Contracting in Latin America: a quick guide for foreign companies dealing with construction contracts
As a region Latin America is forecasting to emerge from a period of stagnant growth in 2018. As a result, the region is progressively becoming a destination for foreign capital investment. With this in mind clients are increasingly exploring the ways in which they can engage the supply chain and protect themselves against risk.
This insight gives an overview of the prevailing contracting modality in the selected countries and provides some advice on common pitfalls and things to avoid.
It is important to understand that in most Latin American countries, there are often two distinct markets and hence it is hard to generalise on trends. These two markets are the ‘local’ market and the ‘multi-national’ market. Multinational clients, consultants and contractors are driving change in contracting modalities and this is affecting standards of project delivery, management methodologies and the professionalising of the construction industries.
Rory Wallace, Turner & Townsend Chile Country Manager, said:
"Contractors still have a strong claims culture – claims are not dealt with as they occur but pile up at the end of the project"
Latin America tends to be dominated by countries that have a Civil Code legal system. This is very different from the Common Law legal system and clients need to be aware or take advice on the implications of this when drafting and executing contracts.
The protections that you think your contract gives you in the Common Law legal system may not exist in the Civil Code system and vice versa. Most, if not all international standard forms of contract need amending to suit the Civil Code and local country’s legal system.
Prevailing contracting forms
There will obviously be exceptions to every rule and we would advise that just because a region does something a certain way does not mean that it cannot do things differently. With careful market engagement and training, clients can often achieve good results by pioneering an approach rather than following the status quo.
|Country||Local Standard Form(s) used||International Standard Form(s) used|
|Argentina||Argentina has various forms prepared by CPAU (Consejo Profesional Arquitectura y Urbanismo). The use of these forms is not mandatory. Clients also draft bespoke contracts.||Use of FIDIC is reasonably prevalent, driven principally by large multinational companies.|
|Brazil||No local standard forms. Contracts are developed in house by Developers/Clients. To be enforceable, the contract needs to be in Portuguese.||Use of FIDIC is reasonably prevalent; Also some examples of the use of NEC.|
|Chile||No local standard forms.||Not in common usage. FIDIC has been used to some extent.|
|Colombia||No local standard forms. Contracts are developed in house by Developers/Clients.||Not in common usage. FIDIC has been used to some extent.|
|Costa Rica||No local standard forms. Contracts are developed in house by Developers/Clients.||Use of FIDIC is reasonably prevalent.|
|Mexico||No local standard forms. Contracts are developed in house by Developers/Clients.||Emerging usage of some international standard forms.|
|Peru||No local standard forms. Contracts are developed in house by Developers/Clients. Contracts need to be in Spanish language.||Large infrastructure projects are beginning to use NEC, FIDIC and PPC2000.|
In the last 10 years, Turner & Townsend has delivered over 250 projects across Latin America in the Real Estate, Industrial, Natural Resources and Infrastructure sectors. In that time, we have learnt much that guides our approach to developing contracts and contracting strategies and managing projects.
We summarise some of our key learnings below.
Key lessons learned:
- Contracts are not read; do not rely on them as a management tool. However, contracts can be useful tools provided that you embed the right behaviours in the project team from the outset.
- The Civil Code protects a supplier far more than you think, to the extent that some of your contract clauses are left impotent – adapt your management strategy to compensate for this.
- In some regions, the slow and cumbersome legal system has deterred litigation - this has caused a culture where enforcing the contract carries no threat.
- Lawyers in the region have a tendency to direct clients towards bespoke contracts - we have seen very few examples of good bespoke contracts.
- Standard forms will require minor amendments before they are legally enforceable; allow time for this and ensure that your team understand the changes and your business understands the implications of the changes in risk allocation.
Eduardo Morelli, Turner & Townsend Argentina Country Manager, said:
“The use of standardised contract forms is paving the way for the local construction industry to be more efficient, minimising project risks and standardising a common language of understanding”.