Through this search we are able to identify & analyze the factors through which small construction companies can gain competitive advantage over their close competitors. Also studied various Project Management techniques that can foster growth of small and developing companies in this sector. This report also identifies the upcoming opportunities that the small and budding companies have in the construction industry. Lastly, it also talks about the key hindrances faced by Indian construction companies in running their operations with suggestions to overcome them. Introduction The Construction industry of India is an important indicator of the placement as it creates investment opportune ties across various related sectors. The construction industry contributed an estimated RSI. 7,807 billion to the national GAP in 2013-14 which amounted to around 9%. The industry is fragmented, with a handful of major companies involved in the construction activities across all segments. Besides, there are medium sized companies specializing in niche activities and small and medium contractors who work on the subcontractor basis and carry out the work in the field.
In 2011 there were slightly over 500 construction equipment manufacturing companies in al of India The sector is labor intensive and provides employment, including indirect jobs, to more than 3. 5 core people. The period from 1950 to mid 1 ass’s witnessed the government playing an active role in the development of these services and most of construction activities during this period were carried out by State owned enterprises and supported by government departments. In the first five-year plan, construction of civil works was allotted nearly 50 % of the total capital outlay.
The first professional consultancy company, National Industrial Development Corporation (MIND), was set up in the public sector in 1954. Subsequently, many architectural, design engineering and construction companies were set up in the public sector such as Indian Railways Construction Limited (RECON), National Buildings Construction Corporation (NBC), Rail India Transportation and Engineering Services (RITES), Engineers India Limited (ELL) etc. As well as the private sector such as M N ADSTAR and Co. , Hindustan Construction Company (HOC), Nasals etc.
In India Construction has accounted for around 40 per cent of the development investment during the past 50 years. Around 16 per cent of the nation’s working population depends on construction for its livelihood and rates assets worth over 200 billion per annum. Total capital expenditure of state and central government was approximately RSI. 8,021 billion in 2011-12 which rose from RSI. L ,436 billion in 1999-2000. The share of the Indian construction sector in total gross capital formation (GIF) came down from 60 per cent in 1970-71 to 34 per cent in 1990-91.
Thereafter, it increased to 48 per cent in 1993-94 and stood at 44 per cent in 1999-2000. In the 21st century, there has been an increase in the share of the construction sector in GAP and capital formation. The main reason for this is the increasing emphasis on involving the private sector infrastructure development through public private partnerships (Peps) and mechanisms like build-operate-transfer (BOOT). LITERATURE REVIEW Introduction to the Indian Construction Industry The Construction Industry in India is the second largest employer of the country after agriculture, accounting for 1 1 % of Indian’s GAP.
It employs more than 3. 5 scores people & its total market size is estimated at RSI. scores. The level Of a country’s development is reflected by its infrastructure & the desperate need for infrastructure development has increased the demand of the construction industry in India. The Indian Construction industry can be divided into three broad segments: Residential, Industrial, Commercial & other buildings. Sewer, Roads, Highways, Bridges, Tunnels & other projects. Specialized activity such as carpentry, painting, plumbing & electrical work.
Characteristics of the Indian Construction Industry Construction industry is a major job creator: The construction industry accounts for 1 1 % of Indian’s gross domestic product (GAP). The industry also generates huge employment opportunities, due to its constant requirement for skilled and unskilled laborers. Moreover, the overall growth of this industry is also positive for sectors such as steel and cement, which are key raw materials. Low entry barriers keep industry fragmented: The construction industry is highly fragmented as low fixed capital requirements for construction contracts remove entry barriers.
Capital expenditure is only required for procuring necessary equipments unlike a manufacturing businesses, which require a setup of plants and machinery for production. Possibility of payment delays heightens working capital intensity: Construction projects are mainly funded and managed by the owner. Apart from the initial advance, contractors receive payments after each project lessons is completed. However, timely payments also depend on the owner’s credit profile and the nature of the project.
Most projects, especially infrastructure, have a gestation period of more than a year. Any delay in payments can push up receivables. Such a scenario makes the construction industry working capital intensive. Projects awarded to lowest bidders, but execution skills crucial too: All governmental construction projects are awarded through a competitive bidding process as more domestic and international contractors have forayed into various infrastructure segments. The project is finally awarded to the sweets bidder.
However, besides bidding qualifications, contractors also need to have strong project execution and technical skills to avoid cost and time overruns. To make these imperative, institutions such as National Highways Authority of India (NOAH) penalizes delayed execution of national highway projects, while awarding timely completion of the same. Input-related risks: Access to inputs is crucial for ensuring timely and cost- effective execution of projects. The major inputs for a construction include: 1 . Labor: Construction work involves both skilled and unskilled labor.
Currently, instruction players are struggling with wage increases, which can be attributed to labor shortages and rising inflation. Local job opportunities from government welfare schemes, growth in the overall rural economy and migration of laborers to Gulf countries for better prospects are some reasons that have led to a shortage of construction laborers. To solve labor issues, improve quality and cut wage costs, construction companies are now increasing the extent of mechanization, particularly in huge infrastructure projects such as highway projects. . Raw material: The construction industry is raw material-intensive. Any change in prices of raw materials like steel, cement, bitumen etc. Impacts players’ profitability. However, the impact is limited to the extent of the proportion of fixed price contracts in a company’s order book. Some construction companies also own quarries so as to ensure constant raw material supply. 3. Land acquisition and government clearances: Land and the related government clearances are the other important inputs for construction work.
Delays in these may increase the gestation period of projects, which can impact the profitability of the project. Recent developments in the Indian Construction Industry The Indian government has recently initiated some policy changes in some sectors of the industry and order inflows have improved in some others. Though, the strained financial position Of companies will continue to impact the industry’s execution pace in 2014-15. It is therefore expected that the industry’s revenues will grow at a tepid pace of 6% to 8% during the year.
The poor financial position of construction companies is reflected in their poorly profitable and highly leveraged balance sheets. Operating margins of construction companies fell by about in 2012-13, as input costs rose ND lower margin segments such as road projects gained share in the order book. Competitive pressures have also been impacting margins. Slow execution and its impact on fixed cost of companies shaved off 5% to on an average, from the operating margins of companies in 2013-14.
In order to protect their margins, players are now exercising more caution in bidding and competition in the industry has moderated. Yet, the hangover of aggressive bidding of the past and the current execution delays continue to weigh on profitability in 2014-15 also. Further, the gearing (Debt-Equity ratio) f construction companies has been rising over the past two years, impacting the financial flexibility of companies. Gearing of major construction companies rose to 3. 3 times in 2012-13, from 2. 1 times in 2008-09.
Net margins, which had been sliding since 2010-11, fell further by 7% in 2012-13 owing to higher interest outgo. The industry (with the only exception of L&T) reported net losses from April 2013 to October 2013. According to the twelfth five year plan, more than 40% of the total government spends have been allocated to construction per SE explicitly, along with various construction projects that will be undertaken for other areas of expenditure. The table below illustrates the sector wise investments for the twelfth five year plan.
Five Forces Analysis of the Indian Construction Industry Us mammary: The construction and engineering industry is characterized by large incumbents operating alongside smaller companies. Rivalry is eased somewhat by companies diversifying operations into other sectors. There are a small numbers of buyers in this industry, and typically large in size. Similarly suppliers have a great deal of power over market players as their raw materials are essential for players’ businesses. However suppliers have also offered the effects of the global economic crisis, seeing the prices of many raw materials rise.
There are few, if any, substitutes available in this industry. Bargaining power of Buyers: Buyers in this industry tend to be large and few in number. Typically the main buyers are government agencies or large private-sector customers, usually corporate rather than individuals. Generally, in this industry, customers invite market players to tender for contracts which are on the customers’ terms. This means the buyer is in a more powerful position as they specifically define the parameters of the project.
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