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Affordable housing: How can developers optimise costs in this segment? written by Vivek Gadhe, published in Housing.com. November 1, 2019

We look at how cost optimisation in the affordable housing segment can help developers to achieve better profits and make homes cheaper for end-users and the ways in which this can be achieved

 

Affordable housing is a sector that has come into its own over the past few years. This is largely due to several government initiatives, including the granting of industry status to affordable housing, the Pradhan Mantri Awas Yojana (PMAY) scheme and the Housing for All by 2022 mission.

 

With the dream of accommodating the urban poor and providing shelter to the lower and middle-income group, the government launched the PMAY in 2016, to build 20 million houses in the country. Currently, the government has sanctioned nine million homes and Maharashtra itself has more than 4 million dwelling units. The Ministry of Housing and Urban Affairs has further announced six public-private partnership (PPP) models, to motivate private sector developers to get into the affordable housing segment. However, there continue to be issues that developers face at the ground level, which impede their entry into the affordable housing sector. These include scarcity of land, lack of transparency vis-à-vis property records, unfavourable market trends, socio-political influence and paucity of skilled manpower throughout the project life cycle.

 

Thus, while the government is pushing for affordable housing, developers still tend to gravitate towards mid-segment or luxury projects, where the profit margins are higher at 20%-30%, as compared to the profit margin of 10% in the affordable housing sector.

 

It is in affordable housing, in particular, that developers need to focus on cost optimisation so as to improve the bottom line. Cost optimisation is nothing but ensuring that the project&rsquos cost stays within the budgeted limit, throughout the construction period. There are several factors to consider, when it comes to cost optimisation.

 

1. Planning and design

 

The initial stage is crucial, in determining the cost of the project. A good, sustainable and a simple and easy-to-construct design, without any complex elevation features, which fulfils building norms and environmental factors within affordable limits, is crucial in project cost management.

 

2. Research and development

 

Improved construction techniques and the use of better and economical materials, will ensure further reduction in costs. All of these require research and development, so as to optimise costs without compromising on quality or structural integrity. For example, modern technology such as aluminium formwork is used across the world, at present. Precast construction technology can also be explored, to ensure that the construction is finished within the stipulated time. Other examples of cost optimisation through research and development, include the idea of making carbon bricks, which has been proposed by students of the Massachusetts Institute of Technology, USA, or even Meghalaya&rsquos plastic road.

 

3. Input materials

 

Value engineering, in the procurement of materials at competitive rates without compromising on quality and durability, plays a major role in cost-efficiency. Innovative ideas in recycling of materials, without compromising the look and feel of the end product, could be a crucial aspect of cost optimisation.

 

4. Labour productivity

 

Skilled labour is crucial in ensuring cost optimisation and timely completion of a project. Recognising this requirement, the government has come up with the &lsquoSTRIVE&rsquo (Skill Strengthening for Industrial Value Enhancement) initiative, funded by the World Bank. This is being implemented for better productivity, which could help the industry in cost optimisation.

 

5. Time

 

This is also an important factor, as it helps to evaluate alternative schedules and an optimum one, considering the project&rsquos deadline for completion. Delays in projects invariably lead to cost overruns, in terms of interest payments, increasing cost of materials and labour.

 

Essentially cost optimisation boils down to the simple task of avoiding or reducing wastages of the five &lsquoM&rsquos of Production &ndash man, material, money, machinery and methods.

 

(The writer is head-construction (affordable housing), Rustomjee Group)