Project Cost in Infrastructure Projects: Concept, Challenges and Way Forward
The IMF and Central Statistic Organization had dubbed the Indian economy as the fastest growing economy back in 2019. Moving forward, in 2021 despite the havoc wrecked by the pandemic on advanced economies across the globe, the IMF has kept India’s growth forecast unchanged at 9.5%. In order to sustain India’s growth momentum, the development of country’s infrastructure sector is cogent. The National Infrastructure Pipeline has been the focus of current policies, with an unprecedented increase in capital expenditure allocation for FY 2021-22 by 34.5% to INR 5.5 lakh crore to propel infrastructure creation. However, the April-June 2021 report of The Ministry of Statistics states that 470 projects sanctioned by the centre suffered from a cost overrun of 61.5 percent, that is Rs 4,46,169.37 crore.
Project cost remains the central concern for any seminal discussion on infrastructural projects in India or around the world. This is the nebulous point where a host of stakeholders would converge to dispute, disagree, or litigate. This article aims to discuss the concept of project cost and its various implications for the different stakeholders involved.
Introduction to Infrastructure and Projects
Costs that are reasonably incurred for the acquisition and construction of infrastructure are referred to as infrastructure costs. Hence, Project cost could mean the total cost of an infrastructure project. In India, there is no clear definition of the term infrastructure. However, on 1st March 2012, the Cabinet Committee on Infrastructure approved the framework to include a harmonised master list of sub-sectors to guide all the agencies responsible for supporting infrastructure in India. These sub-sectors include transports and logistics, energy, water and sanitation, communication, and social infrastructure. Out of the plethora of these sub-sectors, during the fiscals of 2020-2025, it is expected that sub-sectors such as Energy (24%), Roads (19%), Railways (13%) and Urban (16%) shall constitute 70%of the projected capital expenditure in infrastructure in India. The total capital expenditure as per the report is expected to be 102 lakh crore Indian rupees. Furthermore, in India, the current investment in infrastructure is USD 3.9 Trillion, and the required investment is USD 4.5 Trillion, leaving a gap of USD 526 Billion. Therefore, the energy and infrastructure sector are instrumental in generating tremendous employment opportunities and drive a substantial increase in GDP per annum in India as well as countries all over the world.
Structure of Project Finance Transactions
The main parties involved in a project finance transaction structure are (i) The Authority or the Government (ii) The Private Party Investors/Developers, Sponsors or Promotors and (iii) the Lenders. These three parties are key players responsible for the determination of project costs in infrastructure and construction projects. The principal point of convergence for these three players is the project company (i.e., also known as special purpose vehicle) set up by the private party investors under which the infrastructure project is formed and under which the project exists in the concession agreement. The project cost is mainly estimated by the private party and the lenders who would finance in the form of equity and debt. The typical financial structure for infrastructure projects has a debt-to-equity ratio of 75:25. However, the ratio may vary depending upon the risks involved.
Illustration I: Key parties that influence the project cost of an infrastructure project
Risks that affect the Determination of Project Cost
Every project has certain risks attached to its completion. These risks influence the determination of project costs by the authority, the private parties and the lenders. The risks, in turn, then affect the total cost of the project. The risks affecting the three parties are explained below:
Illustration II: Risks that affect the determination of project cost
Risk for Authority
Risk for Private Party
Risk for Lender
Technical or physical risks
Economic or market risks
Economic or market risks
Risk relating to land acquisition
Construction and completion risk – cost overrun/time
For eg. Technical or physical risks may include risks
For eg. Economic or
For eg. Economic or
The other risks that affect the cost of the project are contractual and legal risks, resource and raw material availability risks, demand risks, design risks, force majeure, property damage, permits, licenses, authorization, supply risk, social and environmental risks.
The Major Risks affecting Project Cost in India: Cost Overrun and Time Overrun
Out of the myriad of risks affecting project cost, the major risks in India are the risks associated with cost and time overruns. As many as 525 infrastructure projects were hit by time overruns, and as many as 470 infrastructure projects, each worth Rs 150 crore or more, were hit by cost overruns of over Rs 4.38 Trillion owing to delays, according to a report by the Ministry of Statistics, cited previously The main causes for time overruns are delay in obtaining forest and environmental clearances, delay in land acquisition, and lack of infrastructure support. As per the report, there are other reasons like delay in project financing, delay in finalisation of detailed engineering, alteration in scope, delay in ordering and equipment supply, law, geological issues, contractual complications and delay in tendering.
The Key Elements of Project Cost
The elements of ‘costing’ include variables such as raw materials, labour, and expenses. Thus, for infrastructure projects as well, at the time of estimation of cost, these variables would come into play. The factors affecting cost for a public-private partnership project could be the following:
Illustration III: Factors affecting Cost of Projects: PPP model projects
FACTORS AFFECTING COST OF PROJECTS : PPP MODEL PROJECTS
Costs and delays
Availability or non –
Recurring changes in
Poor site management
Force Majeure events
Unavailability of raw
Poor management of
Delay in approvals and
Political and policy
Costly and time-consuming
Wastage and theft of
Increasing cost of
Inaccuracy in design,
Poor communication for
High legal costs and high
Case Study: The Mumbai Monorail – An EPC Contract Model
Time and cost overruns in projects lead to disputes and arbitrations. A suitable example is the Mumbai Monorail which has entered disputes and arbitration between the Contractor and the Authority over its project cost. The development authority MMRDA entered into a contract with L&T Scomi Engineering for the construction of the Mumbai Monorail project. The original project cost between the Private Party Investors and the Authority was estimated to be Rs 2,700 crore, after which disputes arose. The Authority had claims against the Contractor for not completing the project task on time. The arguments of the Contractor pertained to the cost escalations caused by delays due to the fault of the Authority. In 2019, the Bombay High Court appointed an arbitrator to settle the dispute. Currently, the dispute is still in the arbitration stage. Furthermore, post-December 2018, the MMRDA had taken over the Operation and Maintenance of the Mumbai Monorail project from L&T Scomi Engineering. Due to the Make in India policy, the tenders for manufacturing of the Mumbai Monorail were altered to encourage manufacturers and Indian technology partners to participate and fulfil the demands of manufacturing the additional monorail rakes. Among other issues currently plaguing the Mumbai Monorail project, such as unavailability of a sufficient number of rakes to keep the services running and an inadequate number of spare parts, the widening deficit between revenue and O&M costs, remains primary.
As per the report by the Ministry of Statistics cited above, the reason for cost and time overruns can be largely attributed to the state-wise lockdown due to the COVID-19 pandemic, which has been causing great hindrance to the implementation of infrastructure projects. Time and cost overruns in projects lead to disputes and arbitrations. Furthermore, in the procurement stage of projects, biddings in India happen with the project sponsor underbidding for the project so as to survive the competitive market. However, the underbidding combined with lack of margin included in the overall costs by contractors or sponsors often overlook inevitable hidden and unforeseeable costs which in turn enhance the final costs of the project. For instance, the Mumbai-Monorail project is a classic example of cost overrun. The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above. The compensation clauses should be coherent and unambiguous, and in line with actual project cost incurred in the project leaving less scope for future disputes and arbitrations. Furthermore, it would be useful for the contractors / concessionaires , while making claims in an infrastructure project, to do it in a timely manner while maintaining clear and systematic evidentiary documentation, to substantiate the claims that may have arisen during the course of the project.
 Finance Minister Smt. Nirmala Sitharaman releases Report of the Task Force on National Infrastructure Pipeline for 2019-2025, dated 31 December 2019, Press Information Bureau, pib.gov.in (2019), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1598055 (last visited Sep 17, 2021).
 Forecasting Infrastructure Investment Needs and gaps, Global Infrastructure Outlook – A G20 INITIATIVE, https://outlook.gihub.org/ (last visited Sep 17, 2021).
 422nd Flash Report on Central Sector Projects (Rs.150 Crore and Above), March 2021, Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division (2021), Available at: http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf (last visited Sep 17, 2021)
 Joseph Mante, Issaka Ndekugri & Nii Ankrah, Resolution of Disputes Arising From Major Infrastructure Projects In Developing Countries Fraunhofer, https://www.irbnet.de/daten/iconda/CIB_DC24504.pdf (last visited Sep 17, 2021).
 Make in India Initiative, Government of India.
 Sandeep Shrivastava and Abdol Chini M.E. Rinker Sr., Construction Materials and C&D Waste in India, School of Building Construction University of Florida, USA, https://www.irbnet.de/daten/iconda/CIB14286.pdf (last visited Sep 17, 2021).
 Amendments to the Arbitration and Conciliation Act, 1996, August 2014, Law Commission of India, Report No.246.
 Larsen and Toubro Limited Scomi Engineering BHD vs. Mumbai Metropolitan Region Development Authority MANU 2018 SC 1151, Arbitration Petition (C) No. 28 OF 2017.
Adimulam, S. (2021, March 2). Mumbai: Monorail rakes will be made in India. Mumbai. Retrieved September 17, 2021, from https://www.freepressjournal.in/mumbai/mumbai-monorail-rakes-will-be-made-in-india.
Image Credits: Photo by Wade Austin Ellis on Unsplash
The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above.