CHINA (PRC FIRMS): An Introduction to Construction
CHINA (PRC FIRMS): An Introduction to China Construction
In the first half of 2021, the aggregated construction output of China domestic market was CNY3.33 trillion. Meanwhile, the value of newly signed contracts by construction enterprises has increased by 14.4% year-on-year, amounting to CNY1.41 trillion.
Chinese construction enterprises have manifested their strong international competitiveness in 2021. According to the list of “the world's 250 largest international contractors” released by the 2021 US “Engineering News Record (ENR)”, a total of 78 Chinese enterprises were ranked and three of them listed among Top 10. The number of Chinese enterprises on the table continues to the largest among all countries and regions.
The Development of China’s Construction Industry
First of all, a series of policies have been issued to promote the industrialisation of the construction industry, especially for prefabricated building. This is aligned with the policies of “carbon neutrality” and “emission peak”. The promotion of prefabricated building has become a key to the modernisation, transformation and upgrading of the construction industry. Special guidance and related supporting measures in this regard have been published across the nation, in more than 30 provinces and cities.
Secondly, construction enterprises are prone to capital and financial pressure because the capital liquidity of real estate enterprises on the upstream have worsened. Since the monetary and regulatory policies of China's central bank and the Housing Department on real estate industry have got tighter, almost all real estate developers have been financially restrained, which has a knock-on effect on the cash flow of construction enterprises. Furthermore, a lot of real estate enterprises’ corporate debts, varied bonds or loans, will be due in the next few years. The risks of debt default could spike quickly and they may happen on a large scale.
Thirdly, construction costs have been rising due to inflated price of materials on the supply chain, attributed to factors such as COVID-19 disruption to logistics and higher standards of environmental policies. The prices of steel, cement and concrete have been increasing since the beginning of 2021. Many provincial governments, such as Guangdong, Hubei, Zhejiang, Jiangsu and Anhui have made early warnings of price fluctuation of construction materials. Under the circumstances, most construction enterprises are going to bear heavy loss if the agreed contract price does not allow room for price adjustments or their price claims failed.
New Laws and Regulations
The first PRC Civil Code came to effect on 1st January 2021. The main change to the Chapter of Construction Contracts in the Civil Code is mainly about the inclusion of the provisions of null and void, and statutory termination of construction contracts which were originally referred to in the Interpretation of the Supreme People's Court on Issues relating to Applicable Laws for Trial of Dispute Cases involving Construction Contracts (Old), while the remaining provisions of the Civil Code, as far as the construction sector is concerned, basically inherit the PRC Contract Law.
The latest Interpretation of the Supreme People's Court on Issues relating to Applicable Laws for Trial of Dispute Cases involving Construction Contracts (I) came into effect on 1st January 2021, to be coordinated with the Civil Code. This judicial interpretation absorbed, revised, and supplemented the original provisions of the old judicial interpretations which were released by the Supreme Court in 2004 and 2019.
The PRC Interim Measures for the Management of Special Accounts for Wages of Migrant Workers were promulgated on 7th July 2021. The measures have set rules and requirements on opening and cancellation of special bank accounts for worker costs, allocation of worker costs, wage payment process for construction workers, establishment of monitoring platform etc., to regulate the management of bank accounts specially set for construction builders and workers and safeguard their rights.
General Contract of Construction Project (EPC) (2020 Model Text) (GF-2020-0216) is another important document, released on 1st January 2021. The model text was recommended for enterprises to use in EPC projects. The drafters of the model text learned from FIDIC as reference and revised the clauses of the 2011 version of the Model Text by a large proportion. The latest EPC model text provides guidance for smooth management and development of EPC projects in compliance with laws and safeguards the legitimate interests of all parties to such contracts.
Potential Obstacles for Construction Enterprises and General Tips
Due to the recent market downturn in the industry and the changed real estate policies, many real estate enterprises’ capabilities to repay debts obviously have been hindered. A few renowned real estate enterprises have been in serious trouble, with their debt defaulting, and some of them even had to go through insolvency proceedings. Therefore, from construction enterprises' perspective, they shall carry out due diligence on the financial strength of potential clients, make full risk assessments, and avoid commencing contracting work without any advance and interim payments. After entering the contract and in the process of construction, the construction enterprises shall monitor whether the clients/developers have any distressed situation. They shall take timely actions upon any alarming signs, taking measures such as re-negotiation and/or litigation to secure their project payments.
In respond to the risk of increasing construction material prices, construction enterprises shall fully consider the price fluctuation factors during the process of bidding and before signing contracts, and keep communicating with the clients/developers in the process of construction. It is also suggested to improve the management of material price adjustment and data collection in the process of construction, as preparation to support any potential price claims to be brought in the future.
To abide by the newly enacted laws and regulations, construction enterprises shall establish an updated and proper compliance mechanism covering employees of all functions. In addition, professional legal advice is necessary when it comes to pre-empting legal risks and resolving complex legal issues.