Economic Factors Building

Economic and legislative factors influence the design team and contractor throughout the building project from inception to completion

In this assignment, I am going to highlight the various factors which influence the building project from inception to completion in India. If we consider place as one of the factor for construction economics, it will be fix as India as a country. in this assignment I am going to briefly describe a PEST analysis and its influence on the project.

Introduction:

Lets see what is Economics?

Economics is the social science that studies the production, distribution and consumption of goods and services.(Wikipedia)

The science which studies human behavior as a relationship between ends and scarce means which have alternative uses(Lionel Robbins,1932).

PEST analysis is one of the best tools describing economic factors. PEST analysis consist of following major factors which strongly influence on the building projects from inception to completion. PEST factors are as follows-

Political Factors

Economic Factors

Social Factors

Technological Factors

Some of the other factors which has also strong influence on the building project economy can be as follows

Buyer Power

Supplier power

Michael Porters five force factors

Stock Market performance

Industry outlook

Apart from the above factors we need to understand what is project and what are the stages of project

Project:

Project is the definition of planning, organising and managing resource to bring about the successful completion of specific project goals and objectives(Wikipedia)

Following are the main stages in the construction projects:

1)Conceptualization

2)Pre Construction

3)Construction and execution

4)Post construction and handover to the client.

Indian Construction Industry Scenario:

The Indian construction industry recorded a consistent double digit year on year growth of 12% during 2001-05 and is expected to grow at 25%-30 % during 2005-10.the key drivers of this growth are government investment in infrastructure creation and real estate demand in the residential and industrial sectors.

The Indian construction industry has been enjoying a strong growth with the infrastructure and the commercial sectors are the forefront of this. India expects its economy to grow by 8.7% in the financial ending March. Growth remains strong in the country’s services, construction and communications sectors. India’s economy expanded by 9.6% in the year ended march 2007.despite the forecast of slower growth, India is still the worlds fastest growing economy after China. India has become a center for US and Uk firms that want to outsource services. European and US firms have flocked to India in recent years attracted by its huge domestic market and well educated and productive workforce. The telecom and property sectors have seen the most substantial foreign interest. Buoyant foreign investment levels have boosted stock markets and contributed to consistently strong economic growth in recent years.

India has recorded the highest construction spending growth 2005, driven by infrastructure and real estate sectors. The introduction of REITS(Real estate Investment Trusts)by mobilizing capital markets will further accelerate real estate growth. Technological developments like ready-mix concrete, 3-D Modeling and mobile computing are gradually being adopted.

Construction activity is the integral part of the county’s infrastructure and industrial developments. It includes hospitals, schools, townships, offices, houses and other buildings. The construction sector has major linkages with the building material industry since construction material accounts for sizeable share of the construction costs. These include cement steel, bricks/tiles, sand/aggregates, fixtures/fittings, paints and chemicals, construction equipment, petrol products, timbers, mineral products, aluminum, glass and plastics.

The construction sector is one of the largest employers in the country. It employed a7.62 million workers in 2000-05.The sector has recorded highest growth in generation of jobs in last two decades, doubling its share in total employment.

The share of construction sector in gross domestic product(GDP)which was 5.4 %in 1990-91,came down to 4.4% in 1999-00.Subsequently it picked up and stood at 5.1%in 2000-05.clearly there has been a decline in the share of construction sector in the GDP. The main reason for this is reduced government spending on physical infrastructure in last decade due to fiscal constraints. though their has now been an increasing emphasis on involving the private sector in infrastructure development through public private partnerships and mechanism as build own operate(BOT),private sector investment has not reached the expected levels.

Political factors include following issues:

Ecological/ Environmental issues

Current legislation Home market

Regulatory bodies and processes

Government policies.

Ecological/environmental issues:

Environmental impacts must be considered at several junctures in the planning and design of a building project. First environmental issues play an important role in the site selection. Once the site is selected and design commences, plant and site design must incorporate environmental controls that will minimize the impacts to the human and natural environment during construction and operation.

The environmental issues associated with building construction are, the site features, neighboring land uses and ecological conditions, specific facility components and design and level of community interest are all factors determining the nature and extent of environmental impact review. The issue can range from minor considerations of land disturbance to more significant environmental impacts caused by truck traffic or major alterations to sensitive ecological areas.

Current legislation home markets:

Recent past earthquakes (Uttarkashi 1991,Latur 1993 and Bhuj 2001) have clearly exposed the vulnerability of building. So Ministry of Home affairs, Government Of India constituted the Techno legal regime in country which follows earthquake resistant features specified in Indian standards and Building Codes. Following are some of the central legislation/ guidelines:

Model Town and Country planning Act

Vulnerability Atlas of India 1997

National Building Code

State levels legislation

Indian standard codes

Regulatory Bodies and processes:

As a designer of the building one has to consider the regulatory norms of national building code and local municipal authority norms for the total buildup area.

A building code is a document containing standardized requirement for the design and construction of most types of building. Codes regulate building construction and building use in order to protect the health, safety and welfare of the occupant. Code express all aspects of construction including structural integrity, fire resistance, safe exits, lighting, electrical, energy conservation, plumbing, correct use of construction materials.

Government Policies:

As in any democracy, policy decisions are often taken in India on purely political grounds, some of the policy change example which affects the building project are

Ceiling over agriculture land

Special economic zone act

100% investment of foreign money in SEZ

Cement priced reduced for state infrastructure projects.

Special Economic zone policy was announced in April 2000.this policy intended to make SEZ an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at centre and at state level with minimum possible regulations.

Economic Factors:

Home economy situation

General taxation issues

Market and trade cycles

Interest rates

Exchange rates

Stock Market

Home economy situation:

India is projecting a 8.7% growth in current fiscal year. The government has set a target of 9%GDP during 11^th five year plan(2007-12).This represents the declaration from the unexpectedly high growth of 9.4% and 9.6% respectively in the previous year. India is not bad as most developed nations economies are going down marginally. So from Building project point of view India’s economy is good.

General taxation rules:

In recent year India has imposed 12% VAT on most of the construction material. But has lifted the local octrio systems of the municipalities. In Special Economic zones Government exempted companies operating in these zones from sales tax. So these are important factor building construction to calculate the projected cash flows.

Exchange Rates:

With demand for foreign exchange not keeping pace with the supply of foreign exchange, the rupee appreciated by 8.9% against the US dollar during current fiscal years 2007+08.The rupee appreciation against the US dollar over past 12 months on year basis at a3.2% was even higher. Rupee appreciation is also one of the major factor in building project from material and sell point of view.

Stock Markets:

Stock markets are an important instrument of financial intermediation. They saw from increased activity in 2007-08. primary market issue of debt and equity increased along with private placement. the secondary market too show rising trend. The Bombay stock exchange(BSE) sensex rose from 13072 at end March 2007 to 18048 as on February 2008 while the national Stock exchange(NSE)index Nifty 50 rose 3822 to 5277 during the same period. It shows the share prices are increasing and companies have good time to collect money from the market through IPO to grab new project or investment in new projects.

Interest rates:

This is one of the main economic factor from building construction project point of view. One has to calculate the ratio of investment in the project to return generated from the projects. It is essential to decide whether project is economical viable or not. Otherwise it is better to put money in bank and get interest on it if rate are high than return rate.