Building Your Building

Constructing the factory may be the single hardest part of manufacturing in China. You have to pay attention to a lot of details throughout the entire process. Being overcharged and/or having quality issues with the construction aren’t uncommon.

Some foreign businesspeople believe that there’s a fine line between making sure you’re not getting ripped off on your factory and pushing too hard on cost control. Their thinking is that the builders are going to make some extra margin one way or the other. Therefore, if you fight overcharges too much, they’ll just cut corners to make it up. A good project manager (see “Protecting yourself by hiring a project manager” up ahead) can help you control costs while ensuring quality, but you may still be dealing with builders who are determined to beat you.

Identifying the players

By law, you have to hire at least three different types of companies, all of which must be licensed in China:

✓	A design firm, which designs the facility
✓	A general contractor (GC), which is in charge of overall construction; some large GCs can finance the construction
✓	A supervisory firm called a jian li (pronounced jee-en lee)

The jian li’s role is technically to oversee the construction work. Some firms are reasonably decent about this; others wouldn’t even notice if the structure collapsed. In other words, you’re required to have a jian li, but don’t rely on it to do your quality control — such work’s a bonus if it does. Most investors hire a local jian li recommended by the local Construction Bureau.

Because the jian li can be unreliable, we highly recommend that you also hire a foreign project management firm or have somebody internal who really knows factory construction and can stay on site throughout the process.

Finding a general contractor

One way to find the general contractor (GC) is to ask the local government for recommendations. Many local offices of the Construction Bureau carry out annual surveys to rank local GCs, so you sometimes get very good recommendations from the local government. Other times, you may receive a recommendation to somebody’s friend’s company, which subsequently does a bad job.

You have to decide whether to hire a local GC or somebody from outside the immediate area. Your selection of local GCs is more limited; however, a local GC may be able to get permits a little faster because of its relationships with the government. Also, it may have a shorter time rounding up workers because it’s familiar with the area. Some foreign businesspeople think that the risk of a GC’s taking your money and walking away from an incomplete project is lower if the GC is local. (And in case you’re wondering, China has very few foreign-owned construction firms.)

Contracting your GC

Foreign investors commonly have problems in their contracts in several areas. The best thing to do is use your form of contract. Matter-of-factly tell the GC that you’ll be using your contract, and make it seem like it’s not optional. GC’s forms tend to be vague and give them a lot of wiggle room.

Here’s a list of pitfalls to watch out for in the contract process:

✓	Translation: If you use the GC’s contract, make sure you get a perfect translation of it. You’d be surprised how many foreign investors get badly hurt because of an error in the translation. It may pay to have a couple of people translate the contract.
✓	Negotiation: If you use the GC’s form, they frequently tell you that the contract is standard and that they can’t change it. Don’t believe them — you can often find room to negotiate the terms.
✓	Security: Insist that the GC give you a performance bond or other security. That way, if the GC screws up or walks away, you can immediately get compensation. Try to shoot for security of at least 10 percent of the construction cost (the usual range is 5 percent to 15 percent). The GC will likely fight you hard on this — just don’t give up. Also, the GC is likely to request that you provide security (such as a bank letter of guarantee) for your payment in return, a reasonable and customary request.

If you’re building a factory that’s new or unusual in China or to higher standards than what the Chinese normally build to, you need to make all these standards explicit from the outset of discussions. When evaluating bids, make sure that the special materials and tasks you require are specifically stated in the estimate. Specify your standards and requirements as much as possible in the contract. Finally, constantly verify that the builders are adhering to your requirements — project managers (discussed next) can be helpful here.

Keep thorough and detailed written records of all dealings with your builders. Don’t rely on any handshake agreements — memorialize everything (especially alterations) in writing. Send notes of all meetings and phone calls to the GC (if you send a translation, also make sure it’s perfect). Ask them to sign or otherwise approve the notes.

If you’re not happy with the completed factory, do everything possible to avoid giving the appearance that you accept it. After the factory passes inspections, any building or completion issue becomes contractual (rather than regulatory). Don’t give the GC the ability to argue that you initially accepted known deviations from the contract.

Pay particular attention to flooring and electrical wiring. Although builders may cut corners in a number of areas, these two can be critical. Make sure that flooring is of the correct thickness. Also, make sure that the concrete is proper quality — Chinese builders have a tendency to mix too much sand into concrete. (You may want to ensure that you have a concrete expert on site.) If your floor isn’t strong enough, you can end up spending a lot of money on machine maintenance. Watch out for wiring tricks such as changing the gage or putting aluminum wire inside copper casing to make it look like copper. Incorrect wiring can cause a major setback by frying your equipment.

Protecting yourself by hiring a project manager

The biggest problem investors encounter in the construction process is quality supervision. A number of Western, Hong Kong, and Singaporean project management companies are operating in China. Even if you have good jian li (hired supervisors), project managers do a lot that jian li don’t have the capability to. In addition to supervising day-to-day construction, project managers implement financial and quality controls that can end up saving you a lot of money and heartache.

Project managers aren’t cheap — they often cost in excess of US$100,000. However, if you’re spending over a million dollars on your factory, they’re probably worth it. As with anything else, you can find good managers and not-so-good ones. Ask around for referrals before committing.

If your company has someone internal who really understands factory construction and can be on-site for the entire length of the project, then you don’t necessarily need a project manager.