Impact of COVID-19 on the construction sector in India

ABSTRACT

Since the World Health Organization (WHO) announced the coronavirus 2019 (COVID-19) outbreak as a pandemic, many countries have declared a complete national lockdown after a remarkable spike in COVID 19 cases. These decisions have restricted the movement of people and resulted in a complete shutdown of many businesses across many sectors. The construction industry, as a significant growth driver of the economy with no exception, has also been completely shut down. All the developments and projects were postponed until further notice. It is, therefore, prudent to address the impact of the pandemic at the outset and end of the crisis to prepare for any future possibility and gain lessons for plans.

INTRODUCTION

The construction industry in India is the second-largest employer after agriculture, and it is therefore critical to the country’s economic stability. With an industry size of INR 10.5 trillion,1 it accounts for around 8 per cent of the nation’s GDP and employs close to 57.5 million people. Also, being a core sector, numerous industries are dependent on construction activity in the country. For example, the construction equipment manufacturing industry comprises around 500 companies and is estimated to be sized at INR 375 billion by 2020.

More than 50 million people are engaged in the construction sector and the recent poignant issue of migrant labours’ journey back to their native places under the lockdown period is a grim testimony to the insecurity and transient nature of the job market they have entered into. While exclusive construction activity comprises of real estate (residential building) and non-residential construction in commercial and industrial segments (industrial sheds, prefabricated buildings), the building of infrastructure assets that faces a massive deficit in India as a developing economy, the construction of these assets inroads (highways and bridges), railways, urban infrastructure, ports, shipping, civil aviation, coastal waterways, oil and gas (refineries, drilling and transportation) water transportation and sanitation, power projects, windmills, power transmission, irrigation, space science, cellular operators etc. also fall under the construction and Infrastructure sector which is to be considered as one critical sector only.

Roads and bridges, urban, digital infrastructure, railways, and irrigation sectors accounted for more than 94 per cent of the INR 82.5 trillion investment undertaken from 2008 to 2017. While the investment was significant, the quality of infrastructure called for improvement. This was reflected in the second pillar of the global competitiveness index. India ranked 70 out of 140 countries on infrastructure quality in the global competitive index.

IMPACTS

Suspension of the project is the most affected factor of pandemic occurrence due to the restriction of movement and shortage of supply.

The second most affected part is labour impact and job loss which is due to the suspension of the projects and the fear of gathering due to the spike spread of the contagious virus among workers. The decision comes to an end to avoid assemblies and upkeep social distancing. It, therefore, impacted the workers in terms of finance and safety. Job losses are also a major disaster during the escalating situation of the pandemic. Globally, millions of employees have lost their jobs amid the COVID 19 crisis. In the construction industry, all the employees lost their jobs, and most of the small enterprises are not able to pay salaries during lockdowns.

The third impact is time overrun which is associated with the movement and measure control period. The longer the time required to fight the pandemic will undoubtedly require more time for the project to complete.

The fourth is the financial impact which is caused by the economic deterioration of the state and also due to the suspension of the projects. Subcontractors’ needs to pay machine tariffs and materials on-site may also deteriorate, and that is associated with additional cost. Besides, contractors are obliged to pay salaries in which the work is not progressing. The findings raise the awareness to prepare the construction industry to cope with any sudden pandemic.

It is statically proven that the most impacting factors are the suspension of projects, labour impact and job loss, time overrun, cost overrun, and financial impact. From the interviews, it was highlighted that the economic impact is significant to all the project stakeholders and the workforce. The project developers work hard to mitigate the impact by reducing the number of workers on-site and encouraging offsite work to avoid and slow the spread of the contagious virus. The contractors are also inevitable to face legal issues due to the nonconformity of contractual terms which is caused by the suspension of the project and sudden fluctuation of material price. These unforeseen impacts are indisputably perilous to maintain the stream of the project progress. Projects that are still running due to the urgent need to expand medical facilities are also suitable for many challenges such as shortage of workers, the rise of materials price, and shortage of materials and supply chains.

Reduced labour at construction sites may lead to the idling of the plant and machinery deployed for construction work. These machines have a fixed hiring cost, which is charged to the project regardless of machine utilisation. Considering the lockdown and future uncertainty, it may be a while before machines are operational again. The hiring charges per month for a typical set of machines deployed at a large thermal power plant construction site (660 MW) is around INR 0.0104 billion. In addition to these direct costs, the idling of machines may also have an indirect impact on the construction company in terms of unbilled revenue and ultimate revenue loss due to delayed project completion for the developer.

CONCLUSION

The accurate impact of COVID-19 pandemic is nearly impossible to predict. Still, any prolonged slowdown in Chinese or global economic and manufacturing activity is likely to have significant ramifications for material costs. If reduced construction activity due to virus containment efforts cause a major reduction in demand for materials, the demand reduction may weigh heavily on material costs. Materials which have displayed a downward trend in the last year may be expected to continue that trajectory, with additional fall of five per cent to ten per cent, whereas materials maintaining their growth may rise slightly in the range of one per cent to three per cent.

Under development projects is the worst hit with a minimum impact of two to three months, which may be controllable if measures are taken seriously.

Due to a delay in the construction period from the lockdown, there would be an additional interest cost on the working capital loans taken, which will be borne by the developers or the contractors depending upon the risk-sharing mechanism.

The labour costs for skilled workers are expected to rise by 20 per cent to 25 per cent while that for the semi-skilled and unskilled workers are expected to rise by 10 per cent to 15 per cent.

Revised standard operating procedures duly incorporating social distancing, personal protective equipment and hygiene would drive up project cost in the short term implementation costs may not vary much for linear projects like irrigation canals, pipelines, transmission lines, roads, etc. Still, for non-linear projects, the costs may rise by 2 per cent to 5 per cent.

The projects dependent on specialised equipment, electronics and specialised materials are more likely to be hit by disruptions to the supply chain largely due to the force majeure clauses. The recovery of liquidated damages would not be possible for the developers unlike certain sectors, such as solar projects where the pandemic as a part of Force Majeure Clause (FMC) is not included in the Power Purchase Agreements (PPA) with some of the major solar power developers in India.

Author: Smriti Singh

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