China's Construction Laws


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This article looks at the main regulators and laws involved in carrying out construction projects in China. It also provides some useful tips for project owners to keep in mind when dealing with construction projects in China.

This article looks at the main regulators and laws involved in carrying out construction projects in China. It also provides some useful tips for project owners to keep in mind when dealing with construction projects in China.
Introduction

China has one of the largest active construction industries in the world. With the growth of China's economy in recent years, construction projects ha
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ve spread rapidly across the country. This article provides a summary of the development of China’s main construction regulations, regulations governing foreign investment in the construction industry and provides an insight into how things may be going to develop in the future.

History and Development of China’s Construction Regulations

From 1979, China began to open up to foreign investment. Interestingly, from 1979 to the early 1990s, the construction industry was closed to foreign investment, with it being controlled by the government. As the need to increased construction activity developed in the early 90s, the government recognized the urgent need to invite private participating in the industry. – In 1997, China enacted the Construction Law and in 1999, it enacted the Bidding and Tendering Law - these two pieces of legislation transformed the construction industry. These laws have been revised several times since China joined the World Trade Organization in 2001.

1. Construction Law

The Construction Law is the most important law for China’s construction industry. It provides for a forth a comprehensive legal system for construction industry including contracting awards, qualifications for construction projects, licenses for construction projects, quality standards and supervision, safety issues, legal responsibilities and so on.

Contracting Awards

Articles 7 to 11 of the Construction Law stipulate that construction units need to obtain construction licenses before the start of construction projects and refers to the criteria for obtaining such licenses.

Qualifications for Construction Projects

Article 12 mandates that certain qualifications must be met for construction engineering enterprises, prospecting units, design units and project supervisory units which engage in construction activities. Article 14 regulates specialized technical personnel engaging in construction activities.

Quality Supervision

Articles 30 to 35 and Articles 52 to 63 deal with quality standards and supervision.

Legal Responsibilities

Articles 64 to 83 forest out the legal responsibilities arising in construction work, including civil offences and other issues.

2011 Amendments

The Decision of the Standing Committee of the National People’s Congress on Amending the Construction Law of the People’s Republic of China (2011) was published on April 22, 2011. Under the Decision, various amendments were approved, strengthening the rights of construction workers in relation to insurance and safety issues.

2. Real Right Law

The Real Rights Law (which many foreign lawyers refer to as the “Property Rights Law”) which was enacted in 2007 provides various rights to a property owner that need to be kept in mind when carrying out construction projects in China. Rights to amenity, engineering construction standards, excavation standards, plumbing standards as well as many other rights are dealt with by the Real Rights Law.

3. Work Safety Law

The Work Safety Law was enacted in 2002. It outlines the general safety legal requirements for various industries, including the construction industry.

4. Other Regulations and Notes

It is important for construction companies and customers, to realize that a large number of other regulations, interpretations and opinions (which are similar to regulations in a common law country) exist, in addition to these main national laws. These are set out below. Further, a number of provinces and local governments have also enacted laws and regulations applicable to construction projects within their jurisdictions. Some of the more notable additional regulations are:

1. Administrative Measures for the Pre-examination on the Use of Land for Construction Projects, issued by the Ministry of Land and Resources in 2008, providing approval procedures and requirements for “pre-examination on the use of land for construction projects”.

2. Opinions of the Ministry of Construction, the Ministry of Commerce, National Development and Reform Commission, the People's Bank of China, the State Administration for Industry of Commerce and the State Administration of Foreign Exchange on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market, issued in 2006, details certain guidelines regarding access to and administration of foreign investment in the real estate market.

3. Notice of the Ministry of Housing and Urban-Rural Development on Issuing the Administrative Measures for Design Bidding of Construction Project Schemes, enacted in 2008, regulates the design bidding of construction project schemes.

4. Provisions on the Administration of Foreign-invested Construction Engineering Service Enterprises, jointly issued by the Ministry of Construction (restructured and renamed the Ministry of Housing and Urban-Rural Development) and Ministry of Commerce, which looks at the application procedures for the qualification of foreign-invested construction engineering service enterprises and the supervision over and administration of foreign-invested construction engineering service enterprises.

5. Provisions on the Administration of Work Safety in the Construction of Water Resource Projects, enacted by the Ministry of Water Resources in 2005 for the supervision and administrative of work safety for activities involving the new construction, expansion, renovation, consolidation and dismantlement of water resource projects.

6. Measures for the Administration of the Highway Construction Market, issued by the Ministry of Communications (now known as the Ministry of Transport) in 2005, which deals with the supervision and administration of the highway construction market.

Foreign Construction Enterprise Requirements

The Provisions on the Administration of Foreign-invested Construction Enterprises (the 'Decrees 113'), jointly issued by the Ministry of Construction and the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce (MOFCOM)) and effective from December 1, 2002, states that foreign-invested construction enterprises need to obtain approval for their establishment form the relevant departments under the Ministry of Construction – that process requires the foreign investors to meet the qualifications laid out by the relevant local departments.

Foreign-invested construction enterprises also need to comply with the domestic classification standards for construction enterprise qualifications issued by the Ministry of Construction. Further, according to the Circular on Issues Concerning Proper Handling of the Administration of Qualification for Foreign-invested Construction Enterprises issued by the Ministry of Construction and MOFCOM on September 6, 2004, a newly established foreign-invested construction enterprise should meet the following additional requirements:

i. The construction performance of the foreign investor outside of China may be deemed as its performance inside China, when the investor is assessed;
ii. The foreign-invested construction enterprise may employ foreign service providers as technical and economic management personnel of the enterprise; and
iii. The foreign-invested construction enterprise may employ service providers from foreign countries.

The Regulations on the Administration of Foreign-Invested Construction and Engineering Design Enterprises (the ‘Decree 114’) were jointly issued by the Ministry of Construction and the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce (MOFCOM)) – they commence operation on September 27, 2002. These regulations deal with the construction engineering design industry and the approval procedures for the establishment of foreign invested design enterprises. The regulation stipulates that the establishments for foreign-invested design enterprises should satisfy MOFCOM’s requirements of setting up a joint venture first, Sino-foreign co-operative joint venture or wholly foreign-owned enterprise(WFOE), and then comply with the Ministry of Construction (MOC)’ requirements of obtaining construction engineering design qualifications ("CED Qualification"). The capital requirements for Industrial Qualifications run from RMB6 million for a Grade A Full Industrial Qualification to RMBO.5 million for a Grade C Partial Industrial Qualification or Grade B Sector Industrial Qualification in accordance with the classification standards.

Decree 114 also requires that a foreign-invested design enterprise must maintain a fixed percentage of individual foreign service providers with dual qualifications. Foreign service providers with dual qualifications mean they are qualified in both their home jurisdiction and in China. The prescribed percentage of dual qualified foreign service providers for a foreign-invested design enterprises in the form of joint venture and Sino-foreign co-operative joint venture is 1/8, whereas in the form of WFOE is required to retain at least 1/4 dual qualified personnel.

The MOC and the MOFCOM jointly issued the Implementing Rules for Decree 114 ("Implementing Rules") on 5 January 2007. The Implementing Rules encourage the establishment of foreign-invested design enterprises and provides details regarding the approval procedure, application requirements and filing materials required.

Main Government Departments

As can be seen from the discussion provided above, a number of Chinese government departments are involved in supervising the construction industry in China. Some of the major ones are listed below.

The Ministry of Housing and Urban-Rural Development of the PRC (http://www.mohurd.gov.cn) is responsible for the administration and supervision of construction works including licenses, qualifications, survey, design, tenders and biding and so on. It is also responsible for the supervision and administration of qualifications for construction enterprises in China.

The Ministry of Transport of the PRC (http://www.moc.gov.cn) is responsible for the administration for construction for ports, highways, waterways, airports, water conservation projects and hydropower facility projects. It makes plans for these constructions, and also manages their maintenance use and quality control.

The National Development and Reform Commission of the PRC (http://www.ndrc.gov.cn) is responsible for general macro-economic planning issues associated with the construction industry.

The Ministry of Railways of the PRC (http://www.china-mor.gov.cn) is responsible for the administration of services relating to the survey, design, and tendering and biding for railway construction projects.

The Ministry of Environmental Protection of PRC (http://www.zhb.gov.cn) is responsible for the supervision and administration on environmental protection control during the process of construction.

The State Administration of Work Safety (http://www.chinasafety.gov.cn) is responsible for the supervision of work safety in construction projects.

General Requirements under the Construction Law and Other Laws

Project survey qualification consists of 3 classes: all inclusive qualification, professional qualification and labor service qualification. The all-inclusive qualification is deemed as grade A, and obtaining this qualification means the enterprise may provide survey services for any types of contracted projects. The professional qualification includes various classes according to the nature of the project and technology involved. Enterprises with professional qualifications may only provide professional survey services under the service scope allowed by their qualification class. Labor services qualification does not have a class, and enterprises with a labor service qualification may provide labor services for geotechnical works, water boring and engineering surveys.

Project design qualifications include 4 classes: all-inclusive qualification, sector qualification, professional qualification, and special qualification. The all-inclusive qualification is deemed as grade A, and obtaining this qualification means the enterprise may provide any design services for any contracted projects in all kinds of industry sectors. Sector qualifications, professional qualifications and special qualifications have been divided into different classes according to the nature of the project and technology involved. An enterprise with sector qualification may provide design services for the issued sector and other similar sectors under the granted scope for qualification class. The enterprise with professional qualification may provide professional works to any sector under the granted scope. An enterprise with special qualification may supply design services for specialized projects under the issued scope.

Tips for Dealing with Construction Projects

We thought it would be useful to provide some tips for dealing with construction projects, from a project owner’s perspective. The tips below outline some areas that are often overlooked, or hastily dealt with to a project owners’ peril.

1. Ensure the legal qualifications of the firms involved

A project owner should sight all contractors’ business licenses to ensure that they have adequate business scopes in their licenses and that their registered capital amounts are appropriate. A project owner should make enquiries with the local government as to the general reputation of the contractors as well.

The project owner must confirm that the design firm or contractor has all relevant qualifications appropriate for the project(s) (as discussed above).

2. Ensure that insurance and quality issues are adequately dealt with

Generally speaking, most professional indemnity insurance and design insurance policies are project specific. Further, under the Construction Law, general liability for defects in the construction of a building or asset is maintained for the “reasonable life” of the building – different periods apply to different parts of a building, such as the AC system, mechanical and electrical systems etc. All of these issues need to be dealt with appropriately in the construction project documentation, along with the usual boiler plate clauses such as non-assignment and non-licensing provisions, key performance indicators, installment triggers, quality control and dispute resolution issues.

3. Completion

Chinese law requires that an owner or tenant cannot take possession of a building or part of a building, until a “Certificate of Final Acceptance” has been issued by the Ministry of Construction (now called the Ministry of Housing and Urban-Rural Development) – such a certificate cannot be issued, until key approvals are obtained from the departments in charge of urban and rural planning, fire safety and environment and waste. We have seen these final approvals delayed despite a building being “complete”, so it is important to open an early dialogue with the relevant regulators to keep a project on track.

Conclusion

Whether you are a foreign construction company looking at providing services in China, or a project owner looking at contracting with a construction company, it is important to pay close attention to China’s ever-changing construction regulation landscape. Further, local policies also need to be kept in mind when dealing with projects, as these can make or break a project’s bottom line, depending on margins and relationships.

ABOUT THE AUTHOR: Sarah Xuan
Sarah Xuan is an Associate in the MMLC Group.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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