More action needed to ease contractors’ liquidity crisis

By Dhirendra Negi and Ananya Kumar, J. Sagar Associates

For several years the Indian government has been promoting infrastructure projects, to maximize growth and development of the economy. At the same time, the balance sheets of many infrastructure and construction companies have shown significant losses and high outstanding debts. This is because the rise in the number of projects has resulted in an increasing number of disputes, primarily because of time and cost overruns, leading to claims for extension and prolongation costs. Non-payment of such claims on time has in turn affected the cash flows of infrastructure and construction companies.

Dhirendra NegiPartnerJ. Sagar Associates
Dhirendra Negi
J. Sagar Associates

The Niti Aayog (National Institution for Transforming India) in 2016 issued an office memorandum to the central and state governments and central public sector undertakings (PSUs) on measures to revive the construction sector. The memorandum recognized that the failure of government departments and PSUs to release payments due under arbitral awards was a significant cause of the problems faced by the construction sector. Instructions with respect to treatment of arbitral awards and payment of money to contractors were, therefore, included.

The memorandum recognized the root problem, but the remedial measures it suggested were inadequate. The poor liquidity and cash flow of construction companies does not arise solely because of delayed payment of arbitral awards. The problem arises earlier because of a failure to expeditiously and fairly resolve claims when they are raised during execution of a project, resulting in higher costs and lower returns for contractors.

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Dhirendra Negi and Ananya Kumar are partners in the Delhi office of J. Sagar Associates. Views are personal.


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Dhirendra Negi | Tel: +91 11 4311 0661
Ananya Kumar | Tel: +91 11 4311 0629