KBuzz

Sector Insights
Issue 9 September 2011 kpmg.com/in

An environment of heightened uncertainty prevails as the fear of another economic recession looms over the advanced economies of the world. Indicatively, global activity witnessed a slowdown on the back of rising cost of debt in the US and indebted Euro zone countries, coupled with high interest rates and lack of investor support, which is hurting these economies. As per the latest World Economic Outlook report, global growth will moderate to about 4 per cent through 2012, from over 5 per cent in 2010. Congruent to the mood in the global economy, the Indian economy has been struggling with domestic perils including persistently high inflation, weak government finances and policy inertia. Particularly marred by inflation, which has been sticky for the last 13 months and currently at above 9 per cent, 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. The repo rates, i.e. 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, were raised by 0.25 basis points to 8.25 per cent. The reverse repo rates, i.e. the rate of interest at which the central bank borrows funds from other banks, were increased to 7.25 per cent. Recent data show that this high interest environment is taking a toll on the countrys GDP growth, which has been recorded at 7.7 per cent for the first quarter of 2011, indicating a steep drop from 9.3 per cent for the first quarter of 2010. Adding to the countrys economic woes is the rising number of scams and scandals involving eminent bureaucrats and politicians thereby provoking anti-corruption agitations. The consequent Anna Hazare movement represented the largest civil anti-corruption movement in recent times. While on the other hand the Land Acquisition, Rehabilitation and Resettlement Bill, 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, was introduced in the Lok Sabha. The Bills 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. I hope you find this edition of KBuzz engaging and insightful.

Regards, 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), a Swiss entity. All rights reserved.

REAL ESTATE AND CONSTRUCTION

2011 KPMG, 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. All rights reserved.

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Real Estate and Construction

Cost Reduction and Cost Management in Real Estate Projects

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

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Real Estate and Construction

Cost Reduction and Cost Management in Real Estate Projects

Couple of simple approaches to reducing the cost of construction, specifically during pre-construction stage, 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. We see a lot of stone being used in landscape, specified by the landscape architect, but the stone is not a natural product of the region where the project is. The resultant impact on cost per sq.ft of landscape area is close to INR 15/sq.ft. Imagine this cost over a few million sq.ft of landscaped area, in large office and mixed use projects. Maximize the use of factory built components, wherever they best suit the design and technology available current technologies in use, like monolithic construction through metal form-work, allows for, and enables standardization of steel components, re-barring process and also the concrete casting methods by grids. However, we still do not see factory cut, pre-bent steel being widely used in real estate projects as yet. The same has the capacity to reduce steel wastages by two to three percent in a typical building project, where four to five percent wastages are given as wastage norm. Two to three percent saving for a project of few million sq.ft, with six to seven KG of steel per sq.ft. of consumption, and steel at INR 45/ kg, can lead to decent addition to the bottom line. Cost Management and Reduction during Construction Well the adage is that, you cannot do much when you have started construction, except for mostly buying cheap, and deploying your resources judiciously and with maximum frugality. Since cost commitments in terms of construction contracts and technology are already done at pre-construction stage, cost reductions are difficult during construction; however, cost management is an ongoing process and can be applied and should be applied at this stage to the maximum. Few key areas where cost management, or deep and focused oversight can enable cost savings, or wastage reductions are as follows: Purchase planning do not wait for project sites to raise material indents, and then start planning for purchases. The traditional purchase function and their method of working will not help. The essence is in forward contracts and bulk material purchases, for which detailed quantity estimate and purchase planning needs to be looked into. Wastage reductions and monitoring Generally if there is wastage tolerance provided to contractors, they will tend to not monitor wastages less than the tolerance. The loss is obviously adding to the project cost. It is imperative that detailed wastage and process loss estimates are conducted at various stages of the project, and material reconciliations are done, to assess how and where the wastages can be reduced. Specifically for large projects, with tall buildings, steel wastages should always be looked into. Saving even one percent on a million sq. ft can lead to INR 2.5 million in savings. Other aspects worth making a mention here would be import planning, hedging for material and currency, when there are large imports etc. But real estate and building industry today is sourcing almost over 95 percent of its project requirements locally, and is not indulging into imports. As such the focus is on better sourcing, negotiations and long term forward contracts, across one or multiple project portfolios that are the imperatives of the time.
2011 KPMG, 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. All rights reserved.

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This document has been compiled by the Research, Analytics, and Knowledge (RAK) team at KPMG in India.

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, 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. 2011 KPMG, 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. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.