Road Constructions: Increased Profitability via Better Project & Logistics Planning
Road construction: Opportunity
Over the last few years, the Indian economy has been in a phase of unparalleled growth of about 8-10% per year, making it one of the fastest growing economies in the world. Sustaining this rate of growth will need huge investments in physical infrastructure such as roads, water, power and urban sectors.
Roads is the second-largest infrastructure segment after power in terms of investment requirement - US$135bn over the next five years .
Profitability in Road construction Projects is a concern
But even with this huge opportunity, the interest in road construction among major infrastructure companies is low. This is mainly because contractors in road construction make much smaller profits (average typical margins of 6-10%) than those engaged in construction in real estate (about 20-25%), hydropower and industrial sectors (about 15%) .
Reasons for Low Profitability in Road Construction Projects
These thin margins are mainly due to the delays in overall project implementation. According to a World Bank report about 56% of the completed national and state highway contracts had cost overruns limited to 25% of the initial contract price. An alarmingly large 40% of completed contracts had cost overruns in the range of 25-50%2.
Figure 1. Cost & Time Overrun in Road Construction Projects in India2
India Infrastructure Report (Nomura, 2009)
World Bank Report –Indian Road Construction Industry (Nov 2008)
The main reasons for delays in overall project execution & cost overruns are -
(a) Land acquisition & clearances delays
(b) Planning inefficiencies
(c) Challenging logistics as the projects are linear in nature & spread over several kms
Delays due to Land acquisition & clearances are policy matters that are beyond the scope of this paper. In this paper we will focus on how better planning (Project planning & Logistics Planning) can not only help in timely execution of projects but can also limit cost over-runs.