Part 9, Advanced Civil Construction, 台科大高等土木施工學教材(2022) 

MT KAO (Blog: http://mtkaoforum31.blogspot.tw/)

(mtkaoforum31@gmail.com)

4. Overseas Construction Project

1) Historical Review (in Stages)

(1) Stag 1: Free Movement of Construction Resources between the Borders

Lack or insufficiency of construction resources in terms of material, working capital, and technologies prompted the host countries to accept foreign construction companies to come to their turf when they want to build economies from scratch.

It’s time when machine were expensive, native workers available in number, local engineers to be trained, but the surrounding infrastructure to support the construction activities of the referred project were poor.

The recipient countries needed to implement the projects but they were also obliged to nurture their own construction forces for long term purpose. Therefore, they called for international tenders asking more experienced and resourceful foreign contractors to be the main signing party, and demanded they to form partnership with local contractors.

Though the contractors from developed economies might complain that the local partner weren’t necessary; in general, as a stranger, they really need good guides helping them to recruit native workers, obtain local material, and solving all kind of problems in a culture that sometimes they feel weird and helpless. 

 

The local partners would act as sleeping partners or agents at the time when their ability to handle construction works was limited. But as it went by, they would grow in size and strength to advance their scope of undertaking. Their ascending, in certain extent parallel with the economy development of the host countries, was almost for sure so the international firms should have accepted the result and adjusted their approaches. 

In view of the changing market in favor of the local construction firms, the governments would have to amend the relevant laws so the flow of machine, man and resources would be subjected to regulation. 

Always the new discretion would ask the foreigners to undertake minor part of the business which the locals still need assistance; or only to provide expertise through “Technical Cooperation” arrangement rendering plans, drawing and hand-on instruction. 

After all, the governments holding the budget and power to build the project should have final say to decide who he wanted to deal with. And for civil engineering, it has never been too difficult for people started from nothing; and besides the local people know better than the foreigners to navigate through the local bureaucracy. So, unless it is a loan requirement, the authorities certainly would prefer the locals to be the contractors.

(2) Stage 2: Work Hard vs Work Smart

Thanks to the rising human cost and the diminishing technology edges, construction and engineering firms from developed economies is gradually replaced by the fledging third world contractors, especially those from newly industrialized country. 

For example, the use of construction machines and plants long considered the monopoly of the westerners for magic efficiency and exactness is overtaken by the skilled labors of the contractors from the Newly Industrialized Countries (NIC) with even better dexterity. The NIC contractors are eager to go to overseas countries for projects that only yesterday the Westerners would be yelling yes and no for their technical and management supremacy. 

The landmark change is possible as that the NIC contractors have many projects in hands for practice from planning, design till construction; and it means they’ve venues and opportunities to train engineers, skill labors and commercial staff for years to satisfy generational infrastructure demand of an economy.

 

It’s almost certain that the NIC contractors would always out beat the westerners in international competition as price and schedule were talked about. But the existing order are established by firms of yesterday and the share of added value for the new winners would have become less while the risk is unproportionally incurred to them. 

The reason is that the international contracts now are no more centered on pure construction. And in the name to make the investment more secure, a construction contract now require participation of those non engineers: notaries, law firms, inspectors, laboratories, certifiers, appraisers, unions, arbitrators etc. The absolute figure of fees paid to them is not significant in total contract price but still enjoyable compared to the meager overhead allowed for the hard-working general contractor; most of them now from NIC. 

We understand conditions and specification are drawn by contract experts from developed economies, language, proceeding and supporting document required by the same culture. 

When western general contractors quit substantial construction, they continue to create contractual requirement asking the contractors undertaken to observe. The capital, with regards to its security, is respected so that the clients all over the world eagerly followed as they come in the form such as "norm", "standard", and "proof", despite it further complicate the works. 

 

Now, there will be added values shared by those provide certificate, test report, or litigation documents which the Asians may need more time to apportion. It’s not to say that the values generated by technology, craftsmanship and labors for construction projects become less important. 

But it’s conceivable that working hard as the only way to thwart competitors from the developed economies isn't sensible. The industry evolved, but not everything can be repeating.

(3) Stage 3: Investment Security Trump Everything and in Favor of the Establishment

The trend for construction works in 21st century is many of the gigantic projects will be invested by private entities as schemes like BOT or BT continuously churned out from governments because their coffer seems drained out. Money is everywhere but the mammon doesn’t like to face uncertainty; so, the professionals now including commercial experts are flattered to present risk free schemes to woo investors. 

The security of capital and return of vowed profit will trump anything else. 

As a result, the concerned parties have to pay attention in project phases starting from planning, design, construction, O & M, and until the marketing of the product.

Construction cost is important judged from the big number It used to be, but its

share in total price become lower as non-engineering cost rises in weight. 

Then, the guarantees for work completion is everything, the evolution continues, that the real builder may not be the one awarded the contracts just having the records completing the similar projects, or financial capacity to indemnify the parties nominally.

Public or private clients, when they want to initiate the idea or start the actual construction, justification as to determine who is the partner is important because the decision maker needs to be answerable to say they’re awarding to a reputable company for planning or construction when questioned by stakeholders.

Nowadays there won’t be many conventional “build according drawing” construction contracts among international tenders, the contractors from advanced economies adapt very quickly that they go beyond traditionally a pure construction company 

owning construction resource themselves. 

They have many choices to sub-let part or whole construction works to single or several constructors who maybe local, or a self-regarded higher tier contractor from the other overseas country. He may exercise control and deliver the work effectively similar to what Nike or Adidas have done over jerseys and shoes. 

Under the so-called global market, free flow of man, money, machine, and material is encouraged; and it seems fair. But the problem is now the companies in less developed economies will provide labor and for actual construction but only share limited added values compared with those set up the standard, specification, giving checks and certificates, maintain the margin and profit, but seldom bear the risk.

The 20th century capitalists in construction industry own enormous construction fleet, fostered engineering capability, put up contractual and legal frame and monopolized banking system. With their cultural and political advantages, they commanded the business for long time. 

But when those used to work under the international big firms considered themselves a good learner to join the ranks; the 21st century capitalists evolve that they now concentrate to secure capital and return through "possession", "exchange" and “added value”, engaged deeply in the investment themselves so as to cast off most of the late comers.

2) Distribution of Added Value under the New Market Order

(1) "Labor" was most important element in a producing system, no exception in construction industry, for which, the machine was supposed to replace lot of human efforts in works. But the Engineering professionals are vital in construction works to decide the performance of labor and machines and thus the surplus value; to certain extent the engineer is the "establishment".

But under the modern-day project management system, bankers, notaries, law firms, inspectors, laboratories, certifiers, appraisers, unions, arbitrators and those who will assure the project successful can hold positions and charge their cost relatively easy. It's no choice because the moneymen need their endorsement and ask them to play the dominating roles while the actual doers reduced to their subordinate.

(2) The redistribution of added values between technical and commercial professionals is possible because renowned international banks or institutions will seek opportunity to get involved in construction projects for possibility to offer financing arrangement. The governments around the world, the ventures collecting toll or making profit from franchise always welcomes loans and risk sharing proposal. 

The "establishment", normally construction companies in western countries, are known to and more trusted by the banks or investment funds, so they can reach agreement with each other forming ventures for the projects.

The banks or investment funds may always prescribe, and it's not difficult for the western establishment to respond, that they will add specifications, standards, and contract terms familiar with into construction plans; inadvertently strengthen their positions in the projects, which, many NIC companies will feel not accustomed, and are actually excluded from competition.

Though, the contractors from "South Countries" will be assigned to do the real work but only under the established contractors from the "North Countries". It's a crucial fact that the overhead and profit obtained from the drudgery work is limited and the risk tremendous. Hopefully, after long time and many contracts that the best of NIC contractors going abroad can be improved more than getting mere survival.

3) Chances for Taiwanese Construction Industry to go for Overseas Market

(1)   Compete with Locals over Efficiency versus Providing Loan and Capital 

Possibility exists that a NIC contractor like the one from Taiwan may be able to join the club of international contractors offering conditions allow them to share high added value in overseas projects, however, they have to bring loans at least for their part and still they need assistance from established company or face more uncertainty throughout the process. 

Usually the loans offered for foreign construction projects must be earmarked with the commitment from the local government to guarantee return of the loans; this tends to be difficult when diplomatic relationship not existed between the governments. 

Should Taiwanese contractors or engineering firms not able to offer loans working as the subcontractors of international joint ventures, they need to prove they will be able to save money, keep quality and progress for main contractors. And it means they have to contend with other NIC contractors or even the local ones for playing secondary role.

(2)   Contribution of better Construction Technology under Sublet System

 

It must be admitted that to play the role of constructors in strange country, Taiwanese company cannot be as efficient as the natives to organize local labor force or purchase cheap material. Money is also something that the contractors from developing economics no more feel they are short of.

 

Taiwanese contractors may be slightly better off in competition with locals, for their technology and experience in certain projects are good, but it's diminishing.

 

The sub-contracting system in Taiwanese construction industry is a problem that the resources are thinly distributed among many sub-contractors and leasers. Market is highly fragmented that the main-contractors owns no resource except limited number of engineers, and when they need to work abroad, they don't have anything to move out: professionals or skill labors, forgetting about permits and licenses required to work in alien land.

 

(3)   Possibility to undertake Planning and Design Service

 

   So, it seems like that only consulting companies can go to take meager amount of overseas design contract as much of planning and design works can be done remotely in Taiwan.

 

Of course, the engineering works done must conform with standards and norms such as BS, DIN, or JIS wanted by main contractors and not CNS or American codes usually followed in Taiwan.

 

Supervision will be challenge because the owner or international main contractor wouldn't pay as much of Taiwanese expatriate will cost. It requires a competent local partner to reduce the cost.

 

The purpose to work in overseas countries shall be reviewed. Will the business be expanded to cover foreign countries allowed for, profits overhead or service charge as required? Or will it increase the sales of home country made product, construction plants or permanent equipment indirectly?

 

The calculation is simple and only to become meaningful when business amount is significant.

4) Adjustment Imperative for Company System and Policy

(1) Consideration shall be given to the overseas allowance, vocation, compensation for tax incurred in foreign country, care of spouse and education of children for the expatriate sent to foreign land in addition to their regular salary and bonus in home country.

(2) People sent to foreign land will face challenges and can very likely be working in desolated situation; and only elite of each discipline shall be assigned to solve the problems.

However, two issues always appear in a company undertaking overseas works: 1. sectionalism exists in the concerned departments, chiefs tend to send less qualified people;  2. After distinguished performance in overseas projects, many expatriates coming back home only to find out "good" positions having been occupied by people of inferred capability.

There must be a fair policy and under it a mature personnel management system covering domestic and overseas projects. The chief of department must be a stakeholder for success or failure of the projects the company undertaken.

(3) The sale amount for overseas projects may be meager compared to other company revenue, but efforts to take for operation in different country, such as accounting, tax report, currency exchange, law and rules abiding, local standards and codes compliance, contractual administration, procurement, and financing arrangement have to be tremendous in headquarter. 

Usually in the Company the decision maker is reluctant to pay un-proportional attention to the meager sales amount in single different country to support the overseas construction activities.

Also, the branch or project managers of overseas contracts may not have the knowledge or authority to recruit right and sufficient local assistance. Unavoidable the suffering becomes deplorable at last; dragging down the momentum to pursue the overseas business.

(4) The exploration and subsequent operation of overseas construction market call for the company to provide money, know-how, credited work experience and ready to deploy talented people for whatever the projects undertaken; but ironically big company and their follow managers only to think of overseas business at times when they feel jobs in hands aren't enough.

It takes time to obtain a contract, and the resources shall be paid out at any moment. Therefore, the company to develop overseas work shall be big enough to dedicate for what they will have in hands given the short mobilization time. People have to realize the contracting business will not come only to fit your schedule.

The construction companies in Taiwan long suffered from overdue subcontracting system and resulted market fragmentation. The cruel fact is they don't have sufficient resource to go foreign land. 

Sometimes only sole determination of the strategy makers of a company to go for abroad could be tragic.

5) Assignment of Right People to Run Overseas Works

(1) In different countries, traditions, work conditions, and market competition are not the same; so people to be assigned for business can be unique. In general, personality of a representative is more important than his education; cultural adaptability than language, and impulsive energy than professional experience. 

There're political and diplomatic handicap Taiwanese people working overseas will have had; and under the circumstance maybe people of special trait will be able to do something unusual to overcome the difficult. 

(2) It takes time to get the jobs, especially the good ones. Patience shall be used to evaluate the performance of people responsible for business. For example, the annual scoring plan shall not be used as excuse for those overseas representatives to sign bad contracts to meet target contract amount allocated to them.

For the same consideration that the people in headquarter shall not be hasten to recall representative(s) from foreign branches or delete them after not getting contracts of satisfactory amount.

6) Conceptual Readiness for Construction Companies to undertake Overseas Business

(1) Before going for specific project, the Company must make sure it will have people experienced enough to go for the project; or it will have fair chances to recruit qualified people from the industry.

(2) The company management shall be knowledgeable for overseas projects operation; and is willing and passionate to develop business prospect in foreign lands. It is better that the decision makers will have overseas experiences themselves.

(3) The company employees realize the need to develop overseas business as only means to extend market and enhance technology; and the people are willing to adjust themselves to reinforce expertise, learn foreign language and change work attitude for overseas projects.  

They understand any domestically market protection is temporary, and only the industry essentially strong and internationalized, are their life long professional guarantees.

(4) For operation in strange country, the company management mentality shall be open. But it's easy saying than doing; the feeling of superiority toward the locals are hard to fend off and remains qualm of Taiwanese management. 

Anyway, an idealistic team shall be consisting of agent, sponsors and partners through the intimate cooperation of local employees.

A capable and trustworthy agent or sponsor will obtain in time information, establish the links with authority, and acquire competitive local resource for the Company. Above all, they shouldn't sacrifice the Company for slim benefit to continue the agent ship for minimal commissions.

In almost all the countries, the implementation of the projects, engineering or construction, require minimum participation of the local partner(s); a good one will offer the assistance to reduce the cost, solve licensing and authoritative problems, and truly to share the financial overburdens resulted from the unbalanced payment schedule.

The employment of locals, especially, in the branch office for business pursuance and project supporting is vital; the salary and promotion must be better than local market practice to ensure loyalty and reliability of the natives.

As people from Taiwan in strict sense will only work as passerby ultimately, trust and confidence must be rendered to the locals as they're there may be forever. Even slight discrimination will be incubated and turn out to become source of disloyalty and misconducted behavior in the future.

And for a system that must be built on fraternity and egalitarianism, the decision makers in far-flung headquarter must have responsibility too.

7) License, Registration, Special Permit for Foreign Contractor.

(1) Ownership on land, housing and factory.

(2) Permit business operation to sign the contract

(3) Permit to import the machine, permanent equipment and material

(4) Free to hire local engineers of required qualification and numbers

8) Acknowledge of difference and handicaps:

(1) Handicap in language.

(2) Difference in cultural perception.

(3) Difference in applicable code and standard.

(4) Difference in executing safety and environmental protection rule

(5) Difference in Tax code application and interpretation.

(6) Difference in labor management.

(7) Hindrance or inconvenience caused by entry visa and work permits for expatriates.

9) Unmanageable Risks:

(1) Politic risks (regime change, war, commotion, nationalization, sanctions,    embargo)

(2) Exchange and currency risks

(3) Economic risks (inflation, interference in manufacture and transportation system)

(4) Natural disasters (flood, typhoon, earthquakes, avalanches)

(5) Legal risks (change of law, unpredictable adjudication)

(6) Cultural Risks-incoherent mental and behavioral model between host country people and foreign contractor.

10) Manageable Risks (with care and monetary provision):

(1) Construction schedule and completion date.

(2) In time delivery of construction material and equipment both in quality and quantity.

(3) Contractual risks

(4) Safety and security of expatriates (persons, property, accidents).

(5) Free flow of capital.