INFRASTRUCTURE AND GOVERNMENT

Managing
Construction Risk
A white paper on industry
perspectives and some
recommendations

March 2009

ADVISORY
Major Projects in India – Preparing for
tomorrow now!
Construction is a key economic activity
in India and accounts for almost 15
percent of the nation’s GDP. The India
growth story has been dotted with
large scale expansion plans
encompassing infrastructure, energy
and natural resources and private
building programs. With the impetus to
bridge the large infrastructure gap, we
saw large number of projects being
rolled over the past few years across
almost all industry sectors. This
construction boom was also fueled by
the convenient availability of capital
and at a relatively lower cost.
Amidst this construction boom, the
sector continued to face challenges
around shortage of talent, limited
contractor capacity and rapidly rising
material and labor costs. The current
economic slow down and difficulties in
raising funds is putting further strain on
the capital project owners, who are
now operating in a very demanding
environment with increased scrutiny
from both internal and external
stakeholders.
The ‘growth story’ is now subject to a
new set of challenges and the need to
understand the complexities and risks
along this path is more now. Capital
project owners need to adopt a long
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
term view for realizing practical project
completions; a flexible and agile mid
term strategy and an immediate focus
on the short term for managing the
crisis.
Time to act...now
The Government is consciously
endeavoring to revive liquidity. Fiscal
infusion by the Reserve Bank of India
is definitely a booster shot; but for the
economy to come back on its feet and
its impact to be felt, capital needs to
trickle down to the customer – which
may easily take a couple of months. So
should you wait for the end of the
tunnel – absolutely NOT.
The time is right to revisit your
portfolio, re-jig the existing framework
and shake out all the non value adding
activities spanning strategy to daily
operations. The need for a leaner, agile
and simpler business model is evident.
Outlined in the next few paragraphs
are some steps that you should review
and reflect upon to arrest the fall and
prepare yourself to hit the ground
running when the whistle blows.
 Costs - ‘optimize’ v/s ‘minimize’
1
Inflation and spiraling commodity costs
have significantly affected margins.
Rapid, but sustainable cost reduction
through progressive financial planning
is the need of the hour.
With the shift in the balance of power,
the project owners are managing a far
greater share of contracting risk.
Accordingly, the project owners are
tapping into the power of partnerships.
Today’s relationships between project
owners and contractors are becoming
far more collaborative than in the past,
with integrated project teams often
housed in the same office, sharing
reports that track project progress.
Each party’s costs are effectively
transparent, creating an atmosphere of
mutual trust and dependence.
Managing uncertainty: Understand, embrace and
2 control your RISKS
Despite improvements in the project
risk management practices across the
industry, many contractors appear to
be short of a ‘holistic’ approach where
risk is fully integrated into every aspect
of the construction life cycle. This is
evident from the fact that we still
notice construction projects suffering
from ill defined scope, design and
constructability issues and
mismanaged vendors. As a
consequence there are clear time-cost-
quality gaps, add to that a considerable
tying up of valuable resources when
you shift to fire fighting mode.
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
We believe that those project owners
that respond positively to the new
market conditions can manage the
cost risk more effectively by
developing greater planning and project
management expertise and monitoring
contractor performance more closely. It
will take time to develop such
expertise in-house so there may be a
need for independent assistance,
especially on project planning, design,
engineering and pricing. This would
ultimately help in managing
expectations and preserve a reputation
for completing projects within budget,
which will ultimately help in securing
further business.
With the ever changing risks, bidding process could be enhanced
especially in the current economic through a stronger approval framework
scenario, the need for a more that offers greater commercial
formalized enterprise wide risk oversight on the attractiveness of
management can not be over opportunities. Construction companies
emphasized. There is a need for the require an independent and objective
involvement of the highest level in an risk management team that conducts
organization in the strategic risk risk reviews periodically and can put in
management at the portfolio and the place a mitigation plan that is
project level. The companies need to actionable with defined timelines.
reconsider the effectiveness of their
checks and balances at the project
level. These could include special task
groups for monitoring critical projects,
environmental management systems,
improved quality assurance and
customer satisfaction monitoring. The
 Effective Project Integration
3
Increased pressure on timelines
accentuates the need to bring about a
seamless co-ordination between
various functional areas in a project.
Project integration management
comprises the activities that integrate,
coordinate and bring together the
various functions. With multiple
stakeholders from the investor to the
builder, consultants to the contractors,
vendors to the customers; and each
with their own vested interests, the
project often ends up as no-one’s baby.
Industry sentiment reflects that
functional integration is a key concern
which has not been addressed
effectively.
hand-over phases) need to be well
defined. It should clearly spell out the
objective, activities and respective
outcomes for every process. Currently
although feasibility studies are
undertaken, post feasibility study -
review is not done to assess if study
has achieved its objective. Finance
department should also be actively
involved in the development of project
execution plan(s). Although execution
plans do exist in some instances, but
its relevance is limited as project
schedules are subject to frequent
changes and timely updates to the
schedule with communication to the
stakeholders is lacking.

Organization’s project development

processes (initial scoping study, pre-
feasibility, feasibility, execution and

Successful execution & ‘effective’ monitoring

4
Today there are projects dotted with a
poor scope description and more often
than not a non existent change control
mechanism. Seldom do you see a
project execution plan formulated and
instances where there may be such a
document, its communication and
implementation are major areas of
concern. The planning process needs
to start well in advance of the date you
mobilize site works. To aid successful
execution and monitoring, it is
imperative to have an independent
project monitoring and reporting
mechanism in place.
Best practices to monitor project
progress could include ‘Earned Value
Analysis’ or EVA and an adequately
designed change management process
that is customized to the nature and
scale of the project on hand. Earned
Value Analysis is a method for
measuring project performance. It
indicates how much of the budget
should have been spent, in view of the
amount of work done so far and the
baseline cost for the task, assignment,
or resources. Additionally it provides
the project owner / manager the
visibility on cost to complete which is
an essential input in current times of
depleting cash reserves.
To arrive at a project master schedule,
every discipline needs to make their
detailed schedules, key
interdependencies understood, project
float identified and ownership
assigned. Contractor and vendor
milestones need to be built in to the
master schedule, reviewed by the
execution team and shared with all
departments, post project head
approval and then released for actual
construction.

© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
 Human capital: Investing in the future of the
5 industry
There is a general consensus that
shortage of talent in the construction
sector is a long term problem and will
continue to push up project costs and
risks. The flow of talent into
construction has been gradually drying
up as candidates have sought
alternative – and often more lucrative –
career options. The Government, which
is the biggest buyer of the capital
projects, has also not done enough to
address this challenge. The education
system is often not delivering the
required number of specialists across
project management, engineering,
estimating, surveying and contract
management.
Facing a desperate game of catch up,
the industry needs a genuine
collaboration between project owners,
Embrace sustainability
6
While the vast majority of project
owners recognize the importance of
sustainable construction practices,
many remain unconvinced that it is
good for their business. Limited
regulations around sustainability and
varying implementation across the
world do not contribute to the cause.
Today the technology is available to
create green buildings and
infrastructure for as little as five
percent additional costs. Good
architects can make a building
substantially more energy efficient at
little or no extra cost. Many of those
involved in construction also
underestimate the energy cost savings
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
contractors and governments to attract
more school leavers and graduates.
Companies should also seek to stay in
touch with changing employee
aspirations. By encouraging diversity in
its employment practices, and by
offering greater flexibility in working
hours, the sector can reach out to a
wider potential audience that perhaps
would not previously have considered
such a career. Investment in existing
employees is also crucial in order to
offer better-defined career structures,
with a greater focus on training and
higher salaries where possible.
that accrue from ‘green’ buildings.
Some organizations have made use of
seminars and publications as well as
setting up an internal helpdesk to
spread the word.
As many companies have learned, a
‘green’ reputation can bring real
competitive advantage as well as
longer term cost savings. By
embedding sustainability firmly into
both their own and their business
partners’ culture and operations – and
maintaining a strong independent
overview – owners can stay a step
ahead of both the regulators and their
peers.
Conclusion
The current economic environment and
the increasing strain on resources do
not have a precedent. Construction
forms the key development activity for
the real estate and infrastructure
sectors; and as a result demands a
significant share when it comes to
any/enterprise business strategy.
Interestingly enough, an activity that is
at the very core of growth and
development is almost primeval on its
maturity curve; with a rudimentary
understanding of the prevailing risks
the need to understand, evolve and
implement a risk management strategy
was never more astounding than now.
Even in these challenging times there
is a growing demand for higher quality
services with lower prices and tight
turnaround times. Construction
delivery methods that combine control
and responsibility are becoming more
appealing, if not standard in the
industry.
© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
First riding on the IT boom and then Tough times call for tough measures.
the thrust from the real estate sector The onus is now on the construction
gave the construction industry enough project fraternity to act, take quick
impetus to go from project to project action to inculcate, imbibe and
and clock reasonable profits. This time institutionalize key management
around the equation is a little lop sided, processes in their very DNA – and in
yes the infrastructure gap is glaring doing so they will prepare for
and provides good opportunity, but the tomorrow – now!
dipping investor sentiment, apparent
absence of a risk management
framework and instances of weak
corporate governance, all put together
present a herculean task. The
inefficiencies that got covered up
yesterday will get profiled and the
cracks will begin to show. Project &
program management expertise will be
key, companies that optimize their
costs, while integrating various
construction processes would have a
good chance. An integrated, tailored
and dynamic risk management
strategy coupled with a forward
looking approach that incorporates
principles of sustainability and good
HR policies will be the key ingredients
for successful construction companies.
 About KPMG in India

KPMG is a global network of professional firms providing Audit, Tax and Advisory
services. We operate in 144 countries and have 137,000 people working in
member firms around the world. The independent member firms of the KPMG
network are affiliated with KPMG International, a Swiss cooperative. Each KPMG
firm is a legally distinct and separate entity and describes itself as such.

The Indian member firms affiliated with KPMG International were established in
September 1993. As members of a cohesive business unit they respond to a
client service environment by leveraging the resources of a global network of
firms, providing detailed knowledge of local laws, regulations, markets and
competition. We provide services to over 5,000 international and national clients,
in India. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai,
Hyderabad, Kolkata and Pune.

The firms in India have access to more than 3000 Indian and expatriate
professionals, many of whom are internationally trained. We strive to provide
rapid, performance-based, industry-focused and technology-enabled services,
which reflect a shared knowledge of global and local industries and our
experience of the Indian business environment.

© 2009 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
 in.kpmg.com

KPMG in India KPMG Contacts

Mumbai Raajeev B Batra
KPMG House, Kamala Mills Compound Executive Director
448, Senapati Bapat Marg, Tel: +91 (22) 3983 6404
Lower Parel, Mumbai 400 013 E-mail: rbbatra@kpmg.com
Tel: +91 22 3989 6000
Fax: +91 22 3983 6000 Ashish Shah
Director
Delhi
Tel: +91 (22) 3983 6389
DLF Building No. 10,
E-mail: ashishs@kpmg.com
8th Floor, Tower B,
DLF Cyber City, Phase 2,
Gurgaon -122002
Tel: +91 124 307 4000
Fax: +91 124 2549101

Pune
703, Godrej Castlemaine
Bund Garden
Pune - 411 001
Tel: +91 20 3058 5764/65
Fax: +91 20 3058 5775

Bangalore
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala, Bangalore – 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999

Chennai
No.10, Mahatma Gandhi Road
Nungambakkam
Chennai - 600034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999

Hyderabad
8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad - 500 034
Tel: +91 40 6630 5000
Fax: +91 40 6630 5299

Kolkata
Park Plaza, Block F, Floor 6
71 Park Street
Kolkata 700 016
Tel: +91 33 4403 4000
Fax: +91 40 4403 4199

© 2009 KPMG, an Indian Partnership and a member firm

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual of the KPMG network of independent member firms
or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is affiliated with KPMG International, a Swiss cooperative.
accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information All rights reserved.
without appropriate professional advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of
KPMG International, a Swiss cooperative.