Procurement System in the Indian Construction Industry Issues and Remedies by Pavitra Sharma - Master of Science Candidate in Construction Management at Arizona State University, Tempe AZ

1. Procurement System in the Indian
Construction Industry: Issues and Remedies
Pavitra Sharma
CON 567- Advanced Procurement Systems - spring 2014
Dr. Dean T. Kashiwagi

2. Contents
Introduction-.................................................................................................................................................1
Problems Identified- .....................................................................................................................................2
The Best Value Approach (Kashiwagi, 2014)- ...............................................................................................2
Differences identified between the traditional system of procurement in India and the Best Value
Approach-......................................................................................................................................................4
Proposed Solution-........................................................................................................................................5
Conclusion-....................................................................................................................................................5
Bibliography ..................................................................................................................................................6

3. CON 567
Pavitra Sharma
1
Procurement System in the Indian
Construction Industry: Issues and
Remedies
Introduction-
Procurement in the Indian Construction Industry especially in the public sector is done through
the traditional contracting, that includes awards to the contractor with the lowest bid. Particularly
for public sector, at least 10 to 12 agencies are involved in the process of deciding the necessity
to procure (Jain). Huge amount of cost, paperwork and manpower is expended in the
conceptualization of the process. According to Jain, the recent estimates of the cost of initiations
are as follows (Jain)-
 Central Government: 30-40%
 State Government: 40-60%
 Public Sector Undertakings: 15-25%
 Public Ltd. companies: 5-7% of the value of goods/ (with private holding) services
procured.
 Private Ltd. Companies: 1-2%
Stated below are the principles concerning the owner as envisioned by Construction Industry
Development Council (Construction Industry Development Council; Jain)-
 Principle 1- The most competent agency should be awarded the work.
 Principle 2- The work should be executed at the most economical price.
 Principle 3- Works should progress on schedule and its quality should adhere to the
standards specified.
 Principle 4- Procurement procedure should be transparent.
 Principle 5- Owner’s representatives are competent, experienced and good managers of
work.
Stated below are the principles concerning the contractor as envisioned by Construction Industry
Development Council (Construction Industry Development Council; Jain)-
 Principle 6- Contractor possesses requisite experience in the type of work taken up.
 Principle 7- The Contractor has adequate resources for executing the work.
 Principle 8- The Contractor quotes a workable price.
 Principle 9- The Contractor has the corporate strength and resilience to overcome adverse
situations if and when they may arise.

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Problems Identified-
The reality of situation in the system of procurement is completely contradictory to principles
stated by the Construction Industry Development Council (CIDC). There is no transparency in
the system. The work is awarded to the lowest bidder. The vendors lack expertise. These are to
name a few but there lies a bigger picture.
Principle 1 and Principle 2- During the pre-bid phase, the contract is awarded to the vendor
with the lowest bid. Factors like specific past experience on similar project, performance data,
customer satisfaction and the works in hand is often ignored during the process. CIDC
emphasizes to follow pre-qualification of contractors but due the prevailing system of envelopes
and no interview during this phase, the system fails. Therefore, the owners revert back to the pre
–bid selection of the contractor with lowest bid.
Principle 3- The vendors quote unrealistic and lower bid to acquire the project which in turn
results in time and cost overruns. Therefore, the quality of the project suffers.
Principle 4- Since the lowest bidder is awarded the project during the pre-bid selection, the
credibility and expertize of the vendor is often hidden from the owner. Hence, the system
becomes opaque.
Principle 5- The owner’s team of engineers and managers lack expertise and management
skills which results in weaker quality and schedule control measures. Hence, the project suffers
in quality, time and cost overruns.
Principle 6- The contractor with the lowest bid during the pre- bid selection is awarded the
project. The expertise of the contractor, performance data like cost and time deviations, customer
satisfaction is altogether neglected.
Principle 7- In house resources are minimal in most cases. Contractors rely mostly on
temporary hiring of resources which is seldom preplanned in advance. As a result there is delay
in schedule and cost overruns. Also, the contractors lack expertise which makes it difficult to
identify and mitigate risk.
Principle 8- The field of contracting is highly unregulated in India. A contractor can bid a
certain lowest amount without the financial backing, without identifying the scope of work and
also without adequate resources.
Principle 9- When faced with adverse situations, these contractors adopt short cuts to cope up
with the work as they lack expertize, financial backing and adequate resources.
The Best Value Approach (Kashiwagi, 2014)-
The Best Value based Performance Information Procurement System (PIPS) creates an
environment that includes-
 Client does not manage, direct and control the vendor.
 The vendor is the expert.
 The client utilizes the expertise of the vendor.

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 Minimizes time and cost overruns.
 Forces accountability
 Identification and mitigation of risk.
 Minimal decision making.
 Transparency
 Minimized transactions.
 Minimizes bureaucracy.
 Protects the expert and the owner by maximizing profit and minimizing project cost.
The Best Value PIPS propose four phases-
1. Pre-qualification
2. Selection
3. Clarification
4. Execution
The Pre-Qualification Phase (Phase 0) - The goal of this phase is to increase
competitiveness, to create transparency and identify vendors according to the minimum criteria
set by the owner based on expertize, past performance and experience on similar project.
The Selection Phase (Phase 1) - This phase identifies the Best Value (BV) vendor from the
competing vendors. The BV vendor is selected based on the level of expertise and not based on
the lowest price quote or the best scope of work. The expertise criteria are project capability,
identification of risk and its mitigation plan, value added, cost and an interview. This phase also
utilizes four filters i.e. project capability, interview, prioritization and dominance check, before
moving the BV vendor into the clarification phase.
The Clarification Phase (Phase 2) - This is the most important phase of all. In this phase
the BV vendor is forced to clarify their plan and determine the scope of their proposal. They
must answer any technical questions to show their technical competence. They must provide the
following-
 Detailed project schedule.
 Identification of areas out of their control.
 Risk identification and mitigation.
 Measurement of risk performance.
 Creation of milestone schedule.
 Creation of weekly risk report (WRR) which includes a risk plan, risk mitigation plan
(RMP) and performance measurements.
The clarification phase provides an opportunity to the vendor to identify itself as a BV vendor for
the owner. If the offer is unacceptable to the owner then the next prioritized BV vendor is
brought into the clarification phase.
The Execution Phase (Phase 3) - A contract is signed after the BV vendor is identified
during the clarification phase. The BV vendor delivers its services and mitigates risk in
accordance to the WRR. The role of the client or owner here is to assure that a quality service is
provided by the BV vendor without time and cost deviations with the help of WRR.

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The purpose of these reports is to-
1. Create transparency.
2. Communicate information quickly and in a dominant fashion.
3. Assign accountability.
Differences identified between the traditional system of procurement in
India and the Best Value Approach-
Traditional System Best Value Approach
Pre-bid selection of the vendor. Four phases of selection.
Selection based on lowest bid. Selection based of expertize.
Price based industry structure. Value based environment.
No transparency. Complete transparency.
Scope of the project is determined by the
owner.
Scope of the project is determined by the BV
vendor.
Owner exercises management, direction and
control.
Owner exercises quality control and assurance
with help of WRR.
No performance measurement. Performance measurement is the key.
Vendor exercises owner’s desires. Owner utilizes the vendor’s expertize.
No risk identification beforehand and its
mitigation during the execution.
Complete risk identification and mitigation
plan before execution.
Aim is to maximize profit by maximizing
project cost.
Aim is to maximize profit with lowest possible
project cost.
A win-lose environment.
A win-win environment for the owner as well
as the BV vendor.
No accountability of the vendor. Forces accountability.
Many transactions and decision making during
the execution.
Least transactions and decision making during
the execution as everything is pre-planned.
Overall project cost increases.
Overall project cost remains within the
deviations stated by the vendor.
Owner remains accountable of the risk created
by the vendor.
Encourages transfer of risk to the expert
vendor.
Requires more project managers in the owner’s
management team for MDC.
Requires fewer project managers in the
owner’s management team.
Decreases the efficiency of the expert vendor. Maximizes the efficiency of the expert vendor.
A stressful environment. No stress environment.

7. CON 567
Pavitra Sharma
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Proposed Solution-
For the vendor/contractor-
 Quoting realistic and best price during the bid.
 Provide dominant information about the past experience and related projects executed.
 Provide performance related information such as time deviations, cost deviations,
customer satisfaction.
 Identify the scope of the project.
 Identify risks that are within control as well as out of control before the execution.
 Mitigation plan of the risks identified before execution.
 Provide complete transparency to the owner before and during execution.
 Provide WRR’s during execution.
 Provide performance measurement reports during execution.
 Maximize profit by executing quality work with least time and cost deviations.
For the client/owner-
 Creation of value based environment with high competition.
 Stating clearly the level of expertise required for the project before the bidding process.
 Selection of the vendor based on the expertise.
 Recognizing that vendor is the expert.
 Accept or reject the scope of the project provided by the expert vendor.
 Provide a complete transparent and no influence environment to the vendor.
 Selection of the expert vendor with help of the four phases proposed by the PIPS
approach.
 Introduce complete transparency in the system.
 Exercise quality control and assurance based on the data provided by the expert vendor.
 Minimize transaction but exercise on-time transactions.
 No MDC and decision making.
 Provide a win-win environment.
Conclusion-
India Construction Industry is the second largest industry in the country after agriculture and
contributes to 11% of the country’s GDP. There exists immense potential for growth in the
coming years as India is one the fastest developing economies competing with the developed
counterparts. The prevailing system can be changed if the industry focuses on providing quality
work rather than maximizing profit. Experts and well educated staff should be employed by the
companies and not save money on staff salaries. Use of latest technology and performance
measurement matrices should be encouraged. Honesty and transparency should be thoroughly
exercised. Favoritism, political influence, emotion and self-interests should be discouraged. In
conclusion, the whole system should revolve around the expertise of the individual or the
company.

8. CON 567
Pavitra Sharma
6
Bibliography
Construction Industry Development Council. (n.d.).
Jain, R. (n.d.). System of procurement in construction works: Some flaws and their remedies.
Kashiwagi, D. T. (2014). Best Value Standard.