FM's extension of completion timelines a big relief for construction firms

Many of these firms, which have been grappling with Covid-19 crisis and exodus of migrant labour, will now be able to complete contractual obligations

Finance Minister Nirmala Sitharaman’s announcement on Wednesday of a relaxation in completion timelines for government contracts comes as a breather for companies grappling with the Covid-19 crisis and the exodus of migrant labourers.
 

Sitharaman said an extension of up to six months will be provided by all central agencies — the Railways, Ministry of Road Transport and Highways, and Central Public Works Department. The relief has been extended to all construction related activities and goods and services contracts.

It also covers obligations like completion of work, intermediate milestones and extension of concession period in public-private-partnership contracts. To ease companies’ cash flow position, government agencies will partially release bank guarantees.
 

“For road sector contractors and PPP concessionaires, a standstill period of six months has been announced with no associated penalties for not meeting project milestones, automatic extension of contract period etc. This is another example of simplifying the investment climate with contractors or concessionaires not having to seek extension on a case-by-case basis,” said Arindam Guha, partner, leader – Government and Public Sector, Deloitte India. Other experts feel the relief is on expected lines.

However, there is no mention of cost overruns during the period, said Binod Modi, senior research analyst at Reliance Securities. He said the extension is likely to aid overall IRR (internal rate of return) of the projects.

Bank guarantees can be released depending upon the percentage of work completion. “It will result in sufficient liquidity in the hands of companies and will aid them to meet their working capital needs. Bank guarantees account for 5 per cent of project value, which is usually released after the completion of the projects, that too in a phased manner,” said Modi.
 

Another expert said the extension also gives firms the opportunity to bring back migrant labourers to start construction activity after the monsoon season.
 

Experts believe that it will take about 3-4 months for construction activities to normalise and fresh bidding for contracts to start.

Currently, it is estimated that 30-40 per cent of projects have started construction as in some cases firms were able to retain the labour force.