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KBuzz

Sector Insights
Issue 9 – September 2011 kpmg.com/in

As per the latest World Economic Outlook report. Regards. the Indian economy has been struggling with domestic perils including persistently high inflation. the Reserve Bank of India has been compelled to tighten domestic liquidity and has accordingly hiked interest rates for the 12th time in 18 months. was introduced in the Lok Sabha. which has been recorded at 7. The consequent Anna Hazare movement represented the largest civil anti-corruption movement in recent times. Adding to the country’s economic woes is the rising number of scams and scandals involving eminent bureaucrats and politicians thereby provoking anti-corruption agitations. from over 5 per cent in 2010. global growth will moderate to about 4 per cent through 2012. Congruent to the mood in the global economy. were increased to 7. coupled with high interest rates and lack of investor support. which is hurting these economies.25 basis points to 8. driven by the desire to make land acquisition for industrialisation and urbanisation easier while at the same time providing fair and just compensation for those affected.e. The Bill’s draft makes it mandatory to have the consent of 80 per cent people of any area where land is to be acquired for developmental purposes.e.25 per cent. which has been sticky for the last 13 months and currently at above 9 per cent. weak government finances and policy inertia. i.7 per cent for the first quarter of 2011. indicating a steep drop from 9.An environment of heightened uncertainty prevails as the fear of another economic recession looms over the advanced economies of the world. I hope you find this edition of KBuzz engaging and insightful.25 per cent. 1 . All rights reserved. a Swiss entity. While on the other hand the Land Acquisition. Indicatively.3 per cent for the first quarter of 2010. The reverse repo rates. Rajesh Jain Head – Markets KPMG in India © 2011 KPMG. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). the rate of interest at which the central bank borrows funds from other banks. The repo rates. the rate at which banks borrow money by selling their financial assets to the central bank with an agreement to repurchase them at a predetermined price. Particularly marred by inflation. Rehabilitation and Resettlement Bill. were raised by 0. Recent data show that this high interest environment is taking a toll on the country’s GDP growth. global activity witnessed a slowdown on the back of rising cost of debt in the US and indebted Euro zone countries. i.

an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). a Swiss entity. 34 .REAL ESTATE AND CONSTRUCTION © 2011 KPMG. All rights reserved.

when you have not committed to construction. finishes and interior ambience. and cost reduction strategies in real estate. value engineering analysis and team organization. schematic drawings and preliminary work scope outlines to develop an efficient final design that incorporates not only scope and work quantities to enable superior work planning during construction. The more efficient the end design.com The cost management. even consultants and material specifications. which enable pre-construction and even construction stage planning and cost impact assessment of design. to name the few critical ones. cost and time effective tools. till you have buttoned down on the exact design and material configuration you want. 35 . determine the project amenities. components. all on the drawing board. various technological and material options may open up possibility to re-look at the project and construction cost structures. design and construction phasing. Market sentiments. typically can be divided in two parts.Raajeev Batra Executive Director Real Estate and Construction KPMG in India © 2011 KPMG. The pre construction strategy allows focusing on driving out waste and unwanted cost throughout the design process. more often than not. but also helps in utilizing the most efficient processes. quantity estimates. across the project lifecycle. and even to a large extent in the commercial projects. elemental and specification changes to buildings. before floating a detailed work order or contract. It typically involves proper gathering and dissemination of all pertinent project information including engineering. Raajeev Batra Executive Director Real Estate and Construction rbbatra@kpmg.Real Estate and Construction Cost Reduction and Cost Management in Real Estate Projects Cost management. Technology on the other hand does provide a solution to this dilemma. However. the greater the opportunity for the project to provide competitive product. and bill of quantities can be accurately predicated through the same. 3D BIM (Building Information Management) Design provides efficient. in the Indian context this process is still dynamic. across various construction components of a project. specially in the residential real estate projects. driving costs higher than planned at later stage of the project. a Swiss entity. cost assumptions and project budgets. It also helps enable programming sketching. cash flow forecast. You can change designs. aligned to the project lifecycle. One of the time tested and most basic precept of cost management in real estate and construction projects is that you can influence the cost decisions the most. New building simulation and design technologies are available where complete interior and exterior 3D simulation can be done. Dealing with unwanted cost is critical and provides the project with a competitive advantage. and in that process cost reduction. “One of the time tested and most basic precept of cost management in real estate and construction projects is that you can influence the cost decisions the most. Pre construction (before money and resources have been committed to construction) 2. All rights reserved. inherently two components: 1. is actually a desired out come of a process that covers various project aspects. time schedules. when you have not committed to construction” . an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). During construction – while constructing.

with tall buildings. Specifically for large projects. negotiations and long term forward contracts. you cannot do much when you have started construction. to assess how and where the wastages can be reduced. in large office and mixed use projects. ft can lead to INR 2. except for mostly buying cheap.ft. for which detailed quantity estimate and purchase planning needs to be looked into. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Wastage reductions and monitoring – Generally if there is wastage tolerance provided to contractors. cost management is an ongoing process and can be applied and should be applied at this stage to the maximum. and steel at INR 45/ kg. pre-bent steel being widely used in real estate projects as yet. we still do not see factory cut. and is not indulging into imports. is rooted in the following percepts:  Standardization of design – let the availability of material and ease of procurement determine the specification of the material and usage. when there are large imports etc. © 2011 KPMG. re-barring process and also the concrete casting methods by grids. they will tend to not monitor wastages less than the tolerance. wherever they best suit the design and technology available – current technologies in use. 36 . specifically during pre-construction stage.Real Estate and Construction Cost Reduction and Cost Management in Real Estate Projects Couple of simple approaches to reducing the cost of construction.ft. Few key areas where cost management. and enables standardization of steel components. across one or multiple project portfolios that are the imperatives of the time. of consumption. It is imperative that detailed wastage and process loss estimates are conducted at various stages of the project. can lead to decent addition to the bottom line. and material reconciliations are done. Imagine this cost over a few million sq. however. hedging for material and currency. Cost Management and Reduction during Construction Well the adage is that. The same has the capacity to reduce steel wastages by two to three percent in a typical building project. Since cost commitments in terms of construction contracts and technology are already done at pre-construction stage.ft of landscaped area. The resultant impact on cost per sq. The loss is obviously adding to the project cost. cost reductions are difficult during construction.ft. and deploying your resources judiciously and with maximum frugality. The traditional purchase function and their method of working will not help. But real estate and building industry today is sourcing almost over 95 percent of its project requirements locally.ft of landscape area is close to INR 15/sq. However. and then start planning for purchases. specified by the landscape architect. Saving even one percent on a million sq. but the stone is not a natural product of the region where the project is. All rights reserved. where four to five percent wastages are given as wastage norm. Other aspects worth making a mention here would be import planning. or deep and focused oversight can enable cost savings. We see a lot of stone being used in landscape. Two to three percent saving for a project of few million sq.  Maximize the use of factory built components. with six to seven KG of steel per sq. a Swiss entity. or wastage reductions are as follows: Purchase planning – do not wait for project sites to raise material indents. like monolithic construction through metal form-work.5 million in savings. The essence is in forward contracts and bulk material purchases. As such the focus is on better sourcing. allows for. steel wastages should always be looked into.

and Knowledge (RAK) team at KPMG in India. a Swiss entity.com/in The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Analytics. there can be no guarantee that such information is 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 without appropriate professional advice after a thorough examination of the particular situation. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). kpmg. All rights reserved. The KPMG name. Although we endeavor to provide accurate and timely information. logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. .This document has been compiled by the Research. © 2011 KPMG.