DaiJianZhi – How Foreign Practitioners can accommodate

this new procurement approach in China

Jian Zuo1 and George Zillante2

1
PhD Candidate, School of Natural and Built Environments, Centre for Building and
Planning Studies, University of South Australia
2
Associate Professor, School of Natural and Built Environments, Centre for Building
and Planning Studies, University of South Australia

Abstract
When the Chinese adopted their “open-door” policy in the 1980’s, the procurement
approach used in their construction industry was changed from a centralised
government system to the more competitive bidding and tendering system.

This paper reports on the development of the new procurement approach; known as
DaiJianZhi in China. It describes the features and arrangements of this procurement
approach and discusses the opportunities that it provides for foreign practitioners who
wish to enter the Chinese construction market.

Keywords: DaiJianZhi, procurement approach, China

Introduction

The past two decades have witnessed a rapid development of China’s economy.
Since China’s “open door policy” of 1978 ushered in a period of economic reform,
China has achieved remarkable success in its economic development. To
accommodate the rapid expansion in demand for building and infrastructure, China’s
construction industry has achieved extraordinary growth and has become the
backbone of China’s economy (Low and Jiang, 2003).

The construction industry is vital for China, especially for the development of public
infrastructure. In 2003-04, the total value of production brought about by the
construction industry reached RMB 957.2 billion (US$ 115.77 billion 1 ), contributing
7.0% to the Gross Domestic Product (GDP) (National Bureau of Statistics of China,
2005). This was an increase of 14.5 percent over the previous year’s efforts (RMB
818.1 billion).

By the end of 2004 there were 53,309 Construction enterprises in China. These
enterprises employed 25,579,000 people (more than 3.4% of the total labour force)
and generated RMB 2,774.538 billion in gross outputs and RMB 566.589 billion in

1
Foreign exchange rate is US $100 = RMB 827.69 in July 30, 2004. Source: Bank of China,
http://www.boc.cn/cn/common/whpj.html

1
added value. The Industry had completed 1,281.63 million square metres of floor area
and had some 2,919,390,000 square metres under construction.

This rapid growth has raised a series of concerns from both Government and
academic circles about the management of Government funded projects, especially
with respect to the chosen procurement approach.

This paper reviews the development of DaiJianZhi and its applications as a new
procurement approach in China This will provide foreign practitioners with an
understanding of the procurement approach and serve as an indicator of the services
they can offer the Chinese Government to better manage these types of projects.

Legal person

The Chinese State Planning Commission (which forms part of the National
Development and Reform Commission) issued a policy that requires a Legal Person
to be chosen for all capital construction projects immediately after the approval of the
feasibility study report (SPC 1996).

A legal person must be an organization that has the capacity for civil rights and for
civil conduct and independently assumes these rights and obligations in accordance
with the law (General Principles of the Civil Law of the People’s Republic of China
1986). The legal person can be an enterprise, or an Official Organ, Institution and
Social Organization, or an Economic Association.

According to the laws and regulations General Principles of the Civil Law of the
People’s Republic of China, the project legal person (project entity) is responsible for:

• project incubation and earlier-stage preparation

• financing
• organization and execution of the construction
• check and acceptance of the project on completion
• debt repayment
• portfolio asset management
• the preservation and adding of invested assets value

Why DaiJianZhi ?

Traditionally, a “Project Headquarters” is established to take charge of the whole

project process on behalf of the Government for all government-funded projects. The
Project Headquarters is a temporary organization, which is established at the
inception of the project and is dissolved after the project has been commissioned. The
role of the Project Headquarters during the project process is to act as the project
owner on behalf of the Government.

CEIN (2006) cites a series of issues that derive from such an approach i.e.
• The managers of the project often have a general management background.
Accordingly they may not have the skills and knowledge of contract law,
construction economics and contract administration essential for the successful
management of the project.

2
 • There are a series of competing and overlapping (in function) temporary
organizations established for the project. Similarly, the knowledge and
lessons learned from the project can not be retained or be transferred to future
projects as the Project Headquarter is dissolved right after the completion of
the project.
• It is not unusual for project outcomes to exceed both the original scope and
budget of the project.
• The government, through its representative organization is responsible for all
aspects of the project ranging from the investment strategy through to
construction, management and the sourcing of an end user. This results in a
complex process that is not always transparent and can lead to corruption at
various stages of the process.

Definition of DaiJianZhi

Daijianzhi is a kind of procurement approach, where a special consultant (Agent) is

employed by the client (via tendering) to be responsible for the facilitation of the
project from its inception. The Agent is responsible for controlling the investment,
quality and schedule as well as the transfer of the facility to the end user (State
Council of P.R.China, 2004).

During the period between being engaged as the agent and transferring the facility to
the User unit, the Agent is acting as the Project Entity and covers the Legal Person’s
responsibilities. The Agent charges the Government and the Project Owner the agent
fee, consultant fee and bonus (from cost savings). They also bear the relevant risks
relating to the project management and consulting service. They are not responsible
for the specific risks relating to the design or construction of the project.

A number of non-profit public sector projects have used DaiJianZhi as the

procurement approach since 1999. By April 2005, 16 major projects in Beijing alone
had used DaiJianZhi as the procurement approach. The total investment reached
RMB 0.96 billion (NDRC 2005). These projects include:

• HuiLongGuan Hospital development

• You’An Hospital redevelopment
• DongBa Hospital development
• Beijing Centres for Disease Control and Prevention development
• Main Hall of Central Conservatory of Music development

Relevant laws and regulations

The relevant laws and regulations include:

3
Regulations Issued by Date issued

Decision of the State State Council July 2004

Council on Reforming the
Investment System

Administrative Measures Beijing Municipal March 2004

for the use of DaiJianZhi Commission of
in government invested Development and Reform
construction projects in
Beijing

Standard Conditions of Beijing Municipal Nov 2004

Contract for the use of Commission of
DaiJianZhi in government Development and Reform
invested construction
projects in Beijing

Instructional advice on the Ministry of Finance April 2006

finance management of
government-funded
DaiJianZhi projects
Table 1 Relevant regulation for DaiJianZhi projects

Other Provinces (e.g. Guangdong, Chongqing, Hunan, Tianjin, Guizhou) also issued
similar regulations in order to facilitate the implementation of DaiJianZhi in their
regions.

Stakeholders

The stakeholders in a typical DaiJianZhi project include:

• The Government
• The Project owner
• The Agent
• The contractors, design institute and supervision engineer
• The User unit

Their roles and responsibilities are illustrated in table 1.

4
Stakeholders Roles and responsibilities
Government • approve the feasibility study report and project proposal;
• arrange the allocation of funding on the approved projects;
• establish a company to be the project owner; and
• regulation of the project management market in the
construction industry
Project owner (the legal • choose the Agent (project management consultant) according
person) to the Standard Contract Conditions for DaiJianZhi projects;
• in charge of financing and management of investment;
• being audited by the Department of Finance
Agent (project • providing project management services (design,
management consultant) procurement, construction, etc.) according to the Contract;
• under the supervision of the Government and project owner
contractors, design • provide various services to achieve the project objectives
institute and supervision (e.g. design and construction);
engineer • receive instructions from the Agent
User unit • make it clear what are the real requirements from the end
users;
• managing and operating the completed project (facilities);
• under the supervision of the Government and project owner
Table 2 Roles and responsibilities of various stakeholders in a typical DaiJianZhi project

Figure 1 Layers of the management of a DaiJianZhi project, adopted from Yan & Yun 2006

How does it work?

The process of DaiJianZhi projects is illustrated in Fig. 3.

5
Figure 2 The process of DaiJianZhi projects

6
Opportunities for foreign practitioners

The DaiJianZhi approach has achieved a lot success in government-funded projects.

However, the practice has also given light to some issues that will need to be
addressed in the future i.e.

• too many government authorities with conflicting demands are involved in

DaiJianZhi projects
• The qualification of the Agent may not always be appropriate for the project
• the approach used to select the Agent may not always be appropriate
• the fee charged by the Agent may not always be appropriate
• the conflicts between the Agent and the User Unit will need to be addressed

According to the literature, the capacity of the Agent to undertake the task is one of
major issues that need to be addressed. In some cases, the Agent has not been able to
co-ordinate the various groups involved in the project towards common project
objectives, and this has resulted in poor project performance (Xiao 2006). Similarly,
the Agent is required to provide a security bond certificate issued by the bank. The
security bond should be 10-30% of the total cost of the project which can be a
significant amount for large projects e.g. RMB100million plus if the total project
cost is 1 billion RMB. Normally the supervision engineer firms and project
management consultant firms are candidates for the position of Agent. However, the
registered capital of the supervision engineer firms and project management
consultant firms is only RMB 1 million which means that there is a significant risk
factor in appointing an agent whose registered capital is significantly less than the
required security bond and questions their ability and possible attitudes to manage
risks for the project, (Gu and Zhang 2006; Sun et al. 2006).

Both the Ministry of Construction and the Ministry of Commerce issued a joint
document in January 2007 to encourage and regulate the entry of foreign investment
firms when providing consulting services in construction projects. This policy,
Regulations on Administration of Foreign–Invested Construction Consultancy
Enterprises has been effective from 26 March 2007. This has opened the door for
foreign consulting firms to become involved in DaiJianZhi projects.

Foreign practitioners have the following advantages when choosing to become Agents
in DaiJianZhi projects:

• they have better experience in practicing construction management and project

management in construction projects
• they have better capabilities to co-ordinate various firms towards a common
goal (project objectives)
• they have better capacity to bear risks with higher registered capital

Conclusion

DaiJianZhi is a new procurement approach in China for Government-funded projects.

Private industry has also shown a liking for this approach and there have been
significant increases in the use of DaiJianZhi in the private sector.

7
DaiJianZhi is similar with the Construction Management or Project Management
approach where a consultant (Construction manager or Project manager) is engaged
by the client to manage the project from its earliest stages. DaiJianZhi differs from
the CM or PM approach as the Agent also acts as the Legal Person during the project
process. For instance, the Agent can decide on how to spend the funding for the
project. The Agent is also responsible for both the preservation of the asset and for
ensuring that it increases in value.

Both the construction management approach and project management approach have
been used for a long time in the construction industry in western countries.
Accordingly western practitioners have a real experience advantage which can
translate to significant opportunities when they enter the Chinese construction
market where they can provide relevant services to the Chinese government.

References

Chinese Construction Engineering Information Network 2006, The legal issues in

government-funded projects, accessed online, July 8, 2006. (in Chinese).
http://www.cein.gov.cn/news/show.asp?rec_no=11837,

General Principles of the Civil Law of the People’s Republic of China, Order of the
President of the People’s Republic of China No.28, 1986.

Gu H.C. and Zhang, Y.Z. 2006, Discussion about the Agent-Construction System of
Governmental Project in China, Journal of Chongqing Jianzhu University, Vol.28
No.5, pp.126-128

Low, S.P. and Jiang, H. (2003) Internationalization of Chinese construction

enterprises. ASCE Journal of Construction Engineering and Management, Vol.129
No.6, pp.589 - 98.

Ministry of Construction and Ministry of Commerce 2007, Regulations on

Administration of Foreign–Invested Construction Consultancy Enterprises, Beijing,
P.R.China.

National Bureau of Statistics of China (NBSC) 2005, China statistical yearbook-2005,

China Statistics Press, Beijing.

National Development and Reform Commission 2006, Report on the economic

system reform in Beijing city, access online, September 15 2006. (in Chinese).
http://www.ndrc.gov.cn/rdzt/gggj/dfxx/t20060822_81021.htm

State Council of P.R.China 2004, Decision of the State Council on Reforming the
Investment System, Beijing, P.R.China

Sun H.C., Li, S. and Wu, F. 2006, The discussion of the management of government-
funded projects via DaiJianZhi model, Shanxi Architecture, Vol.32 No.22, pp.208-
209.

8
Xiao, Z.S. 2006, The discussion of DaiJianZhi model in the government invested
construction projects, FuJian Construction Science, No.6, pp.85-87.

Yan, L, and Yun, Y.L. 2006, Management performance improvement of agent system
for government invested construction project, China Civil Engineering Journal,
Vol.39 No.11, pp.120-126.