What Foreign Contractors Should Know About Working in Latin America


4th August 2014

Infrastructure development in Latin America provides exciting opportunities – but what risks should potential builders be aware of?

By Jerry Brodsky

If the topic of infrastructure development in Latin America is of interest to you, be sure to check out Latin Trade’s event TradeAméricas& Connect Americas Expo, held in partnership with the Inter-American Development Bank on September 3 & 4 in Miami.

In many ways, construction of a project, whether private or public, is notvery different when the project is in Latin America as opposed to the United States or anywhere else. Since the laws of nature and physics apply equally everywhere in the world, physical, atmospheric, weather and hydrological conditions under which construction projects are executed should not surprise seasoned builders.

So what differences should foreign contractors working in Latin America expect to see and prepare for? The major differences affecting projects arise from non-natural, non-physical, and totally man-made factors such as laws and regulations, social conditions, quality and skill of local labor and local industry customs, which have a direct impact on construction projects.Therefore, foreigncontractors should understand and be prepared to deal with unique risks and challenges resulting from local practices anddifferences in laws and regulations, which will affect their operations.

While each of the aforementioned key “differences” warrants in-depth treatment and discussion, a good first step is to identify and understand the types of issues involved.

Jerry Brodsky,  Director of the Latin American practice group in the Miami office of the national construction law firm of Peckar & Abramson, P.C.

Jerry Brodsky, Director of the Latin American practice group in the Miami office of the national construction law firm of Peckar & Abramson, P.C.

Laws and Regulations

• Differences in Civil Law and Common Law systems–An important difference a contractor will encounter in Latin America is that every country in the region has a civil law legal system, compared to the common law legal system in the United States (except Louisiana which has a civil code system).The contractor’s projects will be regulated by numerous codes, statutes, rules and regulations, from various levels and forms of government, all impacting all aspects of the new operation.Engaging proper local counsel is the key first step to facing this challenge.

• Performance Bonds: Buyer Beware–Contrary to the common practice for contractors in the U.S. to provide surety bonds for 100% of the contract value, the general practice in Latin America is for such bonds, or their local equivalents, to cover only between 10%-20% of the contract value. The biggest impact of this difference, beyond premium costs, is that ownersin Latin America cover this “security gap” by requiring that contractors provide alternate security, such as letters of credit, insurance, and parent company or individual guarantees.

In addition, the terms “surety bonds” and “performance bonds” can and do have different meanings throughout Latin America, and the differences can be, in some cases, dramatically important. For starters, these types of bonds are not only issued by sureties, as is the case in the United States, they are also issued by banks in some countries. When they are issued by banks, instead of sureties, these instruments can be subject to banking laws, rules and regulations, which can affect how the instruments are interpreted and enforced. Contractors should seek proper local counsel and guidance to understand the risks involved.

• Risk of Legal Instability–Throughout Latin America, as well as everywhere else in the world, the business decisions and operations of contractors, like all other legal professional endeavors, are based on and regulated by existing and future laws, rules and regulations. The risk of shifts and changes in the applicable laws, rules and regulations is likely toaffect contractors, and requires proper local guidance and a good understanding of conditions on the ground, as well as local history and tendencies.

Heightened Risk of Local Impacts

Regardless of who legally bears the risk of differing ground, environmental, or social conditions affecting construction projects, the size of the contingency is relevant to all involved parties.The size of the contingency for these types of risks depends, to a significant extent, on the amount and quality of available information and on the degree to which such information is shared with all who could benefit from having it prior to contracting. Accurate information about existing conditions allows owners andcontractors to better value and price these contingencies and better information translates to acloser optimum risk allocation.

Many of the infrastructure projects being developed in Latin America are located in remote sites, wherethere is limited and, in some cases, noinformation or studies of existing conditions. This lack of information translates to highercontingencies and costs as the parties are required to allocate the risk for unknownground,environmental,and social issues.

Proper management of environmental and community issues requires, in addition to information, proper local guidance and engagement with all private and public parties involved.

Heightened Risk of Lower Productivity

Construction projects in Latin America, as a region, experience lower productivity rates than those in the United States and other parts of the world. For example, according to the Boston Consulting Group, Latin America accounts for at least 20% of the global infrastructure deficit, which is largely attributable to low productivity levels. Lack of planning, slow government approvals, and financial strains account for much of the drag, which delays projects in Latin America, in some cases, to uncompetitive levels. Addressing the local productivity index by combining investment in training and development of local skills with skills imported from other regions provides a balanced short-and long-term approach designed to narrow the gap and need for imported skills over time.

Conclusion

Latin America provides contractors with numerous business opportunities because of the demand and necessity of infrastructure projects in the region. Contractors are attracted to these opportunities because they representinternational expansion and financial growth. However, a contractor’sshort-and long-term success in Latin America starts with proper local counsel and an understanding of the natural and man-made local conditions.

Florida Board Certified Attorney Jerry Brodsky is the Director of the Latin American practice group in the Miami office of the national construction law firm of Peckar& Abramson, P.C. He can be reached at jbrodsky@pecklaw.com.

dennis rodriguez
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