Abstract
Delays in the completion of infrastructure-related projects is a rampant problem in India and it has become even worse with the economic slump caused by the ongoing pandemic. Interestingly, this issue has also been recognized by the Central government recently and thus, steps have been taken to curb the problem.
The main aim of this blog is to identify the reasons behind such delays, with special focus on the prevalent situation due to Covid-19. The blog also contains details of the operational aspects of ‘force majeure’ contracts that are of major importance as the Covid-19 pandemic continues to affect the economic aspects related to infrastructure projects. The blog discusses the implications of such delays, both in general and those caused after the restrictions imposed after the lockdown. Further, the blog also contains some recommendations that could be adopted by the industry stakeholders in order to complete their respective infrastructure projects on time, without any disputes or delays.
Background
Delay in completion of infrastructure projects in India has become a normal and frequent occurrence. Such delays are caused by a number of reasons such as contractual issues, shortage of manpower, delay in obtaining environmental clearances, delay in tendering, redundant laws and rules etc. Recently, Union Minister Shri Nitin Gadkari (Minister of Road Transport and Highways), pointed out the flaws that exist within the Indian bureaucracy with special focus on the infrastructure sector. This speech was delivered at an inauguration of a National Highways Authority of India (NHAI) building in Delhi. Mr. Gadkari pointed out that the clearance for this construction was given back in the year 2008, the contract was signed in 2011 and it was finally completed in 2020. [1] He was quoted as saying: “…the project worth Rs 200-250 Crore has been completed today, after nine years. In the meanwhile, two governments and eight chairmen have changed. This project was delayed only due to indecision of officials.”[2] He further pointed out the indecisiveness and incompetence of the officials, asking them as to how they should execute the construction of the Delhi-Mumbai Expressway which is to be completed within a period of two years. This is just one example of how infrastructure projects in India are infamous for delays and cost overruns. The sector is even more likely to suffer from such hurdles as the country struggles to cope up with the Covid-19 pandemic.
Causes
The effect of such delays not only lead to loss of profits and cost overruns but also to a compromise in the quality of construction, disputes between contractors and buyers and a catena of court cases. Reasons that cause such delays can be divided into the following subgroups:
- Technical and Natural Factors: It is only after the initiation of the project that the authorities and contractors become aware of the specific technological and material requirements. For example, when a road is in its construction phase, there may arise a situation whereby a change may be required in the engineering and design of the bitumen required due to an unexpectedly poor quality of soil. Such changes may require an alteration in the estimated funds as well as the duration of the project. [3]Apart from this, events falling within the ambit of the Act of God or Force majeure may also affect the project, the best example being the on-going pandemic. An economist was quoted as saying: “The lockdowns induced due to the pandemic will lead to delays. The multiplier effect of infra works will also be missing. Overall, the impact will be felt both at micro and macro level.”[4]
- Contractual Failures: The construction phase of an infrastructure project starts with signing of a construction/procurement contract between the contractor and the authority (employer). It is pertinent to note here that the degree of precision with which the said contract is drafted has directly affected the cost overruns. If the contract covers all the actions to be taken and the funds that may be required in case of an emergency or each possible contingency, there will be no cost overruns. In such a case, the contract already contains the obligations to be fulfilled by both the parties and no additional payment has to be made by either of them which ensure that the project is completed within the specified time.
However, in reality, the initial construction contract cannot be completed because it is not possible for the parties involved to be able to foresee every possible contingency that may occur while executing the construction phase. Initial contracts for infrastructure projects are said to be intrinsically incomplete, especially projects that are inherently complex and have a long execution phase, e.g. projects related to civil aviation, maritime industry, power sector, involve complexities and are distinctive in terms of their requirements. Since the learning from previous projects in such cases is also very limited, the cost overruns experienced in these projects are also significantly higher as compared to other projects. [5] It is only after the contractor starts the actual work on the project site that he/she becomes aware of the additional work which is required. It is un-doubtful that such additional work in turn gives rise to the requirement of more funds and hence, cost overruns. Contractual incompleteness is also likely to increase as the size and complexity of the project in question increases.
Another factor contributing towards the delay of such projects is poor planning which ultimately leads to cost overruns in absolute terms. It is to be noted here that if the project planning is poor, the estimates related to its completion and funding will be vague leading to several work becoming necessary that are un-contracted for. If the project planning is haphazard, there will arise more and more complexities with each step of the process and the proportion of work that is left uncovered by the initial contract will also rise. Therefore, in conclusion, the greater the project size, the larger would be the cost overruns. [6]
- Organizational or Institutional Failures: The execution of infrastructure projects demands active co-operation and co-ordination of authorities on several levels in a hierarchical organization. Studies show that there is a conflict between the individual and the organizational objectives at every stage of hierarchy and therefore, such organizations are inherently weak in producing the desired effects. [7]
Further, the joint effort of several departments is also required for the completion of such projects e.g. project implementation, shifting of power lines, water lines, sewer lines, cutting of trees, environmental clearances and other such activities that are performed by different departments. Apart from intra-organizational failures, these projects also suffer from inter-organizational failures as interdependence on each other also means that a department can easily pass off the blame of its inefficiency to others. Projects involving construction of roads, railways and urban-development also require environmental clearance from central as well state authorities, and co-operation from land acquisition authorities, Public Works Department etc. However, insecurity and laxity on the part of any one of the departments can stall the entire project. Moreover, in projects involving construction on ecologically sensitive areas, there is more risk of such intra and inter-organizational failures as more regulations and clearances are required. The problem becomes more aggravated if the project is spread across multiple states as clearances and permits must be sought from various departments in various different states. Every department involved in project planning and implementation can suggest changes in project works, and hence can contribute to cost escalations.
- Time Overruns: Generally, cost estimates for a project are computed using the current prices. Consequently, if there are delays, the prices of raw materials will become higher on account of inflation. Further, since the project remains incomplete, there are bound to be certain overhead costs that have to be met. Apart from this, a long delay may also lead to depreciation of project assets, leading to cost overruns on repair and replacement.
- Economic Factors: As discussed earlier, an inaccuracy in the calculation of estimated budget may be severely detrimental. This is because; finance is the backbone of the construction sector. The raw materials used in the construction industry as well as the equipment used form the major portion of project cost and are required to be purchased in bulk. This causes a huge problem of cash flow in the industry and thus, often requires lending from external sources. However, from quite some time, the developers have been facing massive liquidity crunch owing to the cautious NBFC lending and dried-up investments in the sector which has adversely impacted execution of construction projects.[8]
Further, developers often indulge in rotation of funds from one project to another. However, if there is paucity of demand and sales in the industry it leads to lack of funds for the projects and hence, a delay in its execution. This malpractice, however, has been curbed with the implementation of Real Estate (Regulation and Development) Act, 2016 which requires the developers to reserve 70% of the funds for a real estate project in an Escrow Account. [9] Nonetheless, the sector continues to reel under the remnants of the past with several projects getting stalled due to liquidity crunch.
Implications
The delay in construction projects affects the developers and the buyers alike. Such delays not only lead to cost overruns and loss of profit to the contractor but also result in loss of good faith which the construction company has built over the years and non-productivity losses to the owners. It is also highly likely that such delays become a major cause for conflicts between various levels of authorities (high attrition rate) – it badly affects the performance of the employees and hence that of the entire organization and gives rise to disputes between owners and developers, labourers and contractors due to delayed payments. The ultimate outcome of this is a catena of cases in various jurisdictions and a quality-compromised finished product.
Impact of COVID-19
As mentioned above, COVID-19 has deeply impacted the infrastructure and the construction sector in India. The lockdowns imposed by the government authorities in order to contain the spread of the virus had an adverse impact on a number of construction projects due to lack of manpower, raw materials and equipment, and most importantly due to a severe impact on the supply chain. The legal implications on the on-going projects are heavily influenced by the contracts signed between the stakeholders involved. Therefore, it becomes very important at this point to answer the question as to ‘whether the COVID-19 pandemic falls under the definition of a force majeure event’. In order to answer this question, reference has to be made to the FIDIC (which stands for International Federation of Consulting Engineers, an acronym for its French name Fédération Internationale Des Ingénieurs-Conseils) contracts, according to which COVID-19 does qualify as a ‘force majeure’ event.[10] Clause 19 of the Red Book defines a ‘force majeure’ event as an event that:
i. Is Beyond the control of the parties so involved;
ii. Cannot be reasonably foreseen by either of the parties;
iii. Could not be circumvented, once it has arisen; and
iv. Is not the fault of any of the parties involved.
As per the above definition, COVID-19 readily fits within the ambit of an Exceptional Event. In order to claim an event as force majeure, it is a condition precedent to serve a notice containing details of the event as well as the obligations the performance of which is or shall be frustrated. [11] Such notices may be given by contractors facing delayed material or workforce supplies, or employers that have been denied access or possession to the work site or any of the parties facing such interruptions. There are certain steps that need to be taken by the contractors after the said notice has been served, in order to recover costs.
Firstly, the party serving such a notice must prove causation, that is to say, that the issue faced by them has arisen out of the restriction that has been put in place due to COVID-19. Further, evidence in the form of site photographs, site meeting minutes etc. must also be presented. However, it is of immense importance here that the pandemic may be used by any party as a mere excuse so as to hide a problem which is intrinsically present.
Secondly, it is very important for the contractors to be aware of the fact that while the pandemic might be an entitlement to an extension of time duration of completion of the project, it is not necessarily a guarantee of the recovery of costs. Moreover, the FIDIC contract must be regularly updated, in accordance with the development of events related to the pandemic.
Thirdly, parties that sign a FIDIC-style contract shall be under a contractual duty to ensure minimum delay in the performance of the contract as a consequence of force majeure; and this shall be a continuing obligation.[12]
Apart from all of the above issues, there may also arise disputes which may be specifically related to a particular project such as mitigation measure, critical path of the project etc. in such cases, FIDIC provides for a two-tiered dispute resolution process which is as follows:
1. Reference to a Dispute Adjudication/Avoidance Body (DAAB); and
2. Upon failure of the above, ICC Arbitration.[13]
In case one of the parties is aggrieved by the decision of the DAAB, it is required that the said party must serve a Notice of Dissatisfaction (NOD) within 28 days of the order being passed. Failure to comply with the prescribed rule implied that the order is final and binding upon the parties involved. An ICC Arbitration can also be initiated in a situation wherein one party fails to comply with the final decision of the DAAB.[14]
Change in Law and extension for completion of pending projects
It is an accepted position that the lockdown imposed throughout the country during the initial phase of the pandemic and the rules and regulations imposed thereby would amount to a ‘change in law’ under a construction contract, thus entailing an a proportionate extension of time for completion of the pending project.[15] The MNRE had issued an office memorandum on March 20, 2020 wherein it had taken cognizance of the issue of supply chain disruption due to the outbreak of Covid-19 (as a force majeure event) and directed all the concerned authorities to grant a suitable Extension of Time (EOT) to projects wherever the force majeure clause is invoked. There may be certain cases wherein the contractor gets an Extension of Time along with damages, depending on the interpretation of the contract concluded between the parties involved. The quantum of damages to be awarded can be determined using the following factors:
i. The stage at which the project is presently at, that is to say, if it is at the very initial stage where only planning has been done, the contractor cannot claim damages.
ii. If the project is at such stage where a lot of raw materials, machines and human resources have been heavily mobilized, the contractor can claim damages on the basis of idling of resources.
iii. If the project was being delayed on the part of the contractor from the inception itself, without the pandemic, then he cannot claim any damages.
iv. Damages can be calculated on the basis of Monthly Progress reports or Detailed Project Reports so as to help in assessing the actual deployment of resources related to the project.
v. Quantification of damages will also depend on whether the contractor has performed is ‘duty to mitigate’ the losses likely to be suffered.
The Apex Court had held in the case of Alopi Parshad & Sons Ltd v Union of India [16], that a court of law does not have the liberty to absolve a party of its obligations merely on account of an unprecedented turn of events. The Supreme Court of India in Energy Watchdog v. Central Electricity Regulatory Commission [17] lucidly stated that “insofar as a force majeure event occurs that de hors the contract, it is dealt with by the rule of positive law under the Section 56 of Indian Contract Act. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties”.
Therefore, in case of Project Financing Agreements if a specific Force Majeure clause is absent, the borrower will have to prove that the on-going pandemic and the issues it has given rise to, have impacted the sector to an extent where it is impossible for him to perform the obligations under the project. This is because as long as the borrower succeeds in proving that the pandemic is the cause of its failure to fulfil the debt service obligations, the lender will not take any harsh decisions against the borrower.[18] It is apparent from the decisions of the courts that they are recognizing the occurrence of the pandemic as a supervening event that impairs or affects the ability of borrowers under loan agreements as it is not a ‘wilful’ default and the said situations beyond the reasonable control of the borrower.
Recommendations
It is clear from the above discussion that delays have a snowball effect upon all the works on the project site. It is therefore advisable not to keep the timelines for implementation of such projects open-ended. In order to avoid such delays, it is vital that the contracts involved therein are carefully drafted, containing clauses related to all possible contingencies or emergencies that might arise. It must also be ensured that there are clauses that allow for fresh timelines in case of time overruns and also, the roles, responsibilities and liabilities of each and every participant is clearly defined. Delay analysis should be exhaustive and objective – possibly coupled with a signoff from a pre-agreed, independent party acceptable to both sides. Even after all this, if disputes still arise, the parties must take a practical approach towards them rather than stalling the entire project. Most importantly, the dealings between all the parties involved must be transparent and honest, that is to say, that there must not only exist a transparent contractual mechanism but there must also be a realistic and practicable project management. It would be a major problem if both the parties throw charges at each other and take shelter behind opaque clauses, blaming the other side for its incompetence. Such actions exaggerate the dispute and then the parties end up in litigation. Lastly, there must exist a single window clearance mechanism for all the permits required to kick-start an infrastructure project. This would save a significant amount of time wasted by developers in acquiring NOCs.
As far as FIDIC contracts are concerned, there are bound to arise varying issues for different projects (which may also be unique to that particular project) in the coming years. Therefore, it is imperative that each and every contract is vetted very carefully and individually, keeping in mind every minute detail. Most importantly, parties entering into any contract in future must ensure inclusion of terms and conditions dealing with the risk of COVID-19. It is also very apparent from the above discussion, that the construction sector is highly likely to face reduced supply chain capacity due to major losses to such businesses; the risk of these needs to be evaluated and allocated with clarity and fairness.[19]
Cash flow improvement is the need of the hour and so, in order to facilitate it, focus must be on shorter payment periods, greater advance payments. Improved price indexation and reduced retentions. [20] In addition to this, some governments are also offering aid to such businesses that have been negatively impacted by the on-going pandemic. [21] There have also been announcements by the State related to relief packages for employers. Recently, the Central Government has also taken cognizance of the issue of delay in timely implementation of infrastructure projects and so, it has asked all the related departments and ministries to ensure a tighter system of monitoring and to increase accountability in the system.[22]
Conclusion
It can therefore be concluded that if the public and private sector work in harmony with each other, they can bring the Indian economy back on track. The Government is also bringing in private players in the industry to boost the economy for e.g. privatisation of the railway sector. As it is clear from the above discussion, the effects of the pandemic are long-term and therefore, we must try to make the most of the opportunities created on account of Covid-19 and adapt to the present situation.
About the Authors
Mr. PC Sinha is the Director of PCS Integrated Services Pvt. Ltd.
Ananya Vatsa is a penultimate year student at the Maharashtra National Law University, Nagpur. She is also an Associate Editor at the Indian Journal of Projects, Infrastructure, and Energy Law (IJPIEL).
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel & Samarth Luthra
Senior Editor: Aakaansha Arya
Associate Editor: Ananya Vatsa
Junior Editor: Janvi Johar
Preferred Method of Citation
PC Sinha and Ananya Vatsa, “Delays in Project Completion in India” (IJPIEL, 1 January 2021)
<https://ijpiel.com/index.php/2021/01/01/delays-in-project-completion-in-india/?et_fb=1&PageSpeed=off>
Endnotes
[1] Separate donkeys from race horses — why we must listen to Nitin Gadkari’s speech on governance, The Print, (Oct, 31, 2020, 3:57PM) https://theprint.in/opinion/separate-donkeys-from-race-horses-why-we-must-listen-to-nitin-gadkaris-speech-on-governance/534504/.
[2] ‘I am ashamed this project took so long to finish’: Nitin Gadkari on NHAI building inauguration, Scroll.in, (Oct 29, 2020, 9:46AM) https://scroll.in/video/977066/i-am-ashamed-this-project-took-so-long-to-finish-nitin-gadkari-on-nhai-building-inauguration.
[3] Ram Singh, Delays and Cost Overruns in Infrastructure Projects: An Enquiry into Extents, Causes and Remedies, CDE (August 2009) p 11.
[4] Vrishti Beniwal, India’s crawling infrastructure projects to be delayed further by Covid and lockdown, The Print (July, 31, 2020, 8:28 AM) https://theprint.in/economy/indias-crawling-infrastructure-projects-to-be-delayed-further-by-covid-and-lockdown/471689/.
[5] Ibid.
[7] K.V., P., V., V., R., V. and Bhat, N. (2019), “Analysis of causes of delay in Indian construction projects and mitigation measures”, Journal of Financial Management of Property and Construction, Vol. 24 No. 1, pp. 58-78. https://doi.org/10.1108/JFMPC-04-2018-0020.
[8] What leads to delay in Completion Projects, 99 acres, https://www.99acres.com/articles/what-leads-to-delay-in-cmpletion-of-projects-in- india.html.
[10] Conditions of Contract for Construction, FIDIC Construction Contract, https://www.hcindiabrunei.gov.in/docs/1562048637FIDIC%20Condition%20of%20Contract%20(General%20Conditions).pdf.
[11] Atul Sharma, India: Managing The Impact Of COVID-19 On The Infrastructure And Construction Sector, Mondaq (Sept,02,2020) https://www.mondaq.com/india/litigation-contracts-and-force-majeure/981394/managing-the-impact-of-covid19-on-the-infrastructure-and-construction-sector.
[13] Palash Taing, India: The COVID-19 Effect On Construction Industry: What Does The FIDIC Say?, Mondaq (July,01,2020) https://www.mondaq.com/india/litigation-contracts-and-force-majeure/958878/the-covid-19-effect-on-construction-industry-what-does-the-fidic-say?type=mondaqai&score=65
[14] Ibid.
[15] Force Majeure In Project Financing & Infrastructure Projects, Singhania & Partners LLP, https://singhania.in/force-majeure-in-project-financing-infrastructure-projects/amp/.
[16] AIR 1960 SC 588
[17] (2017)14 SCC 80
[18] Supra Note 15
[19] Supra Note 11
[20] Ibid.
[21] Breaking down Centre’s Atmanirbhar package, The Indian Express, (May, 20, 2020, 7:51 PM) https://indianexpress.com/article/explained/atmanirbhar-package-full-break-up-of-rs-20-lakh-crore-nirmala-sitharaman-lockdown-6414044/
[22] Centre asks ministries to ensure timely completion, better monitoring of infra projects, The Hindustan Times (Nov,19,2020,09:11AM), https://www.hindustantimes.com/india-news/centre-asks-ministries-to-ensure-timely-completion-better-monitoring-of-infra-projects/story-eAJw9VxqZjc1PRCOHqDuFJ.html
Recent Comments