2.77 0.83 1.08 1.40
5 Plant Equipment 4.44 24.19 0.48 0.05 0.06 0.07
6 Insurance and bank interest 5.17 28.42 0.57 0.06 0.07 0.08
7 Miscellaneous
(Project office, Travel, Head office
expenses including agency
commission)
4.44 24.19 0.48 0.05 0.06 0.07
Total 100.00 550.00 81.81 22.31 28.85 37.31
Source : Survey.
189
Table – 5.41
Analysis of Construction cost in respect of urban project in the second year and estimation of additional investments
in the next three years.
(Rs. In lakhs)
Sl.
No.
Items Fresh Investment
(2002)
Additional Investments
Percentage Value 2003 2004 2005
1 Land - - - - -
2 Survey and Soil investigation,
Tendering, Design and Project
Management Consultants
- - - - -
3 Personnel :
Migrant 18.29 155.46 7.77 0.38 0.40
Local 12.20 103.71 10.37 1.03 1.14
4 Materials 43.56 370.25 22.21 6.66 8.66
5 Sane 2.78 23.64 7.09 2.12 2.76
6 Plant Equipment 7.32 62.22 1.24 0.12 0.13
7 Insurance and bank interest 8.53 72.50 1.45 0.14 0.15
8 Miscellaneous
(Project office, Travel, Head office
expenses including agency commission)
7.32 62.22 1.24 0.12 0.12
Total 100.00 850.00 51.37 10.57 13.36
Source : Survey.
190
According to Tables 5.38 and 5.39, a fresh investment of Rs. 1250
lakhs in construction in respect of rural project in the first two years
would lead to additional investment in allied sectors to the time of Rs.
147.43 lakhs in the next 4 years. These are estimated under the second
assumption. It is only 31.82 percent of the total additional investment
under first assumption.
As per Table 5.40 and 5.41, a fresh investment of Rs. 1400 lakhs in
the construction of an urban project in the first two years would lead to a
total additional investment of Rs. 245.58 lakhs in the next four years.
These are estimated under the second assumption. This is only 44.49
percent of the total additional investment under the first assumption.
Forward Linkages
Based on the above hypothetical example, the following forward
linkages have been traced.
1) Demand for furniture, 2) consumer durable, 3) desk top computers 4)
security, 5) laundry 6) gardening 7) cost of maintenance 8) cost of
decoration of the units 9) insuring the residential units and 10) marketing
the existing units for the purpose of sale.
Closely related to the forward linkages is the consumption linkage
through increased demand for goods and services especially, Fast Moving
Consumer Goods (FMCG). However, it is very difficult to trace each and
every item that becomes part of the forward linkage.
Backward Linkages
Based on the above hypothetical example, the following backward
linkages are traced. They include mainly the inputs, that is, material and
non material. The main items are listed below.
191
1) Land, 2) sand, 3) cement, 4) steel, 5) brick 6) insulation, 7) wood, 8)
tiles 9) paint, 10) sanitary ware 11) electrical lighting and 12) fittings.
Besides the above, a number of professional services are needed
from the outset of a project till its completion. All types of labour namely,
skilled, semi skilled and unskilled are required to undertake the project. It
is estimated that a large number of manufacturing industries are
dependent on the construction industry for their survival, growth and
expansion. The impact of the construction industry on the commodity
market, the labour market and the financial market is phenomenal. While
assessing the linkages of the construction sector, it is found that,
backward linkages are more exactly measurable than forward linkages.
References
1. Op. Cit.
2. Op. Cit.
3. NICMAR Journal of Construction Management April – June 2002,
Vol. XVII, No.II, p.172071-77. The Future of Construction is EPC
Business, p.172071-77.
4. Op. Cit.
5. Op. Cit.
6. Op. Cit.
7. Op. Cit.
8. Op. Cit.