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23 SEP 2019

Global contracts - a multi-layered structure

It's a simple fact – some countries have money, others don't. There is currently high demand for new infrastructure, both social and economic, around the world. But meeting this demand with the necessary funding is not the only critical factor here – any project funding must be spent wisely.

Operating in an international environment without understanding the rules of the game is flirting with disaster. Many construction firms have struggled internationally because they failed to take the time to understand the political climate and regulatory environment in which they were operating. These factors have an impact on market competition, and a project's procurement and contract management processes.

Market intelligence

It is important to understand the different cultural, market-related and political approaches that can affect contracting internationally. Before you enter a territory, scan the market, understand who the key players are, the ownership structures and the procurement processes. Market intelligence means asking some key questions:

• Is the market dominated by a few key companies, or is it fragmented?

• Who are the key players in the market?

• Are the players owned by the government, private sector or foreign investors?

In the UK, much of this information is available from bodies such as the Department for International Trade.

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Construction workers
Contracting internationally requires construction professionals to be more aware of different cultural and political regulations

Political risk

Governments set the rules of engagement and influence how the market operates, which can dictate projects procurement.

If you work in a country where contracts are awarded by a government that does not respect the rule of law or does not believe in a fair allocation of risk or amicable dispute resolution, this can affect the success of the project. In most parts of the world - with the exception of China - two rules of law operate in the construction industry: common law, based on the English legal system of precedent, and the civil code.

Operating in an environment where you don't understand the culture, the industry structure, its ownership and how businesses operate, can put your organisation at significant risk. Even if you are already operating in the market, continue to examine how the market players and structure of the industry impact competition in the market.

Operating in an environment where you don’t understand the culture, the industry structure, its ownership and how businesses operate, can put your organisation at significant risk.

Contract considerations

Working on construction contracts outside your own jurisdiction should always include the following considerations:

• What procurement processes are in place and how well are they understood by investors, project funders, contractors, suppliers and clients?

• How easy is it to use a contract in the jurisdiction in which you are working?

• Bankability: whether the project is funded by the private sector, private equity, individuals, sovereign wealth or an international bank, make sure the project has bankable funds.

• The contract should build sustainability and integrity into the procurement process.

• Risk must be fairly allocated and the contract should also include protection for any unforeseen circumstances.

• Understanding the local law and its interpretation: it is important to specify what jurisdiction the contract is based on.

The biggest risk when working internationally is entering a contract in one part of the world, yet the client or sponsor being based elsewhere. For example, if the investor is from Saudi Arabia, there could be a clause in the contract to say that Saudi Arabian system of law will govern the contract, even if the investment is being made in South Africa. If you sign a contract and there are subsequent problems, it is important to know the governing rules.

contract-admins-pexel
Contractual risks when operating globally can be high, so it is imperative that construction professionals do their due diligence prior to commencing work

Contract management and diligence

Diligence is essential at all stages of managing the contract.

Stage one: ensure that the contract structure is correct.

Stage two: apply contract management processes to monitor the engagement process. The communication process between yourselves, the client and supply chain should be well structured.

Final stage: good preparation at stage two means that at the financial accounting and closing the contract stage you are well equipped to implement change management processes if necessary.

If there is a situation affecting your entitlement – such as mediation, adjudication, or even litigation – make sure you follow the correct protocol. Some countries may not allow any phase of dispute resolution in the contract and any dispute will go straight to litigation, which can be expensive. Check the contract's terms and conditions thoroughly to avoid potentially running the project at a loss.

International construction contracts can be challenging in terms of selecting the right contract and understanding the levels of risk. However, as long as organisations carry out the necessary due diligence and understand the market they are operating in, working globally can be extremely rewarding, enjoyable and profitable.

This article originally appeared in Construction Journal (September-October 2019)