A Study on the analysis of payment problems in private building sector in Kerala State, India

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

A Study on the analysis of payment problems in private building sector in Kerala State, India

1 Student, M.Tech (Construction Management), Dept of Civil Engineering, Srinivas University Institute of Engineering and Technology. Mukka, Mangalore, India 2 Associate Professor, Dept of Civil Engineering, Srinivas University Institute of Engineering and Technology. Mukka, Mangalore, India 3 Professor and HOD, Dept of Civil Engineering, Srinivas University Institute of Engineering and Technology. Mukka, Mangalore ***

Abstract - As withanycommercial activity,cashflowis essential to the survival of a construction company. Cash flow and financial health highly dependent on timely payments from builders due to the fact that construction takes a long time, products are expensive, and payments are typically made for work that has already been completed is brought. Liquidity bottlenecks for contractors not only lead to business failures, but also have ripple effects down the supply chain. Recognizing this impact, most countries have enacted legislation specificallyforconstructionindustrypaymentstoensurea steady flow of cash to project participants. However, payment issues exist in culture and practices, suggesting industry characteristics can make mitigation difficult. In this context, the study focuses on examining payment issues in the Kerala construction industry and exploring viable solutions to secure payments to construction stakeholders.

Key Words: Construction management, Payment problems, Construction industry, India, Kerala.

1. INTRODUCTION

Theissueofpaymentsintheconstructionindustryisnota new phenomenon. The problem seems to be generalized bycontractorsandsubcontractorsnotreceivingmoneyon time. This can take the form of underpayments, late or delayed payments, and no payments at all. Non-Payment or Underpayment refers to circumstances in which a scheduled payment has never been received and/or is deemed uncollectible, written off or partially/completely lost. On the other hand, delay or delinquency in payment occurs when payment is not made on time to the prime contractor or subcontractor according to the deadline agreedbetweentheparties.Financingisatthecoreofany economic transaction, so payment defaults will undoubtedly have many ramifications for project stakeholdersandtheindustry.

Late or missed payments have an immediate impact on cash flow. This leads to contractors, and ultimately subcontractors, seeking additional funds through overdrafts, trade credits, or other means. In China, delays and eventual non-payments, in addition to lack of guarantees, have been reported to lead to significant liquidityproblems,puttingconstructioncompaniesatrisk ofbankruptcy.Aprudentcontractormayanticipatedelays in client payments and consider the risk factor for late/non-payment when setting prices. However, this increases the cost of the project as contractors tend to raise their bids when they know their customers are behind on payments. Late or non-payment of payments will lead to disputes and subsequent suspension or termination of the project. Payment issues are one of the leading causes of conflict in the construction industry, accordingtoresearch.

Type of Payment

Work done in the construction industry is usually paid in

The instalments during the term of the contract are called intermediate or down payments, and the last instalment is called the final payment. From another perspective, the researcher classifies contract

payment

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

1.13 Advance payment

Topaythecontractorinadvancebeforetheworkisdone.

1.14 Payment after completion/Milestone payment

This refers to a situation where a party is requesting paymentforthecompletion ofall activitiesperformed for amilestone.

1.2 Payment Problems - International Perspective

The operation of payment systems is not always smooth. Customer payments to prime contractors are often slow and inconsistent, leading to delays in payments to suppliers and subcontractors. This negatively impacts the efficiency and stability of the industry as a whole. Agreed procedures are necessary to ensure that payments are maderegularlyandpromptly(Banwell,1964).

1.3 Types of Payment Problems

Based on previous research that expressed a comprehensiveviewofpaymentissuesandsaiditcovered thefollowingrangeoftopics:

a) Late payment where the time taken to make paymentisbeyondthecontractedpaymentperiod is due to the usual practice of late payment of invoices.

b) Partialpaymentofaninvoicewherepaymentis withheldforanyreason;or

c) Non-payment of a building professional for any part of the contracted buildingworks by endcustomers,developersorheadcontractors.

2. OBJECTIVES

The main focus of this research is to explore viable solutions that can secure payments to building stakeholders for construction projects. One focus is the impact of payment difficulties due to construction bankruptcies to explore the concept of security against bankruptcy risk. To achieve this set goal, the goals pursuedincurrentresearchareoutlinedbelow.

1. To investigate the extent and nature of payment problems in the Keralaconstructionindustry.

2. To investigate the causes of payment problems in the industry.

3. To evaluate the effects of payment problems in the industry.

4. To explore feasible solutions that could secure paymentstopartiesonconstructionprojectsinKerala.

3. LITERATURE REVIEW

(1) Hughes, Hillebrant and Murdoch (1998) “Financial Protection in the UK Construction Industry” explains that defaultsareprimarilyduetotworeasons."Unabletopay" refers to the financial difficulties of the payer, either becausethepayerisnotseeking fundingordoesnothave sufficient capital and inadequate cash flow management. The "do not pay" situation is due to the attitude of the payer. It seems common for clients to delay payments to contractors and subcontractors to manage cash flow for otherprojectsandreduceoverdrafts.

(2) Abdul-Rahman et al. (2008) A survey of issues affecting payments in the construction industry in a rapidly developing economy found that consultants and contractors have differing perspectives on the causes of late payments. According to contractors, the most common causes of late payment are delayed certification, poor financial management by the customer, local culture/attitudes, failure to implement proper corporate governance by the customer, and is an underpayment of notarized amounts from customers are the most common causeoflatepayments.

(3) Danuri, et al., (2006). “Delay and Non-Payment Issues in the Malaysian Construction Industry – A Contractor's Perspective” According to Malaysian contractors and consultants, other causes of payment problems include: WILLFUL MISCONDUCT Customer reluctance to pay, lack ofbudgetfortheyear,lack of communicationandconflict between parties, delays in submitting claims for payment from contractors, general misunderstanding of contract terms.

An analysis of the literature has revealed that payment problems in the construction industry have multiple causes. The consequences are failure to raise funds or insufficientcapitalandinadequatecashflowmanagement, inefficient use of funds, lack of capital to fund projects, withdrawal from banks during periods of declining sales. Indicatesfinancialdifficultiesduetofailureto raisefunds, delaysinreleasingretainagestocontractorsanddelaysin evaluating and certifying interim and final payments. Another study found that contractors and stakeholders in the construction industry, including suppliers and subcontractors, complained that they were not paid or were unreasonably delayed by their employers. Payment issuesatthetopofthehierarchyhaveseriousimplications for cash flow issues in the contract chain. Despite numerous investigations, the problem of late or nonpaymentofpaymentsseemstocontinue.

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

4. METHODOLOGY

A quantitative approach was used to determine respondents' perceptions of the impact of financial stabilityoncashflowrepresentedbydelayedpaymentson their financial performance. This approach was also used to collect data for ranking the financial stability factor among other construction productivity factors. The study focuses on contractors whose businesses are classified as small and medium enterprises. Thesearethemainphasesforconductingthisstudy.

•Identifyingtheproblem

•Specifyingresearchobjectives

•Specifyingresearchscope

•Datacollection

•Literatureresearch

•Questionnaire •Dataanalysis

•Results

4.1 Designing and collecting data through a questionnaire survey

Asurveywasconductedastheprimarydatasource.There are two ways to collect data from surveys. One is called horizontal height and the other is called vertical height. Cross-sectional studiesare designed tocollectdata overa short period of time whereas longitudinal studies are designed to collect data over a longer period of time. Due to the time limitations of this study, a cross-sectional surveymethodwaschosen.

4.2 Data collection

The questionnaire was distributed as a Google form to a random sample of 45 construction companies in the Kerala construction industry. These communication methods returned 30 completed questionnaires. Therefore,theresponseratewas67%,andthis30-person responseratewasusedfortheanalysis.

4.3 Rating scale

Each statement in these questions should be rated on a scale from ``strongly agree'' to ``strongly disagree'', starting with the following rating system. Strongly agree - 5 Agree - 4 Satisfied - 3 Disagree - 2 Stronglydisagree-1.

Table -1: Questionnairefor“Generalexpectedeffectsof thedelayinpaymentstothecontractorsfinancial performance”. No

General expected effects of the delay in payments to the contractors financial performance 1

Delay in the project payments delays labours wagepayments 2 Delay in payment hinders the contractor’s laboursincentiveprogram

Delay in payment affects the amount of the line ofcreditsprovidedbythematerialssuppliersor thefinancialinstitutes

Delay in payment affects the contractor’s equipmentownershipandoperationcapabilities

Delay in payment affects the contractor’s materialssupplyingcapabilities

Delay in payment in one of the projects affects theforecastedcashflowofotherprojects

Delayinpaymentaffectsthefinancingcostofthe project

Delay in payment affects the forecasted profit margin

Delay in payment may erode the contractor’s reservefund

Delay in payment affects the contractor’s financialreliabilityinthemarket

Delayinpaymentingeneralcriticallyaffectsthe projectsuccessfulness

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

stability. Large companies tend to be financially stable. However, this does not apply to small and medium-sized construction companies. Survey results distributed to 45 construction companies in Kerala showed that late payments on projects can have a significant impact on financial performance. Additionally, the SPSS analysis ranked the productivity factor number one and payment delays number four among the 21 construction productivityfactorsstudied.

The study found that the top 5 out of 14 “Common Expected Impacts of Late Payments on Contractor Financial Performance” are payment issues in the Kerala constructionindustryare;

Delayinpaymentaffectstheamountofthelineof creditsprovidedbythematerialssuppliersorthe financialinstitutes

Delayinpaymentaffectstheforecastedprofit margin

Non-adherenceofcorrectformatsbyContractor andImpropersubmissionsbyContractor(less documentation)

Delayinpaymentaffectsthecontractor’s materialssupplyingcapabilities

Delayinpaymentaffectsthecontractor’sfinancial reliabilityinthemarket

Thestudyfoundthatthetopfiveoutof21“Productivity factors”ofpaymentproblemsintheKeralaconstruction industryare;

Lackofmaterial

Lackoftoolsandequipment

Laboursskillsandexperiences

Delayinpayment

Lackofpropermaterialhandlingandstorage

Planningandworkflow

RECOMMENDATION

PAYMENTDELAY:

6. CONCLUSION

The purpose of this study was to identify the factors responsible for payment problems in privately funded constructionprojectsinKerala,theirimpactandsolutions. The focus of previous research has been on large construction companies. However, the ranking of relative importance of late payments may differ among small and medium-sizedconstruction companies. Delayed payments can impact a company's cash flow and affect its financial

The study recommends that modified strategies or methods be adopted for construction project implementation. Also, enforce contractual indemnity clausesunderthetermsofthecontract.Ifthereisa delay in certificate approval. Customer will pay interest on payments not paid on time. It is hoped that the results of this research will help those in charge of implementing publicworkstopayconstructioncostsinatimelymanner.

PRODUCTIVITYFACTORS



International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

a good job if they don't know what's going on.For bestresults, communicateyourgoals to your crew before starting a new project and keep them informed throughout the project.



o Manage Equipment Requests & Delivery Centrally

With many worksites, each requiring different equipment and tools on a daily basis, it is important to have a centralized system that can handle equipment distribution and allocation requests. Merchandise management systems can take overthesetasks.

o Determine the Cost of Equipment Use

For example, you may want to set different rates for different sites or projects. There maybeastandardpriceforanexcavator,but prices may be higher due to remote work sites or project density in a particular area. However, it needs to be managed based on different variables such as hours, days, weeks,months,overtime,andduration

o Get Your Construction tools Inspected Regularly

Itisinevitablethatequipmentwillcomeback damaged.Ofcourse,don'tletthiscontinue.

o Schedule usage and Periodic Construction Equipment Maintenance

Regular maintenance and inspections are important throughout the life of your equipment. A maintenance plan is very importanttothelifeofyourequipment.

Laboursskillsandexperiences

o Provide proper training programmes

If you want a construction site that runs efficiently, you need to train your workers. Make sure everyone is trained before startingaproject.

o Clear communication

Communication is the number one productivityfactor inanyjob.Noone can do



Delayinpayment

o Enforcement of late clauses in contracts. Applying fees to late payments can be determinedinthesamemanneraslatefees.

o Development of each contractor's payment department to report late payment issues. This department is responsible for maintaining records for each customer, including a history of late payments. These customers will be penalized if they do not make the contracted payments on time. The department recognizes that time is of the essence and must be able to resolve any relevantissuesasquicklyaspossible.

Lackofpropermaterialhandlingandstorage

o TrainYourWorkers

Handling and storing materials involves manyrisks,someofwhicharedangerousand can harm workers. However, educating employees on best practices can eliminate someoftheassociatedrisksanddangers.

o StoreSimilarMaterialsTogether

Some building materials and chemicals can reactwitheachotherwhenputtogether.For example,somearehighlyflammableand can reactwitheachother.Thisposesahazardto boththeworkerandthematerialitself.

o ChooseStorageSpace

Thequalityofmostbuildingmaterialscanbe affected by various weather conditions. For best quality, store at room temperature and covercarefully.

REFERENCES

(1) Abd El-Razek, M. E., Bassioni, H. A., & Mobarak, A. M. (2008). Causes of Delay in Building Construction Projects in Egypt. Journal of Construction Engineering & Management,134(11),831-841.

(2) Abdul-Rahman, A., Munaaim, M. E. C., Danuri, M. S. M., & Berawi, M. A. (2008). Issues affecting payments in the buildingandconstructionindustryofarapidlydeveloping economy.BuildingEngineer(November).

(3) Abernethy, M. (2010). Reservations about NEC 3 Contractor, 34(4). Retrieved from http://www.contrafedpublishing.co.nz/Contractor/May+ 2010/Reservations+about+NEC3.html

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056

Volume: 09 Issue: 12 | Dec 2022 www.irjet.net p-ISSN: 2395-0072

(4) Abeysekera, V. (2002, 10 April). Re-engineering payment procedures: An agenda for client financed construction.presentedatthemeetingoftheInternational conferenceonreengineeringconstruction,HongKong.

BIOGRAPHIES

Nikhil Soman is pursuing M.Tech Construction Management at Srinivas University Institute of Engineering & Technology, Mukka, Mangaluru. After Bachelor Degree in Civil Engineering, Nikhil Soman has worked as Site Engineer at Kannur International Airport project (Kerala, India) for 6 months and as Civil Engineer in an Architectural Company for 3 years.

Shrinath Rao K is working as AssociateProfessorintheDeptof Civil Engg at Srinivas University Institute of Engineering & Technology, Mukka, Mangaluru. He has 7 years of work experience at Abroad and 14 yearsatIndiaincludingTeaching, Review & Re-Design of Syllabus, Quality Assurance in Higher Educational Institutions and ConstructionIndustry.