In any country, contracting practices prevalent for project execution critically determine the on-ground pace of infrastructure development. In this regard, important aspects such as formats/models for project execution, overall landscape of the contracting industry, level of technological innovation, and the government’s experience (with regard to contracting works for infrastructure projects) pave the way for establishing practices. In countries such as India, which are yet to mature as infrastructure markets, it is encouraging to note the gradually improving contracting scenario. While there are varying experiences across sectors and key stakeholders, the nuanced differences form a crucial determinant of the learning curve for project execution for infrastructure development.
The models and formats for infrastructure project execution have evolved over many decades of experience. For effective contract execution and administration, the choice between the engineering, procurement, and construction (EPC) model and item rate contracts has always been a matter of debate. In general, both the EPC model and the item rate format have been fairly successful in India, in sectors such as roads, airports, and urban rail. The popularity of various models, of course, has varied from time to time.
With regard to EPC contracts, the pre-construction stage largely forms the basis of project execution. Planning is elaborate, involving the preparation of detailed project reports (DPRs) that give a fair amount of visibility in terms of costs, and labour and equipment requirements. Fixed timelines and project costs are known variables in an EPC contract, clearly stating the employer’s requirements with regard to project deliverables. Considering the government’s experience with the EPC model, most of the success has been witnessed after pain-points such as land acquisition have been addressed (in the road sector). That said, the model still has its issues. One of the biggest challenges with EPC is the upfront finalisation of the project design, which sets the project execution in stone and mid-course corrections with regard to project design result in inordinate delays, leading to significant cost overruns. Moreover, EPC contracts can be riskier in terms of project execution since the contractors may resort to unsafe practices in order to avoid deviations from the pre-defined design plans in such contracts (as deviations invite penalties). Some industry players believe that effective cost to the contractor is higher in the case of EPC contracts.
Item rate contracts are also common in practice, with their own set of pros and cons. For sub-contracting works, for instance, a company would prefer item rate contracts since smaller contractors have greater clarity on the amount of work and the costs associated with the work delegated to them. Technically, item rate is less risky for a construction company than an EPC contract. In case of item rate contracts, the contracting authority bears more risk as compared to the contractor. The DPR stage is much closer to the actual construction date. Any deviation or surprise factors calling for a change in scope of work requires approval from the government. On the flip side, it has been observed that there is lack of due diligence on part of the bidders in case of item rate contracts, where winning the contract becomes their sole aim. The scope of arbitrations can be effectively minimised if the bidders are willing to show genuine commitment towards completing the project. A general understanding is that in item rate contracts, the contractors are willing to complete the works that are highly profitable to them. At the same time, they try to defer the construction work on less profitable projects. Hence, there is always a tendency to drag the project under the pretext of land acquisition and law and order issues.
An intersection of the two formats is the open book estimate (OBE) mode. Marquee players such as Engineers India Limited have entered into OBE contracts with Mangalore Refinery and Petrochemicals Limited, Hindustan Petroleum Corporation Limted’s Vizag and Barmer refineries. OBE contracts usually address the challenges associated with both item rate and EPC contracts.
The bidding segment is increasingly being digitised. Digitised documents, online bid submissions, online application systems for uploading project-related documents and digital signatures are some of the key enablers of a more evolved bidding scenario.
Lately, contract management is becoming increasingly technology driven. With the adoption of new technologies such as artificial intelligence and blockchain, the entire value chain of contract management is streamlined, resulting in more effective and time-bound project management.
In sum, contracting practices are gradually evolving and becoming better. Many learnings (such as improved DPRs and consultancy works) can be drawn from the wide experience across sectors and this must be incorporated for improving the overall contracting landscape. Ultimately, the genuine commitment of all stakeholders will determine the pace of contract execution in the infrastructure space.