FRANK L. McCLENDON : Rebuilding the Mideast : Lawyer Tells Smaller Firms How to Bid on Projects

When Iraq invaded Kuwait last August, the emirate’s ruler reportedly wept for his country. So did a number of U.S. companies whose work was disrupted in that country and in the region.

Now that things are slowly returning to normal in Kuwait, the tasks of parceling out reconstruction work and stemming the pollution caused by oil well fires has begun.

The major reconstruction jobs will be awarded mainly to a small group of experienced construction companies that have worked in the region for decades.

But Iraq’s devastation of Kuwait has been so thorough that many believe there is ample room for newcomers to participate in the country’s reconstruction.

One of those who sees opportunities for small companies in the huge job of rebuilding Kuwait is Frank L. McClendon Jr., a senior attorney in the Irvine law firm of Ernest Brown & Co. The firm, which specializes in international construction and environmental law, counts several major companies among its clients, including Fluor Corp. in Irvine.

McClendon, a transplanted Texan who was once an in-house legal counsel at Fluor, said it is tough but not impossible for newcomers to crack any Middle Eastern market.

McClendon has worked on Middle East-related legal problems for oil and construction companies for 15 years.

In a recent interview with Times staff writer Cristina Lee, he discussed the legal, business and cultural aspects of negotiating and striking deals in the Middle East.

Q. What legal services do you provide to companies that want to do business in the Middle East?

A. There are two types of services. One involves transaction work and it’s done at the beginning of a project. This is the fun part of the business because you’re creating something new. It involves working with the sales people and project managers to come up with the best ways to present a competitive bid.

It also includes analyzing the proposed contractual terms to determine unusual risks that may not be covered by insurance, adequacy of terms of payment, foreign exchange-rate risks, import/export restrictions on materials and equipment, possible work-permit problems for employees, and unusual host-country taxes. We also make recommendations on how best to deal with the risks in future bidding and negotiations.

When the contract is finally signed, attorneys are seldom involved again until a serious problem develops on the project, such as cost and schedule overruns.

That’s when the trouble-shooting service comes in. The attorneys are called in to try to recoup or minimize the company’s losses.

There’s probably 10 times more legal work for attorneys in such instances. It is not unusual for inexperienced contractors to keep such poor records that they discover their losses very late in the project.

Any time I get a call from a contractor and he believes that he’s losing like $300,000 on a project, I know at that moment he’s probably losing at least $1million.

Q. What do companies need to know about working in the Middle East?

A. One of the big problems facing foreign companies working in the Middle East arises out of providing bid bonds or performance bonds on new projects.

Many of the contractors think that performance bonds in the Middle East are the same as those in the United States. They think that if they do a good job, they don’t have anything to worry about. They expect the bonds to be released after the expiration date of the bond.

However, when you sign a contract with a government agency in the Middle East, they usually require a performance bond that is supported by an unconditional and irrevocable letter of credit from a local bank. The bond is usually equal to about 10% of the contract price. The owner of the project has the option to invoke the letter of credit if a contractor fails to perform to the agency’s satisfaction.

Since the letter of credit is unconditional, the project’s owner does not have to prove a deficiency in the contractor’s performance before demanding the funds on a letter of credit. So if a client is dissatisfied with the outcome of a $50-million project, the client can go to the bank and demand $5 million.

Q. What are some problems related to bid bonds?

A. Government bureaucrats usually find something wrong with the workmanship during the course of a project. When something goes wrong, the client may sometimes threaten to invoke the letter of credit unless the contractor meets certain new conditions. This demand may include a requirement to do additional work not included in the original contract, without payment.

That comes as a shock to many companies that are new to projects in the Middle East.

Government bureaucrats often view the bond as if it were money in the government’s pocket and which they don’t want to give up. So even if there may not be a real problem in the project, bureaucrats are reluctant to make a decision to release the money just in case something goes wrong with the project even long after it’s finished.

Normal accounting practice will treat an outstanding letter of credit as a direct charge to the balance sheet of a company. This reduces the company’s ability to get performance bonds on new projects. Without the ability to obtain performance bonds, companies eventually face going out of business.

Q. What does it take to be eligible to bid for projects in the Middle East?

A. The first step is to obtain a valid business license in the host country.

Most U.S. companies believe that obtaining a business license is a routine and easy procedure similar to qualifying to do business in the United States.

But this is normally a very difficult process in the Middle East. It can easily take between two months and a year to get a valid business license. This includes countries like Saudi Arabia, Kuwait, the United Arab Emirates and Oman.

To facilitate a business-license application, I’d advise a company to hire a law firm in the Middle East to do the paperwork necessary to obtain the license.

Q. How should companies without work experience in the Middle East prepare to bid for projects?

A. It will be extremely difficult for a company with no prior experience of working in the Middle East to just show up in a target country and say they want work. A lot of information about available projects is passed by word of mouth. You have to spend a lot of time in a target country to develop good contacts.

A good place to start is with the commercial attache at the U.S. Embassy. They’re usually very supportive of U.S. business interests and routinely make a big effort to accommodate U.S. companies looking for business in the target country.

Q. What should companies do to increase their chances of winning a bid?

A. I have used agents and I recommend that companies new to the area use them to get started. That’s because agents know how to approach members in the ruling family or the government ministers responsible for the projects.

Agents are local businessmen who are normally either a part of, or well-connected with, say, the ruling Al-Sabah family in Kuwait or the Saud family in Saudi Arabia. They are a vital and acceptable part of doing business in the Middle East. Even large international construction companies like Fluor Daniel or Bechtel use respectable local businessmen as agents.

Great care must be taken in choosing the agent because the reputation of an agent will reflect upon the U.S. company bidding for a project. If an agent has a very high standing in the local business community, the U.S. company being represented is assumed to be also a reputable and reliable company.

Q. How are agents paid?

A. The standard practice in the Middle East is that agents only get paid when a project is awarded to their client. The payment is usually in the form of a small percentage of the client’s revenue from the project.

Depending on the project, it’s usually between 1% and 2% of the total project revenue. In extreme cases, or if a project is relatively small, such as below $5 million, the agent might be paid as much as 5% of the project revenue.

Q. When should a company pay an agent?

A. The award of the project to a company should not automatically trigger a payment to the agent. It is important to put a provision in a contract with agents that they only get paid after the company starts receiving periodic payments from the owner of the project.

Some agents, however, are so well established that they are able to successfully demand that their out-of-pocket expenses be paid by their client regardless of the outcome of the bid or negotiation.

There is a trend in the Middle East for host governments to strongly encourage U.S. companies to enter into partnership relationships with local businessmen to bid on or negotiate for projects. This gives the local businessmen a larger stake in their economy and an incentive for the successful completion of new projects.

Q. How does the bidding process work in the Middle East?

A. If it’s a straightforward type of project, such as putting curbs and gutters on the streets, the bidding process will be similar to that in the United States. That is, the low bidder is likely to win the project.

When projects are more technically complicated, decisions are made more on the basis of a company’s experience in that country, personal relationships between the bidding company and the host government, and proven technical competence of the company.

While bids on U.S. public-works projects are open to the public, bidding on such projects is usually done behind closed doors in the Middle East.

The bidding process in the Middle East is normally used to reduce the number of bidders down to two or three contractors. Government decision-makers rely on their staff to act as review teams to reduce the number of likely contractors. However, the ministers can elect to influence the staff to include candidates of their choice in the final round. The government agency will then negotiate individually with these remaining contractors for the purpose of obtaining price concessions.

In the Middle East, there tends to be a greater reliance on established personal relationships and verbal presentations of the merits of a proposal than on the bid documents per se. In the United States, there’s a greater emphasis on the written proposal than on verbal explanations.

Q. What does the agent do during the bidding process?

A. The role of the agent is to advise the U.S. client on bidding tactics and even possibly advise them on what the other competitors are offering for the project and the tactics of the competitors. Of course, having access to this sort of inside information is not customary in the United States.

Q. How are decisions on awarding projects made?

A. A reputable local business agent often has friends or business relationships with members of a ruling family or government ministers whom they meet with informally after work hours. A normal business practice is for important government and business decision-makers to preside over informal meetings in the evening. This gives the agent an opportunity to discuss his client’s ability to successfully do the job.

It is customary in the Middle East for many important decisions to be made during these informal, after-hours discussions. This is an integral part of the decision-making process in the Middle East.

Q. How were some of the projects in the Middle East affected by the war?

A. The accumulation of unexpected costs by U.S. companies has been substantial as a result of the war. Many U.S. companies experienced extra costs immediately after Kuwait’s invasion last August. Some had to evacuate employees and their dependents when Iraq fired Scud missiles into Saudi Arabia. Housing costs and food for employees went up.

The first costs that impacted U.S. companies doing business in the Middle East were dramatic increases in insurance and security expenses. Some companies had to bring in security specialists to analyze the working conditions of their employees and recommend safety measures for avoiding war-related incidents or possible terrorist activities at construction and office sites in Saudi Arabia.

Some faced additional costs in trying to convince existing employees to remain in Saudi Arabia to finish the projects. Some employees felt they were entitled to hazardous-duty pay and were asking for 15% to 20% wage hikes.

Q. How did U.S. companies try to contain the extra costs as a result of the war?

A. I’m representing Fluor on a project in Saudi Arabia that saw a substantial increase in costs when Iraq invaded Kuwait. There was an acceleration in insurance costs to cover personal injury and death in a war zone. The premium just went through the roof.

Fluor and other U.S. contractors are asking the Saudi government to pay for the unforeseen costs arising from the war. The Saudis claim that many of the extra costs were risks accepted by the contractors when they signed their contracts. Many of the contracts in question were entered into before Iraq invaded Kuwait.

The Saudis argued that although there was an invasion of Kuwait, there were no active hostilities in Saudi Arabia before the allied forces invaded Kuwait. They were trying to pretend that everything was business as usual. But now that the war’s over, maybe there will be a relaxation of the Saudi attitude toward footing the extra costs, and maybe the U.S. companies can get some relief.

Q. What are some of the problems companies face in rebuilding Kuwait?

A. I would advise companies to explain fully to employees the toxic situation brought about by approximately 600 oil wells burning out of control and polluting the atmosphere. Companies should try to get the employees to sign a document acknowledging that they’re going into a toxic environment of unprecedented proportion. Hopefully, this will minimize the risk of future lawsuits by the employees that were there.

With all the toxic fires burning from the oil wells, it’s very important that companies fully disclose the hazardous nature of working in Kuwait. The companies should also closely examine their workers compensation-insurance policies to make sure that the employees are properly covered in the unfortunate event that a health problem arises.

The health of the employees should be the companies’ paramount concern. Companies should introduce stringent safety measures such as possibly issuing gas masks or housing the employees far away from the toxic work sites. They should also consider rotational leaves to get employees away from the toxic environment.