Ashley Howlett considers changes to the laws relating to Project Management in the People’s Republic of China.

It is fair to say that project management services in China are very much in their infancy and on the whole tend to be undertaken by foreign enterprises rather than domestic Chinese enterprises. The Chinese construction industry remains organised in the traditional manner, with the design institutes on one side and contractors on the other. As such, procurement systems such as design-build and turnkey EPC are rarely seen or used.

In light of these prevailing circumstances, the Ministry of Construction (MOC) has been encouraging Chinese construction enterprises to adopt the project management model for a number of years. In 2003, the MOC issued a guidance opinion on fostering the development of general contracting and project management. This opinion stressed that in order to assist Chinese construction enterprises to “go out,” it was necessary to adopt the international practice of project management in China. To this end, Chinese construction enterprises were encouraged to establish project management organisations and systems.

As part of this process, the MOC in August 2004 issued a Code of Management of General Project Contracting for Construction Projects. This Code is essentially a National Standard and prescribes standards for, amongst other things, construction management, schedule management, cost management, quality and safety management as well as contract management. In November 2004, the MOC issued the Provisional Measures on Construction Projects Management (“the Provisional Measures”) aimed at improving the standard of construction in China by placing more emphasis on project management as a means of procuring successful construction project delivery.

THE INTENT AND SCOPE OF THE PROVISIONAL MEASURES

The Provisional Measures are intended to apply to all construction project management activities conducted in association with construction works in China. Construction project management is very widely defined as “professional management and service activities carried out by enterprises engaged in project management at the authorisation and entrustment of the project owner, throughout theworks or during an individual stage.” Article 6 of the Provisional Measures itemises project management as:

• Assisting the owner in preparatory planning, economic analysis, ad-hoc evaluations and determination of investment; in order words, assisting the owner with feasibility studies;
• Assisting the owner in acquiring land and obtaining planning permits;
• Assisting the owner in organising and managing the design process;
• Assisting the owner in procuring appropriate construction, equipment supply, and supervision services;
• Assisting the owner in negotiating and executing appropriate contracts with the construction contractor as well as suppliers of building materials, equipment, structures, and fittings, as well as assisting with the supervision of their implementation;
• Assisting the owner in managing the construction process including budgeting, schedule, and claims management;
• Assisting the owner with post construction management.

The Provisional Measures apply to all project management services provided on construction projects in China, regardless of whether those services are provided by foreign or domestic enterprises.

QUALIFICATION REQUIREMENTS

Prior to the issue of the Provisional Measures, project management services providers were not required to hold a formal Chinese qualification certificate.

However, the Provisional Measures require project management enterprises to have qualifications in one or several of the following fields: surveying, design, construction, supervision, cost advice, or tendering agency. This means that all enterprises undertaking project management must hold one or more of these qualification certificates.

INDEPENDENCE OF THE PROJECT MANAGER

One of the significant initiatives introduced by the Provisional Measures is the concept of independence. The Provisional Measures dictate that project management enterprises cannot own or be associated with any of the construction companies on the projects that they are managing. The reason behind this requirement is made clear by the activities that are expressly prohibited in the Provisional Measures, such as accepting bribes or asking for kickbacks or other favours, or conspiring with the contractor to use substandard construction materials.

While there are very good reasons why, in the China context, it is beneficial to have the project manager independent from the contractor, internationally it is not uncommon for the project manager to be connected with the contractor, and in some cases (for example, in the United States) the project manager acts as the contractor. Of course, when the project manager also acts as the contractor, there is an inherent conflict between the interests of the owner and the interests of the project manager. For example, when the project manager acts as the owner’s representative, its only concern is the protection of the owner, whereas when the project manager also acts as contractor, there is a split of loyalty.

Nonetheless, it is possible to incorporate checks and balances in the project management agreement to address and mitigate this issue.
Accordingly, the blanket prohibition is not entirely appropriate and will no
doubt deter many large foreign project managers or contractors who commonly act as integrated total construction solutions providers. Such organisations provide engineering, procurement, construction management, and general contracting services often on a turnkey basis and as such deliver potentially significant cost savings to their owner clients. It is often the potential cost savings that convince owners to put less emphasis on the issue of split loyalty.

ACCOUNTABILITY OF THE PROJECT MANAGER

Another area where the Provisional Measures promote international practice is accountability. On every project, it is vital that the project owner has confidence and trust in the entity managing the project – in many cases, the project manager acts as the owner’s representative and, therefore, has a high degree of responsibility. For this reason, it is common for named individuals to be appointed for the duration of a project who can only be removed with the owner’s consent. In this regard, the Provisional Measures promote accountability by not permitting project management companies to subcontract their management business or allow other companies to undertake project management in their name.

INCENTIVES FOR THE PROJECT MANAGER

The Provisional Measures allow project owners to reward the project management enterprise by granting them a certain percentage of any cost savings that result from recommendations proposed or implemented by the project management enterprise. The parties are free to agree to the percentage in their project management contract.

SUMMARY

Effective project management is a key component in successful construction project implementation. In the context of a construction project, where the owner is not experienced in the administration and organisation of building or engineering projects, it is important to engage a construction professional with the necessary qualifications who is able to make decisions for the owner in relation to carrying out the project. An effective project manager will assist the owner in deliberating and decision making in connection with the project. An experienced project manager, by bringing to the project his particular expertise to ensure that the project comes in on time and budget, allows the owner to reduce the risk of cost overruns and project completion delays.

Ashley Howlett is a Partner in the firm of Jones Day and based at their Beijing office.
Tel: +86 10 5866 1113,
email : ahowlett@jonesday.com .