Overcoming roadblocks and red tape on international design and engineering projects
For the last 10 years, Portland, Ore.-based Glumac, which specializes in cost-effective, sustainable design of advanced technology, health care, institutional and commercial facilities, has been adding to its international building portfolio in both Europe and Asia. Yet, to increase earnings during the recession, in the past four years, the firm has ramped up its focus on projects in South Korea, Hong Kong, and China, in particular. “We were looking for overseas work that could help us during the recession,” says Edwin Lee, P.E., managing principal of Glumac’s Los Angeles office. “We needed to find some way to ride this slowdown out for maybe another 10 years. We’ve been actively looking for overseas work, investing our time and effort to market work over there. Now, we’re getting something out of it. We’re very glad that we started making the investment four years ago.”
Glumac’s first recent overseas clients were U.S. businesses expanding their research facilities into Asia. “Our U.S. clients bring us along to China,” says Lee. This type of expansion can hardly come as a surprise to the engineering industry. Recently, the World Green Building Council (WGBC) stated that China has the largest construction volume in the world. “We’re a service sector, serving the developer industry,” Lee says. “Now, developers are all going to Asia and building campus-type office buildings and high-tech research facilities.”
For example, recently, Glumac performed the design and commissioning for a U.S. Green Building Council (USGBC) Leadership in Energy and Environmental Design (LEED)-certified 700,000-sq-ft research and development facility in Chengdu. In addition, it has been pursuing projects sponsored by the U.S. Army Corps of Engineers (see The New York Times Reports on U.S.A.I.D. Failures). “The military market is also an overseas market to us,” says Lee.
South Korea and Guam both contain air bases on which the firm has worked. However, local overseas clients have now begun hiring the firm as well. “Now we’re slowly being pulled into working with local clients,” says Lee, who estimates his firm’s current billing for overseas work at about 12%.
All things equal, try Canada
Glumac is not alone in its expansion into international territory during the domestic construction slowdown — and for good reason. The global construction boom over the past decade in Europe and Asia is poised to reach an all-time record in 2012, according to the International Construction Information Society (ICIS). In addition, in its “Second Quarter 2011 IHS Global Insight Global Construction Outlook,” IHS, an Englewood, Colo.-based global information company, is predicting total global construction spending to increase 3% in 2011, and to reach the pre-crash peak level (last seen in 2007) in 2012.
Despite these favorable conditions overseas and canceled/postponed projects in the United States, chasing design and engineering projects in jurisdictions other than the United States can be a difficult proposition for inexperienced U.S. firms (see Cutting the Red Tape in India). “Right now, the work has dried up here in the United States, and there are a lot of hungry U.S. engineers that had stayed away from international work and are now, in order to stay afloat, going outside home jurisdiction,” says Joseph Dennis, general counsel at Arup for its Americas Region. “But it’s very dangerous when engineers that have never done international work begin bidding on every job they see. I’m not trying to dissuade anyone from doing this type of work. Arup spends a lot of time doing work in countries outside of the United States. It’s just that the firms that don’t do a lot of it are more at risk.”
Dennis, who has regional responsibilities for overseeing Arup’s legal portfolio in connection with its contracts, disputes, corporate affairs, and risk management and is also an active committee member of the legal counsel forum to the American Counsel of Engineering Cos. and a board member of both the NYCAIA/ACEC Contracts Committee and the NYC AIA/ACEC Risk Management Committee, recommends an easier alternative for venturing out of the country for the first time. “Canada is pretty similar to the United States and a pretty friendly jurisdiction,” he says. “All things being equal, try Canada.”
However, not every firm will be able to secure projects in Canada. Firms must go where the projects are located, and in recent years they’ve been in non-English speaking countries. Firms can look to trade agreements in determining their destination of choice. “The trade agreements between countries play a big part in the tax treatment,” Dennis says. “If there’s a good relationship in our country and the country you’re working in, then you’re going to have favorable tax treatment.”
Still, the key to a successful international endeavor is to have someone in-house who speaks the language. “If you have some really good staff who speak Portuguese, then you may be much more able to do a project in Brazil than if you don’t speak the language, especially if you need to have deliverables in the language,” Dennis says. “You worry that the translator won’t get it right. You should be designing in your own language, and that should be your responsibility.”
Furthermore, there are other considerations firms must have in their contract above and beyond the language (see Top 10 Considerations for International Contracts). Dennis urges firms undertaking projects in other jurisdictions to do their homework. “There are a lot of things that firms working in any particular jurisdiction can protect against,” he says. “You can save yourself time, effort, and money if you do the homework.”
Dennis advises consulting a lawyer experienced in such matters and also speaking with local engineers who have performed work for the jurisdiction you’re considering entering. “Spend the whole day with them, and ask all the questions that take you through this work,” Dennis recommends. “Like anything in life, if you’ve never done it before, you’re going to make mistakes — and those mistakes can be very costly. It’s a lot cheaper when you learn the lessons from other people than when you’re on your own watch.”
Above all else, Dennis advises safety must be the first priority. “We certainly try to stay away from places where we’d be putting staff in harm’s way,” says Dennis.
For example, if working on a project located in the Nigerian Delta, make sure there are no site visits required. “There’s no danger because you’re sitting in Boston,” he adds.
However, when site visits are required, which they often are, other safety precautions must be taken to deal with any worst-case scenarios. “It gets very complicated,” says Dennis, who explains that in some countries your firm will have to have a policy for extreme cases, such as kidnapping and ransom (K&R). “You have to have a good K&R policy if you’re going to be sending people into places that are difficult,” he says. “Brazil is a place with a lot of work, but it’s got a known risk of bad things happening to foreigners. If you’re just starting out and want an international project, Canada is probably better.”
Establishing an outpost
According to Glumac’s Lee, one of the most difficult aspects of beginning to work in countries other than the United States is dealing with differing expectations that stem from cultural differences. For instance, in Lee’s experience, clients based in the United States provide specific requirements for their projects. “When we design a project in the United States, we basically stay the course with what the requirement is set forth by the clients,” explains Lee, noting that in Asia, the client expects the American consultant to guide them from the very beginning of a project. “When they hire you as an American consultant, they expect you to tell them what’s the latest and greatest. In their mind, that’s why they’re hiring you in the first place.”
As a result, there can be confusion over the requirements of the project in general. “There are a lot of guessing games, in terms of establishing the requirements and the intention of the project,” says Lee. “If we don’t get it right, we end up going around in circles. That loses some of the efficiency in terms of the design process.”
Due to these misunderstandings, members of the Glumac team spend more time abroad, particularly in figuring out the terms of the design requirements and building codes. “We burn a lot of our hours and time on these matters rather than on the actual project requirements,” says Lee.
Notwithstanding the time invested in project requirements, the firm would still be spending more time on-site anyway. According to Lee, the firm’s Chinese partners expect more face-to-face meetings than is usual for work in the United States. “The way I operate in Los Angeles, my phone hardly rings,” says Lee. “We’re always communicating digitally. But over there, they like to have face-time meetings. That makes it very difficult for us. That’s why we have to have our staff over there at all times to handle some of what we refer to as the routine meetings. They aren’t really necessary, but they still want us to be there.”
Accordingly, to meet the demands of the required face-time, Glumac recently opened an office in Shanghai. “We thought that even if the U.S. market picks up, we would want to continue our work there,” says Lee. “We decided not to do like most American firms and hit-and-run. We decided to establish over there and have our experienced staff train local staff over there.”
In addition to cheaper labor costs in China — a 1-to-6 ratio of salary scale, according to Lee — the firm wants to train local talent to work in a more “American” way. In Lee’s experience, the firm was not successful in “bridging the gap” between his firm and the local engineering firm they were working with. “We’re still trying to push the American way of doing design work over there,” says Lee. “The general service level of the professional A/E firms over there is not better than that in the United States. That’s why there’s a huge gap between us and the local firms there — and that’s how we pick up some of the nice work with some good fees.”
Most often, the local engineers didn’t even understand the schematic or design development drawings, says Lee. “We spent a lot of time telling them what we wanted, and they would come back telling us that it’s against the code. It took a long time to transform a design into a construction document that the local contractor could price and build.”
An office in the new jurisdiction, where warranted, is a good idea, says Dennis. “When your company has a physical presence in the jurisdiction, there’s generally a much more connected understanding of working in that jurisdiction,” he explains.
Yet, an office may not expedite licensing issues. “There’s no benefit of reciprocity with American licenses,” says Lee. “So they don’t want to recognize the license at the state level, which is considered second tier. Our license will never be accepted over there, so we can only be a consultant. We can’t actually call ourselves a design engineer because we don’t do the construction documents. We hire local engineering firms who can stamp the drawings and get a building permit for us.”
Local partners are important, Dennis agrees. “You need to understand the local codes and how the work is done in the specific jurisdiction,” he says. “How is the work signed, sealed, and stamped? You should be going in with a local partner consultant who’s walking you through these kinds of things so you can satisfy these obligations.”
SIDEBAR: The New York Times Reports on U.S.A.I.D. FailuresIn the July 5 edition of The New York Times, Op-Ed Contributor Glenn Zorpette, the executive editor of IEEE Spectrum, the magazine of the Institute of Electrical and Electronics Engineers, in an editorial called “Struggling for Power in Afghanistan,” revealed doubts about the ability of the U.S. Agency for International Development (U.S.A.I.D.) to administer a five-year, $1.2-billion program to create a modern electrical grid in Afghanistan.
“As in Iraq, the main American electrical reconstruction effort in Afghanistan is divided between U.S.A.I.D. and the Army Corps of Engineers,” wrote Zorpette. “Of the two, the Corps has proved far more efficient.”
Many completed U.S.A.I.D. projects have been failures in scheduling and use, according to the article. For instance, a 105MW diesel power plant at Tarakhil, outside Kabul, took nearly three years to build and cost $40 million out of a total outlay of more than $300 million for delays and contracting problems. The contractors were the Louis Berger Group and Black & Veatch, which despite letters of criticism sent to the companies and poor performance reviews, were offered a $266-million contract without competitive bidding last October. Yet, the plant has sat idle because of high diesel prices in comparison to the lower costs of power from abroad.
In light of these problems, Zorpette recommends that the agency turn over its projects to the Corps of Engineers, because its experienced engineers and lack of playing by politics makes it a much better candidate to manage large electrical projects.
To read the full story, visit The New York Times website at: http://www.nytimes.com/2011/07/06/opinion/06zorpette.html.
SIDEBAR: Top 10 Considerations for International ContractsTo make up for gaps in revenue caused by the U.S. construction slowdown, many U.S. engineering firms have pursued projects overseas, particularly in areas with construction booms, such as China and India. However, venturing into new jurisdictions can come with pitfalls not related to the actual design and engineering work. To prevent costly delays and other mistakes, Joseph Dennis, general counsel at Arup for its Americas Region, urges firms to take precaution when first setting up the terms of a project. “Once you do the project setup properly, you can do your engineering and have great experiences,” he says. “But the project setup is the hardest part. It’s where you’re completely outside your comfort zone, and you can make a lot of mistakes that with more experience you wouldn’t have made. That’s where it’s prudent to get the consultant expertise in helping you set up your project. It’s money well spent.”
Dennis provides the following considerations when going forward with an overseas project:
- Choice of entity and licensure/registration issues. When firms begin work in a new jurisdiction, they should already understand the licensure and registration issues. Just as engineering licenses vary from state to state, such as requirements for registering with the board of engineers, sometimes there are different registration requirements for national and local registration. “You really need to understand whether the practice of engineering in a country is going to trigger an engineering registration requirement,” says Dennis.
In addition, firms must know if they are providing only engineering services, or are they going to bring the project through the construction phase. “It’s often a very good strategy, when you don’t have the biggest presence in a country, that you do that preliminary work and then team up with a local engineer or a local architect,” says Dennis. “Then, at some point in the process, you can hand the project off to the local team.”
- Currency fluctuations. According to Dennis, it’s always a mistake to work in a currency that’s not your country’s currency. “When you take a job in another currency, you’re essentially making a bet on that currency,” says Dennis. However, if you accept the local currency, you should put a contingency within your own budget that deals with allowing a reasonable currency fluctuation.
- Cash flow deficit. On large foreign projects, in particular, it is important to stay cash positive through mobilization payments and regular invoicing. According to Dennis, it’s wise to negotiate a mobilization payment, which is a payment issued before you start work. Firms can also begin issuing invoices a few months ahead. “There are lots of strategies,” says Dennis. “The key one though is that when they start to not pay you, you stop work or you threaten to stop work. Your ability to come back and get redress is very limited. When you don’t have the relationships with the head client that you may have on your own turf, you have to be very disciplined.”
- VAT/withholdings. Your fee should be exclusive of any of the value-added tax (VAT) or withholdings, says Dennis. Whatever the developer needs to pay for withholdings or local taxes shouldn’t come from your fee. “Every time you work for a foreign national, you have that situation,” he says. “You need to put that burden on them. Making your fees net free of any VAT or withholdings is a really good strategy when working outside of your home jurisdiction.”
- Local codes/standards/customs. “When in Rome” doesn’t apply to engineering work. Through the Foreign Corrupt Practices Act (FCPA), U.S. firms working out of the country are held to firm standards. “If you’re out of home jurisdiction, it doesn’t matter that prospect fees or other institutional forms of behavior that would be criminal or subject to violation in the United States are acceptable,” says Dennis. “You’re judged by the standard of your home jurisdiction, and anything you can’t do outside of your home jurisdiction, even if it’s legal or conventional outside of your home jurisdiction, you still can’t do.”
- Permanent establishment. Staff on-site for more than six months can result in local income tax to your firm. Limit visit lengths and use subcontractors. Depending on the country, typically after 180 days, the jurisdiction may have an independent right to charge your firm with an income tax as if it were a local entity. “It can be avoided if you understand it,” says Dennis. “You stay there for a few months, go home, and then come back. Sometimes you can use subcontractors or independent consultants.”
- Site supervision/safe design. Firms must understand decennial liability and that the conventions in many jurisdictions require a higher level of participation than U.S.-style construction administration and that the conventions regarding designing for safety vary from those in the United States. Typically, the construction phase service in the United States involves a few site visits and general confirmation that the construction is going in accordance with the design intent, according to Dennis. However, in many jurisdictions outside the U.S. borders, that’s not the case. “They’re expecting more of a site supervision in that the designers and engineers are there every day,” he explains. “Plus, they have more authority on the site and are responsible for what happens on-site much more than in a typical design-bid-build in the United States.”
Additionally, in countries that follow the Napoleonic code, firms may be liable for their work in a strict sense, regardless of negligence, for 10 years post-construction. “That may influence your decision-making process when choosing projects in those jurisdictions.
- Bonds. Often, bid bonds, payment bonds, and performance bonds are required and can be problematic for U.S. design firms. According to Dennis, it’s important to secure these when needed before a firm wastes time and effort on a project. “If that’s one of the early questions they ask, they may write these projects off in the early stages,” says Dennis.
- Dispute resolution. Seek to make your contracts subject to U.S. law or international arbitration, and stay away from the local courts.
- Insurance. Confirm your U.S. policy has worldwide coverage, that your insurance complies with the contract, and that a local fronting policy is not required. Most policies will have worldwide coverage, but sometimes firms have to pay extra money for it.
SIDEBAR: Cutting the Red Tape in India
Home to one of the world’s fastest-growing economies, India is under pressure to generate its energy through cleaner sources to help counter the effects of climate change from greenhouse gases. Clean energy projects in India would be among the most cost-effective ways to reduce global greenhouse gas emissions. U.S. investment in clean energy projects in India have the potential to receive excellent financial returns, reduce carbon footprint, and also earn high corporate responsibility ratings for investing in environmentally beneficial initiatives. Indian industry would also benefit through substantially reducing production costs and emissions. Unfortunately, perceived and actual high transaction costs and bureaucratic and legal roadblocks have stymied most efforts. Now, a project run by the Center for Climate Change Law at Columbia Law School, New York, seeks to change that.
“The fastest growing sources of greenhouse gas in the world are China and India,” says Michael Gerrard, the Andrew Sabin Professor of Professional Practice and Director of the Center for Climate Change Law. “Several studies have shown there is enormous potential to moderate greenhouse gas growth in those countries through available energy-efficiency technologies and renewable energy technologies, but the difficulty in the mechanics of financing has emerged as one of the significant roadblocks, so we’re hoping to clear away that roadblock here.”
Funded by a $485,000 grant from the Sujana Group, an Indian producer of steel, power, and energy, the Clean Energy Investment-U.S. India Project will help facilitate U.S. investment in the clean-energy sector by developing contracts and other legal instruments designed to become standards in the industry.
“The basic idea is that there are heavy transaction costs in financing energy-efficiency and renewable energy projects in India,” says Gerrard. “It’s an enormous market, but one of the roadblocks is that a great deal of paperwork is required in order to arrange financing for these projects. So the basic idea is to prepare template contracts and other documents that would allow the parties to arrange for financing much more easily than if they had to prepare the documents from scratch.”
Earlier this month, a representative from the Columbia Law School, along with members of the legal firm Weil, Gotschal, and Manges, which is providing pro bono assistance, met in consultation with Indian attorneys and U.S./Indian experts in investment, project finance, and clean energy to draft the contracts and other legal documents.
The aim is to make the contracts and other documents available for free online so they can be readily adapted for projects throughout India. In addition to the contract-drafting efforts, the 18-month project also includes two international symposiums — one that took place in July 2011 and one scheduled for March 2012 — to bring together major players in this sector.