Education

Cementing success with project controls

Sunil Kothari Nikhil Kenjale | Updated on October 14, 2012 Published on October 14, 2012

Real estate developers must re-think the control and governance aspects of their business, so as to effectively manage their stakeholders’ expectations.





Recently, a construction crew in Changsha, China, built a 30-storey, 183,000-sq-ft hotel in just 15 days. Similarly, the Ark Hotel was built on Dongting lake in Hunan Province by Broad Group, a Chinese company specialising in sustainable architecture.

It was built to withstand a magnitude-9 earthquake, as tested by the China Academy of Building Research, according to which the building is five times more quake-resistant than conventional buildings. All the materials were pre-fabricated, and sections were built to specification offsite — so there was little wastage.

How was this possible? No doubt technology played a major role, but equally important were the process and project management controls. Can we expect a similar outcome in India? Let us evaluate some of the risks and controls relevant to the real estate industry in India.

Real estate growth

The rapid growth in the real estate sector has attracted huge investments, including foreign direct investment exceeding $10 billion in the past decade.

The stakeholders are keen on returns, and developers have the huge task of meeting stakeholder expectations. The typical risks and challenges faced include demand contraction, increasing cost of raw material and service, high cost of capital, approval delays and process inefficiencies.

Governance and ethics

In 2011, a Kochi-based company reportedly collected over Rs 100 crore from buyers, mainly Indian expatriates in West Asia. It used the goodwill earned from its previous projects to attract buyers, but missed many deadlines for 11 new projects, resulting in losses for buyers.

Though real estate is the second-largest employer after agriculture, the industry is highly disorganised, and there are few corporate players. Given the increasing scale and complexities, real estate entities should incorporate good governance and ethical practices. Globally, the sector is closely connected to politicians.

In India, there is sizeable use of illegitimate money in real estate operations, and a huge presence of unorganised players, making it a challenge to enforce good governance and ethical practices.

Rise in outsourcing

Apart from outsourcing hardcore construction-related activities, the trend has spread to areas such as acquisition and disposition support, lease administration, investment and fund accounting.

Managing the extended enterprise brings more challenges — controlling outsourcing contracts and getting work completed on time, ensuring payments for work certified as completed and recoveries for non-compliances, and safeguarding project assets.

Project Management

Weak project management is another area of concern, as it can result in cost overruns, liabilities and project delays. It is interesting to note that the National Capital Region, which attracts the maximum number of real estate investors, also has the maximum number of delayed projects. These include projects from well-known companies.

Independent audits

Apart from statutory audits involving financial reporting and tax filing, few real estate entities go in for independent internal or process audits. This is mainly due to the presence of small, non-corporate players, and owners or promoters continuing with traditional ways of controlling business.

Technical Guide

The Institute of Chartered Accountants of India published a technical guide on internal audit for the real estate sector in 2010.

Controls implemented at the right time, in the right direction, and with the right magnitude, will help real estate companies strengthen their processes and governance, thereby minimising risk of project delays, cost overruns and losses.

The guide emphasises that internal auditors should play a key role in the construction industry owing to the multi-dimensional challenges at play.

The need is for internal auditors to understand the basic concepts and peculiarities of the industry and roll out efficient processes.

The guide covers in detail the nature of the Indian construction industry, legal framework, and major areas of internal audit.

Real estate developers must re-think the control and governance aspects of their business, so as to effectively manage stakeholder expectations, and contribute positively to the country’s development.

Sunil Kothari is Partner and Nikhil Kenjale is Manager, Deloitte Haskins & Sells

Published on October 14, 2012
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