Vietnam: Amended Construction Law adopted with more clarity on regulatory compliance in construction projects

In brief

On 17 June 2020, the National Assembly of Vietnam passed Law No. 62/2020/QH14 on amendments to the Construction Law ("Amended Construction Law"). The Amended Construction Law takes effect from 1 January 2021 and will supplement and amend the current Construction Law No. 50/2014/QH13 dated 18 June 2014.

The Amended Construction Law reflects the government's effort to clarify and simplify licensing procedures for construction operations as well as to distinguish regulatory procedures for each of the investment forms (including private investment, public-private partnership (PPP) and public investment).

From a project developer's perspective, the Amended Construction Law introduces certain practical changes that address unclear points under the current legislation. Along with further guidance documents, the government expects that this change in law can stimulate investment into construction projects for both private investment and PPP investment projects.

Key takeaways

The Amended Construction Law makes the following key changes, among other things:

  • narrowing cases of projects that require a preliminary feasibility study (Pre-FS) report
  • changes to cases of exemptions from the construction permit
  • clarifications on FEED design as a design formulated after the step of basic design
  • new compulsory insurance for construction contractors
  • changes to preconditions for the commencement of construction works

Apart from the above, there are some other changes provided by the Amended Construction Law concerning new required content of Pre-FS, a one-stop shop for authorities' review on construction design, and term clarification.

It is necessary for both the project owner and construction contractor to understand this legal amendment to ensure their best legal position in developing or carrying out a project in Vietnam.

In addition to reviewing substantial provisions, developers should also consider the legal transition process until the Amended Construction Law's effectiveness. While the Amended Construction Law generally becomes valid on 1 January 2021, certain provisions have an early effective date of 15 August 2020. 

The Amended Construction Law contains provisions that are to be guided under further implementing decrees and circulars. The government plans to have the draft guidance documents by December 2020, with an overarching aim to simplify administrative procedures and stimulate construction investment.1 

Therefore, please do not hesitate to contact us if you would like to know more about any of the following:

  • further details and other areas of the Amended Construction Law, as well as current regulations in relation to construction operations
  • specific implications and effects for energy and infrastructure construction projects, including LNG-to-power and other energy projects, water supply and treatment, expressway airport, seaport infrastructures, real estate, etc.
  • potential upcoming additional guidelines in relation to the Amended Construction Law and other legal documents in relation to construction operations
  • legal and practical solutions to issues from the front-end stage to the back-end in relation to a construction project in Vietnam

In more detail

Narrowing cases of projects requiring the formulation of a preliminary feasibility study (Pre-FS) report 

The Amended Construction Law introduces new criteria to determine projects that are required to have a preliminary feasibility report ("Pre-FS"). From the amendments, project developers must formulate a Pre-FS in the following cases:

  1. projects of national importance or Group A projects funded by public investment capital
  2. projects required for the preparation of a Pre-FS under the law on PPP investment 
  3. projects whose investment policy decision (IPD) is under the approval authority of the National Assembly and the prime minister in accordance with the Investment Law 

In addition, the project developer can formulate the Pre-FS on a voluntary basis. Pre-FS preparation and appraising order will be decided based on the project's investment form. Public funded projects, PPP projects or independent private projects will be subject to specialized laws (i.e., Law on Public Investment, the PPP Law or Investment Law, respectively). 2

A private project developer may benefit from the new list because, compared to the current construction law, the new list narrows the cases requiring a Pre-FS.

Under the current law, if an independent private project that has not been approved in master plans is classified as a national importance or Group A project under the classification of the Law on Public Investment, the project is subject to the Pre-FS requirement. This classification covers a wide range of projects, including projects with an investment of VND 800 million (approximately USD 33 million). 

On the other hand, under the Amended Construction Law, only a private project subject to IPD's approval authority of the National Assembly or prime minister must have the Pre-FS. Compared to national importance and Group A projects, such project is more limited with a higher value of investment (e.g., VND 5 trillion) or from specific industries (e.g., oil and gas exploitation, airport, seaport).

New cases of construction permit exemption

The Amended Construction Law maintains a general approach that a construction permit is compulsory before construction commencement, except for certain projects under the exemption list. The change under the Amended Construction Law is on the list of construction permit exemptions.

A new exemption is a construction work in which the construction authority has appraised the construction design formulated after the basic design, and it satisfies the conditions for granting a construction permit.

In addition, there are certain notable changes to the list of construction permit exemption cases:

  • abolishing the current construction exemption case for projects approved by the prime minister, ministries, heads of ministerial equivalent agencies or chairpersons of people's committees
  • abolishing the current construction exemption case for construction works in rural areas within a region for which neither a master plan for urban development nor a detailed construction master plan is approved

Therefore, project developers may need to review the new lists of construction exemptions for the best plan for complying with the project development regulations.

Clarification on FEED design 

The Amended Construction Law clarifies that the Front End Engineering Design ("FEED Design") is a construction design formulated after basic design. Therefore, project developers will determine the relevant procedures to appraise or approve the FEED Design with more certainty.

Construction designs under the current construction law are classified depending on the number of design steps. If the project adopts two design steps, the construction designs in the project include basic design and then detailed drawings for building construction works. For three-step design projects, there are basis design, technical design and then detailed drawings for building construction works. Each stage of design is subject to different evaluation procedures.

The following design step will be based on the prior design step and will provide more details (e.g., the technical design is in line with the basic design and contains more technical details and contents). Under the current construction law, construction designs formulated after the basic design include technical design and the detailed drawings. Under the new law, construction designs formulated after the basic design include the FEED Design, technical design and detailed drawings for building construction works and other designs (if any) under international practices.

The FEED Design, being common in international practice, has been adopted in Vietnam, particularly in projects under the EPC/turnkey delivery method. However, project developers face uncertainty in complying with design appraising requirements under current construction law because, although the FEED Design is recognized in certain guidance decrees, there is no official provision on the FEED Design in the construction law. 3

This new clarification under the Amended Construction Law demonstrates the government's effort to clear the uncertainty issues faced by project developers that engage foreign construction contractors or use international construction standards.

New compulsory construction insurance for construction contractors

The Amended Construction Law introduces a new compulsory insurance for a construction contractor. Instead of being encouraged to purchase as per the current law, a contractor for building construction works will be required to purchase insurance for civil liability to third parties. 

After this change takes effect, a contractor for work execution must purchase two construction insurances: (i) insurance for employees involved in the execution of building works on-site; and (ii) insurance for civil liability to third parties.

The insurance for civil liability to third parties is currently guided by Decree No. 119 and Circular No. 329. Decree No. 119 currently recognizes insurance for civil liability to third parties as an encouraged insurance, not compulsory. In addition, Circular No. 329 outlines implementation provisions of insurance for civil liability for third parties. 4

Project developers are recommended to follow up with this legal development of the compulsory insurance in order to ensure their best position in construction contract drafting. Meanwhile, construction contractors should review this requirement for the purposes of regulatory compliance.

Changes to preconditions for construction commencement

The Amended Construction Law provides changes to conditions for the commencement of construction works. Notable changes include:

a. abolishing a condition that project developers must have arranged sufficient capital funds in accordance with the construction works schedule

The abolishment of the condition for a capital fund arrangement provides more flexibility for project developers as they can arrange financing separately since it can be difficult to prove the "sufficient" capital arrangement under the current construction law, which confuses project owners regarding regulatory compliance and which might expose the project owner to an administrative fine. 

b. adding a new condition that project developers must have notified the local construction authority about the commencement date of construction at least three working days before the construction commencement

This authority's notification is not a new requirement since the current construction law also requires project owners to notify the local authority about the commencement. However, the Amended Construction Law now stipulates this notification as a condition to construction starting and reduces the notifying time requirement from seven to three working days prior to the commencement.

Other changes to construction regulations

In addition to the changes mentioned above, there are other adjustments on certain regulations and terms, including the following:

a. New content of Pre-FS

The Amended Construction Law adds the preliminary environmental impact assessment as a new item in the report of Pre-FS. Project developers in Pre-FS-required projects may need to review this environmental assessment item in accordance with relevant environmental protection regulations.

b. One-stop shop for basic design appraisal

The Amended Construction Law provides a one-stop shop regime to simplify the authority's review of the basic design and firefighting and prevention measures. From 1 January 2021, project developers can submit a design appraisal dossier to the construction authority responsible for seeking and collecting opinions from firefighting police authorities on fire safety measures.

c. Changes to projects that require the authority's appraisal on construction design

The Amended Construction Law changes the criteria in determining whether a project must have a construction design appraised by a construction authority. As such, an authority's appraisal will be required for construction works that:

  • materially affect the environment and community safety; and
  • are constructed in areas without an urban master plan, master plans of special functional zones, and detailed rural master plans. 

d. Replacement of the term "State capital" project

The Amended Construction Law replaces term "State capital" with "Public investment capital" and "State capital not from public investment." This is an update for consistency with the Law on Public Investment and the law on using state capital in enterprises. 5

This adjustment provides clarity for certain projects where project developers are in partnership with state-owned enterprises (e.g., PetroVietnam or EVN). Project developers of projects involving "State capital" under the existing regulations should review the change to identify the relevant implications to their projects.

Remaining issues for consideration

Certain legal issues of the current construction law remain unchanged in the Amended Construction Law. For example, the Amended Construction Law does not have any substantial changes in relation to construction contracts and foreign construction contractor licenses. 

Regulations governing construction contracts lack clarification in the case of private invested construction projects. Most of construction contract regulations and forms are applicable to state-funded construction projects. Given the lack of guidance, there is uncertainty for parties (i.e., project owner and construction contractor) in negotiating and executing contracts. For example, a construction contract even with foreign entities is still required to use Vietnamese language. Given the lack of clarification of "used in Vietnamese," there is a strict interpretation that parties have to execute the construction contract in Vietnamese in addition to another language version of the contract.

In addition, the current construction law requires a foreign contractor to obtain a construction operation license (i.e., foreign contractor license) before carrying out any construction activities on Vietnamese territory. Given the broad definition of "construction activities" in law and the lack of clarification on this licensing requirement, foreign contractors could face uncertainty as to whether they are carrying out a construction activity and if they are required to obtain a foreign contractor license.

Transition process until the effectiveness of the Amended Construction Law 

The Amended Construction Law takes effect from 1 January 2021. However, there are certain exemption cases that are coming into force early, as well as transition provisions for consideration on a project-by-project basis.

The following notable provisions enter into force on 15 August 2020:

  • construction permit exemption for works that have obtained appraised construction design formulated after the basic design
  • change of competent authority issuing construction permits to construction works of special grade, from the Ministry of Construction to the local People's Committee

In addition, there are transitional processes to be reviewed specifically for each project: 

  • Construction projects that have their IPD decided or approved before the effective date of the Amended Construction Law are not required to prepare a Pre-FS.
  • Construction investment projects that are approved before the Amended Construction Law's validity are not required to be re-approved. Subsequent activities that have not been implemented will be in compliance with the Amended Construction Law. 
  • For projects in operation, cost management shall be continued as per the law before the Amended Construction Law.
  • For construction works whose construction designs were formulated after the basic design have been appraised before 15 August 2020, project owners can be issued a construction permit under the current construction law if the owners request so.
  • For construction works that have a construction permit, if there is any amendment to designs formulated after the basic design from 1 January 2021, the construction permit will be required to be amended as per the Amended Construction Law, except for the case where there is a request for authority appraisal on construction design after the basic design for the amended construction works.
  • Construction works that have been commenced without a construction permit as allowed under the current construction law before the effective date of the Amended Construction Law, but are subjected to construction permits under the Amended Construction Law, can continue their construction.

Project developers should take into consideration the legal transition process to see whether they have any impact on their ongoing projects. 

1 Resolution No. 84/NQ-CP of the government dated 29 May 2020 on action plans of the Ministry of Construction.

2 Law No. 39/2019/QH14 of the National Assembly dated 13 June 2019 on public investment ("Law on Public Investment").

3 The FEED Design is defined under Decree No. 37/2015/ND-CP of the government dated 22 April 2015 on construction contractor. However, this decree only applies to state-funded projects and, in addition, the definition of FEED Design therein is unclear.

4 Decree No. 119/2015/ND-CP of the government dated 13 November 2015 on compulsory insurance in construction and investment activities ("Decree No. 119") and Circular No. 329/2016/TT-BTC of the Ministry of Finance dated 26 December 2016 guiding the implementation of Decree No. 119 ("Circular No. 329").

5 Law No. 69/2014/QH13 on management and using state capital investment in the enterprises' manufacturing and business activities.

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