China: the tendering process

The famous saying by Deng Xiao Ping – “feeling the stones when crossing the river” – describes vividly the attitude of the central Chinese government throughout the gradual reform from central planning economy to an open market economy.

Before the open-door policy, tendering in construction projects was utterly unheard of. The value of construction works was calculated based on official standard pricing manuals. Since both sides were financed by the state, neither cared much about the eventual cost.

When foreign investors entered the market, tendering was introduced and used to establish the contract price for construction works. Unable to calculate their cost accurately because of the lack of a suitable accounting system, many contractors bid unreasonably low prices in the rush to secure these new commercial jobs.

In order to regulate the practice, the Ministry of Construction issued laws aimed at protecting the contractors from unfair tender practices and established tendering offices to implement them. Early requirements were very harsh to the tender inviting party – for example, all tenders that fell outside +3% or –5% of the approved pre-tender estimate would be declared void. Most of these requirements have been abolished but tendering in China is still very different from in Western economies.

Tendering is mainly regulated by the Tender Law enacted in August 1999. Article 3 stipulates its application to the following types of work:

• Large-scale infrastructure or public utility projects relating to the public interest of society or public security
• Projects wholly or partly using state-owned capital or state finances
• Projects using loan or aid funds provided by international organisations or foreign governments.

Interpretation differs in each city or province and many extend the law to nearly all projects because they either “relate to public interest of society” or “utilise state-owned capital or state finances”, including bank loans.

The Tender Law stipulates the procedure in administering a tender and the penalties for not complying with it. Apart from the financial and disciplinary penalties listed, it should be noted that approval from the tendering office is a pre-requisite for issue of the construction work permit. Improper tendering will therefore affect the start of works on site.

For large public projects, it is not uncommon that the assessments are done in a locked-away camp

Tendering must be carried out by a qualified tendering agent, a professional body that comprises mainly qualified engineers. The agent prepares the conditions that will incorporate a marking scheme for evaluation of the tenders received. Tenders are done either on an open or invited basis. Private projects would normally adopt the invited basis.

Articles 34 to 45 of the Tender Law lay down how the tenders received should be handled and assessed. The tenders should be opened publicly in a venue with representations from all tenderers. The tenders are then assessed by a tender evaluation committee comprised of representatives of the tender inviting party and independent experts selected by the tendering office.

The evaluation committee must have an odd number of no fewer than five members, of whom at least two-thirds must be independent experts. All assessments must be carried out in strict confidence.

For large public projects, it is not uncommon that the assessments are done over two or three days in a locked-away camp. The evaluation committee will recommend the award and the tender inviting party should notify the successful tenderer within 15 days and lodge the notification with the tendering office.

The requirements of the Tender Law are not popular with developers in China, either foreign or local. The law gives disproportionate influence to the tendering agent, who normally liaises with the independent experts.

The evaluation method does not suit large-scale complicated projects which would normally need analysis by the whole consultant team before any recommendations can be made. In private projects, it also deprives the developer of its personal preference.

To overcome the above drawbacks, tendering in China involves a lot of preparatory work, including application for waivers of certain procedures, discussions with tendering office officials and liaison with tendering agents.