New Rules for Construction Projects: Supplements to the Bidding Law

Scope of Application

The New Procedures are founded on the Bidding Law and apply exclusively to construction projects where invitation and submission of bids is required under Article 3 of the Bidding Law and the Standards for the Scope and Size of Construction Projects Requiring Invitation for Bids Provisions, which were issued by the SDPC in 2001 (Scope and Size Standards). Two criteria identify such projects - one `financial' and the other `descriptive'. If a project is an infrastructure project or a public utility project involving issues of public interest or security, is a project funded or financed by the state or is a project using international loans or grants, and has a construction contract sum of over Rmb2 million or a total investment sum (for the project) of over Rmb30 million, then the project falls within the Mandatory Tender Categories making the invitation for bids compulsory.

State-funded Projects

One of the purposes of the Bidding Law is to ensure that state funds are properly spent on construction projects. Unofficial sources² reveal that relevant government departments have done a joint survey into 78 state-funded projects and discovered that Bidding Law compliance was achieved in only 4% of those projects. Understandably, this has seriously affected the transparency and fairness of the tenders for these projects. The SDPC has been making efforts to improve the situation. For example, in a SDPC regulation governing bids for major state construction projects, such projects are defined as construction projects that: (i) are funded or financed by the state; (ii) have been examined and approved by the SDPC; and (iii) have been examined and approved by the State Council.³ As a result the bidding process in relation to such major projects has been supervised more carefully under the SDPC regulation.

The New Procedures have made a further, and probably more effective, effort to regulate bids for state-funded and financed projects. In this context, Article 11 of the New Procedures is of considerable importance.

Article 11 requires that public bids must be invited in relation to wholly state-funded construction projects or where the majority or a dominant portion of funds comes from the state. This requirement supplements the Bidding Law, where open tender was only required for key projects as determined by the SDPC or by local governments. For that reason alone this new requirement should have a significant effect. In addition, due to the introduction of the concept of "dominant portion", a project funded by more than two investors is likely to be required to go to open tender if one of the investors is using state funds and has the biggest equity interest in the project (even if that share is less than 50%).

However, the second part of Article 11 allows certain projects to be exempted. One such exemption is allowed where the cost of an open tender cannot be justified when compared with the price of the project. Unfortunately, the provision does not specify who should determine whether the price of the project justifies an open tender and on what basis such comparison should be made. However, it does say that in the event a project is not appropriate for open tender, a selective tender may be used with the approval of the government authority that approves or administratively supervises the project. This seems to suggest that the final decision as to whether to go to open tender on a project is to be made by the relevant government authority.

As a further step to prevent evasion of the need to go to open tender on state-funded projects, Article 68 of the New Procedures allows the relevant approval authorities to suspend the execution of, or stop provision of funds for, any project where an employer has failed to invite tenders when it is legally required to do so, or where an employer has divided the project into small packages in an attempt to escape the Mandatory Tender Categories.

Projects Exempted from Tender

Tender exemptions are included in the Bidding Law and some other existing regulations. Under the Bidding Law, projects involving national security, state secrets, emergency rescue and disaster relief or use of relief funds to provide employment opportunities may be exempted from tender. Also exempted are projects involving patented technology or know-how.⁴ Article 12 of the New Procedures has incorporated all of these exemptions and has also added two additional categories. The first relates to small size auxiliary works to a project under construction or works adding to the main structure of a project where the original contractor still has capacity to undertake such works. The second relates to a project developed by a contractor for its own use and where the contractor is qualified to undertake the project.

It appears that the first exemption is intended to encourage efficiency; an employer may save costs if the original contractor is engaged to undertake supplementary and/or additional works. The second sensibly exempts projects funded by contractors for their own use. Obviously, projects developed by a contractor for a commercial use are not covered by the exemption and tenders must be invited if the project falls within the Mandatory Tender Categories stated above. All the above exemptions need to be first approved by the government authority that approves the project.

Base Price and Fraudulent Tender

As the New Procedures are aimed at ensuring compliance with the Bidding Law, the drafting bodies have made great efforts to address the areas where non-compliance is most likely to occur. The base price in a bid and the fixing of a tender by fraudulent acts between the employer and a bidder or between bidders themselves are two such areas.

Although the Bidding Law requires an employer to keep the base price confidential (so as not to affect a fair tender), disclosure of the base price is in practice very common. In an attempt to stop such disclosure, Article 34 of the New Procedures requires the employer to keep confidential not only the base price but also the process of how the base price was determined. Article 34 also states that no one is allowed to force employers to have a base price, submit it for approval or interfere with the process of determining the base price. An employer on a project is thus at liberty to determine whether or not to have a base price. Under Article 47, any disclosure by an employer to a bidder of the base price or any related information constitutes a fraudulent act between them, which will render any award to that bidder invalid under Article 71.

Article 47 defines other fraudulent acts between an employer and a bidder to include:

• opening of a bid before the scheduled date by the employer and disclosing information in the bid to another bidder;
• assisting a bidder to alter information or the tender price in a bid already submitted;
• agreement by the employer and a bidder to decrease or increase the tender price after the contract is awarded where the aim of that agreement is to compensate the bidder or the employer for the decreased or increased portion; or
• determining the winner prior to the conclusion of the tender process.

The New Procedures also include steps to eliminate fraudulent acts between the bidders participating in a tender. Under Article 46, such fraudulent acts include:

• the bidders pre-agreeing between themselves to increase or decrease the tender price or what tender price is to be submitted by a certain bidder; or
• conducting price competition between themselves to select the "winner" before they tender for the project.

Under the Bidding Law, an award granted in circumstances where there has been fraudulent conduct between an employer and a bidder or between bidders themselves is invalid. The New Procedures now define in quite clear terms what constitutes such fraudulent conduct.

Tender by a Consortium

The New Procedures also provide further guidance and clarity for consortium tenders. This is likely to be particularly useful as such tenders have become increasingly common in China's construction market, particularly in the context of major construction projects.

Both the PRC Construction Law and the Bidding Law encourage tenders for construction projects by consortia formed between parties with the relevant qualifications. Under the Bidding Law, the parties to a consortium are required to enter into an agreement to clearly define the rights and obligations of each party and such an agreement is required to be submitted to the employer together with the tender documents. If the consortium wins the project, all the parties to a consortium are required to sign the contract and assume joint and several liability to the employer under the contract.⁵ Articles 43, 44 and 45 of the New Procedures contain additional requirements for tenders by consortia.

First, a consortium is required to notify an employer of any changes within the consortium and obtain the consent of the employer to such changes prior to the tender submission deadline. Second, the consortium must appoint a lead party with a power of attorney, executed by all the consortium members, to carry out coordination between the employer and the consortium during both the tender and works execution stages. Third, each consortium member or the lead party is required to give a tender guarantee to the employer. Interestingly, although Article 37 requires bidders to submit a tender guarantee (in an amount not exceeding Rmb800,000) where the employer so requires, Article 45 appears to make provision of such a guarantee mandatory for consortium bidders.

Legal Liabilities

Finally, it is important to note that the New Procedures have imposed legal liabilities on any party who fails to comply with any of the new regulations. These new liabilities exist in addition to those stated in the Bidding Law. Conduct subject to these newly promulgated liabilities includes:

• an employer who terminates the tender process without cause after the tender notice or invitation is issued, the tender documents are sold or the pre-qualification is conducted;⁶
• an employer who fails to comply with the tender formalities required under the New Procedures. For example this would include a failure to give sufficient time prescribed by law to any bidders to prepare tenders or acceptance of bids after the submission deadline;⁷
• composition of a tender evaluation committee otherwise than as required by the Bidding Law and the relevant regulations or where the evaluation process of such a committee fails to comply with the above law and regulations;⁸
• an employer who fails to give an award or where either party fails to sign the post award contract in compliance with the requirements stated in the New Procedures;⁹ and
• an employer who, after the award is given, has bilaterally increased the amount of the performance bond to be provided by the awarded contractor or forced the contractor to advance funds to the awarded project.¹⁰

It is also interesting to note that the Bidding Law allows an employer to call on a performance bond provided by a contractor in case of any breach of contract by the contractor. Of course, while the law permits this, such a call can only be made in circumstances where the wording of the bond in question also permits it. Moreover, in an attempt at evenhandedness the New Procedures also provide that an employer shall give a payment bond in the event that a contractor is required to provide a performance bond.¹¹ However, the new regulations are silent on whether the contractor can call on such a bond when the employer fails to pay. This is something of course to be determined by the terms of the bond.

Conclusion

As the New Procedures represent an effort by government departments to supplement the Bidding Law, their significance cannot be overlooked. The New Procedures also attempt to address issues that have arisen during the implementation of the Bidding Law. As a result this piece of legislation is quite lengthy (at 92 Articles) and detailed. It will be interesting to see the extent to which, in practice, these detailed provisions will be implemented, followed and, if need be, enforced.

Endnotes

1 These regulations include: the Administration on Invitation and Submission of Bids for Building Foundation and Municipal Infrastructure Works (the Ministry of Construction); the Administration of Invitation and Submission of Bids for Telecommunication Construction Projects Tentative Provisions (Ministry of Information Industry); the Administration of Invitation and Submission of Bids for Highway Construction Projects Procedures (the Ministry of Communications); and the Administration of Invitation and Submission of Bids for Water Conservation Construction Projects (Ministry of Water Resources).

2 The Beijing San Kene Investment & Consulting Centre.

3 The Supervision of Invitation and Submission of Bids for Major State Construction Projects Tentative Procedures, issued by the SDPC on January 10 2002.

4 For example, Article 12 of the Administration of Invitation and Submission of Bids for Water Conservation Construction Projects.

5 The Bidding Law, Article 31.

6 The New Procedures, Article 72.

7 Ibid, Article 73.

8 Ibid, Articles 78 and 79.

9 Ibid, Article 81.

10 Ibid, Article 83.

11 Ibid, Article 62.