Two Common Barriers for Chinese-Funded Capital Project Investments in the U.S.

Greg Ray

Like other foreign investors, Chinese-owned companies are likely to experience a learning curve when investing in capital projects located in the United States. With the cost of labor, permitting requirements, and other localized requirements varying from region to region across the United States, each investment by a Chinese-owned entity is likely to face its own unique set of challenges.

Despite reports that Chinese foreign direct investment (FDI) decreased substantially in 2017 following years of steep FDI increases, there are a variety of reasons why Chinese companies will continue to spend capital to develop assets in the United States. Among these reasons are access to financing in China, wage inflation and labor shortages due to China’s rapidly aging population, global brand building, and investment diversification. There is, of course, also the current administration’s enthusiastic endorsement of those multinationals who invest for production in the United States as well.

IPA works together with client executives, project organizations, and project teams to address common areas of difficulty that get in the way of delivering successful capital projects globally. For Chinese-owned companies investing in the United States, IPA observes two areas that commonly disrupt capital project performance. One area of difficulty is accurate cost estimating and contingency setting for capital projects. Another is adherence to U.S. construction safety requirements and Best Practices for construction safety without eroding capital effectiveness.

Accurate Cost Estimating and Contingency Setting

Cost estimating and setting contingency for a capital project in a new location is difficult. Chinese owner companies normally have an especially difficult time with contingency setting, as the predominant contracting strategy in China is to use small owner teams with a single, all encompassing, lump-sum engineering, procurement, and construction (EPC) contract. The contractor—typically a sub-company of the State Owned Enterprise (SOE) in the public realm—builds the cost estimate and sets the contingency for the project. However, when approaching projects in the United States, this is not possible because Chinese owners cannot transpose their EPC contractors onto U.S. soil to execute projects. Best Practice is to set contingency based on a large number of factors, including key equipment risk, project execution planning, construction labor availability, and bulk material risks for the project location. This is very difficult to do remotely.

However, it is not just about setting contingency. Local risk factors unique to different regions of the United States make capital project cost estimates difficult for most foreign owner companies. IPA’s global capital projects database of more than 18,000 onshore projects contains detailed cost information from thousands of completed projects across the United States. With these data, IPA is able to assist owner management and project teams to perform detailed statistical analysis of their project cost estimates. Using IPA’s proprietary statistics models for both cost capacity and effectiveness, IPA can give business and project professionals a better understanding of how their overall cost targets compare to the industry average costs in the U.S. region. The IPA analysis explains which cost categories are budgeted higher (or lower) than competitors who have completed similarly scoped projects.

Beyond data-based cost analysis, IPA works with clients to perform a qualitative project cost estimate review that involves examining the Basis of Estimate and assesses all key assumptions made during estimate development. IPA reviews each major input into the estimate, including the methods used to estimate the equipment, bulk materials (quantity take-offs and prices), construction labor costs (basis for wages and productivity), project management, construction management, and detailed engineering costs. Additionally, IPA considers the use of allowances, contingency, and escalation in its cost assessment. IPA research has shown that estimates prepared using Best Practices, in combination with a closed scope, are significantly more precise, better centered, and more competitive.

U.S. Construction Safety Performance

Unlike the practices China owners use to build projects in other world regions, there is no possibility of transporting Chinese EPC firms together with their construction labor workforce across the ocean to complete projects in the United States. It is not possible to bring “local norms” for construction practices into the various regions of the United States, so Chinese companies must familiarize themselves with the required local construction safety practices. IPA has extensive research on construction safety Best Practices and has identified the key practices that are essential to reducing the risk of safety incidents on projects. IPA works with project teams prior to authorization to ensure that construction safety Best Practices are clearly understood, have been planned for, and will be implemented as projects enter execution.

In addition, using proprietary statistics models, IPA helps clients to understand the risk of encountering safety incidents based on the total field labor hours and what has been experienced by completed projects in Industry. In this way, project leadership and stakeholders are made more aware of the potential for encountering safety incidents and can plan accordingly for additional safety support on projects where there is a high probability of occurrence.

There are many other difficulties that Chinese companies and other foreign investors regularly encounter that are unique to investment in the United States and the rest of North America. Such difficulties include construction management approaches, local contracting strategies, and project staffing and function competency assessments. With the right capital project evaluation experience, data, and knowledge of Best Practices, Chinese owner companies can take proactive actions to increase the effectiveness of the capital spent in the United States.

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