Workshop on “Enforcement of Contract Clauses & Timely Recovery” on 23-24th February, 2012 ‘Time and Cost Over-run in AAI Projects (Causes and Solutions)’ TOPIC

 A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under- estimation of the actual cost during budgeting.cost Cost overrun

 Cost overrun is common in infrastructure, building, and technology projects. A comprehensive study of cost overrun published in the Journal of the American Planning Association in 2002 found that 9 out of ten construction projects had underestimated costs. Overruns of 50 to one hundred percent were common. infrastructurebuilding technologyprojects Cost Overrun…….

 Cost overrun should be distinguished from cost escalation, which is used to express an anticipated growth in a budgeted cost due to factors such as inflation.cost escalation Cost escalation

 Professor Bent Flyvbjerg of Oxford University believes that big public- works projects almost always have cost overruns due to strategic misrepresentation—"that is, lying", as he defines the term.Bent FlyvbjergOxford University Continu…..

 A time overrun, also known as a time increase is an unexpected time incurred in excess of a estimated/ allocated time.time Time Overrun

Interesting Facts  Nine (9) out of Ten (10) infrastructure projects fall victim of cost escalation  Cost escalation generally varies from 10% to 50%  Cost escalation exists across twenty (20) Nations and five (5) Continents; it is a global phenomenon. India is NOT an exception.  Cost escalation appears to be more pronounced in “Developing Nations” than in “Developed Nations”  Cost escalation has not decreased over the past 70 years - No learning seems to take place  The worst part is that the pattern has not changed for the past years  Bandra-Worli Sea Link cost escalated from Rs.300 to Rs.1600 Crores with Five (5) years delay Contd..

Interesting Facts….  According to the Economic Survey of India for till September 2005, of the 683 infrastructure projects, having an estimated cost of Rs.2,81,890/- Crores, spread over 16 sectors, 171 projects (25%) are having cost over runs to the tune of 38.87% as compared to their latest approved estimates. There are 247 projects (36%) which have a time over run, ranging from one (1) to 168 months.  The project that look best on paper have the largest cost over run.  P ublic Ownership:- “Problematic” because of lengthy/complicated procedures.  Private Ownership:- “Successful” in cost control due to over simplification.  Most of the projects of Delhi Metro of DMRC have been completed on time and within budget

 The analysis of the Ministry of Statistics and Programme Implementation shows that cost overrun in projects even with respect to the original approved cost have come down from 62% in March, 1991to 12% in March, 2008 and the increased to 21% in September This has resulted into indirect savings of more than 2,50,000 crore over a period of 10 years. This has been possible due to the dedicated effort of the infrastructure and Project Monitoring Division of MOSPI and

 Other Ministries. The increasing trend of in cost overruns in the recent years is mainly due to the impact of high increase in the cost bulk materials such as cement and steel in and recent recession. The trend of cost overruns is depicted in the Figure 1.

 The analysis of time overrun in terms of percentage of projects running behind their original schedule also shows a declining trend. Percentage of projects behind schedule declined from 62% in 1991 to lowest ever to 31.72% in March 2001, to 34.13% in March 2007 and increased again to 52.10%. The increasing trend of percentage of delayed projects is also due to the same reasons as in case of cost overruns. The projects in the Highway, Power, Petroleum, Shipping and Ports, Telecommunication, Steel, Fertilizers and Railway sectors suffered the most. The trend of percentage of delayed projects is depicted in Figure2.

Scope Quality

 Project constraints have been listed as “quality," "time," and "cost“. These are also referred to as the "Project Management Triangle," where each side represents a constraint. One side of the triangle cannot be changed without affecting the others.Project Management Triangle

 The time constraint refers to the amount of time available to complete a project. The cost constraint refers to the budgeted amount available for the project. The scope constraint refers to what must be done to produce the project's end result. These three constraints are often competing constraints: increased scope typically means increased time and increased cost, a tight time constraint could mean increased costs and reduced scope, and a tight budget could mean increased time and reduced scope.

Status of Projects in AAI as on Total Ongoing Projects52 Annex I & II Projects in Progress within time0 Projects delayed upto 25% of stipulated time 06 Projects Delayed upto 50% of stipulated time 08 Projects Delayed more than 50% of stipulated time 38 Status of Mega Projects at Kolkata & Chennai Airports Annex III

STATUS OF ONGOING PROJECTS RegionTotal On- going Projects Projects in progress within time Delay up to 25% of Stipulated time Delay up to 50% of Stipulated time Delay more than 50% of Stipulated time Northern Southern Western Eastern North- Eastern TOTAL Annex-I Engineering Works 17

STATUS OF ONGOING PROJECTS CNS Works RegionTotal On- going Projects Projects in progress within time Delay up to 25% of Stipulated time Delay up to 50% of Stipulated time Delay more than 50% of Stipulated time All Regions Annex-II 18

STATUS OF MEGA PROJECTS AT KOLKATA & CHENNAI Annex-III PARAMETER Kolkata Airport Chennai Airport Estimated Cost (Crs.) Stipulated Date of Completion Present Physical Progress 93 %96.5% Delay already occurred 33%54%

IPreparation of Faulty Estimates: - Inadequate site condition survey/data for finalizing Scope of Work - Improper Design & Drawings - Unrealistic Time Period fixed for Completion - User Consultation Process not done. 20

Preparation of Faulty estimate (Contd…) - Rates not based on actual market rates - Narrow range of approved makes - Non- consideration of rehabilitation of existing structure/services at the time of planning - Factors of insurgency / disturbed area 21

IIDelay in applying/issuing of NOC / clearance from statutory authorities IIIDelay in Environmental Clearance IVNon-availability of complete land/site free from encumbrances 22

VSelection of consultant & contract agencies: - Selection without assessing Technical & Financial capability - Lack of experience in similar nature of work 23

VIDelay in issue of working design & drawings VIIDelay in issue of NOTAM – indicative of prior lack of coordination VIIIFrequent changes in scope of work, drawings & specifications 24

IXDelay in rehabilitation of existing structures / services XNon-availability of construction material ( points to inadequate site survey resulting into costly substitution at a later date) XIIncomplete/Improper nomenclature of items in contract agreement 25

XIILack of co-ordination amongst the various disciplines and other airport functionaries XIIIInadequate monitoring system 26

1.Estimate should be based on actual site data /drawings 2.Scope of work should be well defined & finalized in consultation with user Agencies 3.Presumptions should be minimized 27

4. Realistic time frame to be kept 5. Proper Market Survey for estimates 6. Proprietary / Imported items should be minimized. 7. Timely action for statutory clearances 28

8. Technical Sanctioning Authority to ensure availability of land 9. Advance / timely actions for diversion of services/obstructions relocation of structures etc. 10. Proper Selection of Consultant & Contract agency 29

11. Regular monitoring of performance of consultants/contract agency 12.Yearly performance evaluation mechanism for timely action to weed out non- performing contract agencies/consultants 13.Timely issuance of working drawings 30

14.Proper co-ordination among the disciplines & other airport functionaries 15.Penalty Clause for deficiency in services of Consultant/Contract Agency 16.Timely decisions/ approvals / sanctions regular monitoring of Projects 31

1.Advance actions to remove hindrances, structures, diversion of services coming in the alignment of the project structures 2.Clear and well defined scope of work vetted by all stakeholder departments within AAI 3. Dedicated and independent PM&QA cell to monitor progress of work. 32

4.Web enabled project monitoring software being put into place 5.Delegation of power is decentralized with accountability 6.Project In-charge to monitor slippages in targets. 33

The “GOAL” can be achieved if we have “WILL, COMMITMENT, DEDICATION AND PASSION” to feel the need and purpose.

Important tips for effective contract management Immediately on receipt of letter of acceptance, open site order book. Hand over the site. This is important, since time allowed in contract for execution of work commences from 10 th day after the date on which the Engineer-in-Charge issues written orders to commence the work. If handing over site is made in phases. Please make an entry in site order book to the extent site handed over.

In accordance with clause 13, insist time & progress chart from the contractor. Closely monitor the progress made. Compare the progress achieved in relation to clause 13.1 of contract. This clause envisage progress of work with relation to time lapsed. In case, there is backlog in the progress, promptly issue a diligence notice. The notice should highlight the slippages.

Clause 32 of contract envisages compensation for delay. This clause stipulate that the contractor, if failed to maintain the required progress (as agreed), they are liable to pay compensation. Hence, diligence notice should invariably notify the intended action for breach caused. Closely watch the progress at the portion of site handed over. Read the contract thoroughly. Take timely decision.