Vietnam’s economy and infrastructure are rapidly developing, fueling significant growth in the construction market. However, major construction projects continue to face significant challenges, particularly in securing skilled labor and high-quality materials. As a result, construction projects often rely on foreign contractors, presenting both opportunities and challenges for them. This is especially true given Vietnam’s legal framework as well as its licensing and compliance requirements, which can often appear complex and daunting.
This article aims to provide a comprehensive roadmap to guide foreign contractors in successfully obtaining and maintaining operational licenses in Vietnam.
Understanding the basics: What are the OLC and PMO?
A foreign contractor is defined as an organization incorporated under foreign law or an individual of foreign nationality who is selected to sign and execute a construction contract within the territory of Vietnam. A foreign contractor may act as a general contractor, a joint venture contractor, a main contractor, or a subcontractor. (Article 3.12 of the Decree 175/2024/ND-CP)
When participating in construction projects in Vietnam, foreign contractors should be aware of the following key terms under Vietnam law:
1. Operating License for Construction (“OLC”)
An Operating License for Construction refers to the license for construction activity, which is a legal document issued by a competent state agency in Vietnam to a foreign contractor for a specific contract. This license can be granted after the contractor has won a bid or been selected to undertake construction activities in Vietnam. (Article 3.10 of the Decree 175/2024/ND-CP)
2. Project Management Office (“PMO”)
Upon obtaining an OLC, foreign contractors may set up a Project Management Office at the project location, depending on the project.
For contracts involving construction planning, construction investment project preparation, construction surveys, or construction design, foreign contractors are allowed to establish a PMO at the registered headquarters of the investor or may proceed without establishing a PMO in Vietnam.
For contracts related to construction execution or construction supervision of projects that span multiple provinces, foreign contractors must establish a PMO in the locality where the construction permit has been issued. The PMO is only operational during the contract execution period and must be dissolved upon the contract’s termination.
An OLC is required for each foreign contractor (or consortium thereof) participating in a construction project in Vietnam. This means that if a foreign contractor engages in multiple projects in Vietnam, even if an OLC has been obtained for one project, a separate OLC is required for each additional project. Furthermore, a PMO must be established (if needed) for each new project in accordance with the applicable requirements.
Step-by-step process to obtain OLC and PMO
1. Preparation phase
During the preparation phase, it is essential for foreign contractors to prepare all the required documentation and ensure that all documents issued by overseas authorities are consular legalized (e.g., Incorporation Certificate and audited financial statements (AFS) for the three years preceding the application for the OLC) along with their certified Vietnamese translations. This step should be carefully managed to avoid unnecessary delays and costs.
Additionally, foreign contractors are required to form a joint venture with a Vietnamese contractor or engage a Vietnamese subcontractor. This requirement must be demonstrated through an In-Principle Agreement or a Joint Venture Agreement with a local subcontractor, unless the domestic contractors are unqualified to participate in such arrangements. Besides, we recommend checking the capability of the Vietnamese contractor (or subcontractor) intended for collaboration, to ensure that the requirements can be met for specific construction sectors under the law on construction.
It is important to note that the construction contract can only be executed after the OLC has been granted, which often presents significant challenges once the contract has been awarded, as the foreign contractor cannot commence operations until the OLC is granted. (Article 148 of the Law on Construction)
Finally, we recommend foreign contractors to consider in advance the appointment of the Head of the construction site (or Project manager), to represent the contractor in signing the documents necessary for the licensing and management of the PMO’s operations.
2. Application for OLC
Licensing authority: The Department of Construction (“DoC”). If the construction activities span two or more provinces, the competent authority is the DoC in the locality where the foreign contractor intends to establish its PMO.
Timeline: By law, the results are required to be issued within 20 days from the date the DoC receives a fully valid application. However, the actual timeline may be longer in practice due to the assessment process by the relevant authority.
3. Establishment of PMO
Notification to local authorities: Foreign contractors must notify the relevant authorities of the establishment of the PMO using the form attached in Decree 175/2024/ND-CP. This is to inform the authorities of the existence and operation of the PMO, including the Ministry of Construction (“MoC”), Ministry of Public Security, Ministry of Trade, Ministry of Finance (“MoF”), State Bank of Vietnam (“SBV”), Provincial People’s Committee, and the DoC.
Tax registration and compliance: Foreign contractors must register and pay taxes according to the provisions of Vietnamese law, implement accounting regimes, open accounts, and make payments according to the instructions of the MOF and SBV.
Staff hiring: Foreign contractors are also obligated to carry out the recruitment and use of Vietnamese and foreign workers in accordance with the provisions of Vietnamese labor law; only economic management experts, technical management experts and highly skilled people are allowed to work in Vietnam provided that the local workforce is not capable of fulfilling the roles.
4. Additional compliance requirements for foreign contractors
Regulatory compliance: They must comply with regulations on norms, standards, construction quality management, labor safety and environmental protection as well as other relevant regulations of Vietnamese law.
Purchase insurance: They are required to purchase insurance according to Vietnamese law for the contractor’s work.
Inspection of equipment: Foreign contractors are required to inspect the quality of imported materials and equipment supplied under the contract.
Compliance reports: Compliance reports on labor matters must be notified in a timely manner to all relevant state management agencies, notably regarding the termination of the contract and of the operation of the construction management office.
Proper documentation: In Vietnam, the importance of proper documentation in construction projects cannot be overstated. These documents must be meticulously prepared, signed, and retained for future reference. Failure to do so may lead to difficulties for the contractor when collecting the necessary documents to complete the project files upon completion of the project and construction work.
Key challenges and practical solutions
Challenges foreign contractors face
Language and cultural barriers: Vietnamese is the official language, and language and cultural differences in business practices and negotiation styles can lead to misunderstandings.
Complex regulatory processes: Navigating Vietnam’s regulatory landscape can be challenging due to complex and time-consuming procedures for permits and compliance.
Frequent changes in regulations: Regular updates in regulations, particularly regarding construction safety, labor, and environmental laws, can lead to delays and unforeseen costs increase.
Solutions and tips
To address these challenges, foreign contractors should work with local experts and advisors to carefully prepare the project and anticipate potential challenges. Our team regularly communicates with local authorities to stay updated on regulatory changes and current interpretation of the regulations.
Building strong partnerships with reputable contractors, suppliers, and subcontractors helps mitigate risks and streamline processes. Additionally, cultural training can improve communication and strengthen relationships with local partners, ensuring smoother project execution.
By leveraging these strategies, foreign contractors can enhance their chances of success in Vietnam’s construction market.
Conclusion
In conclusion, obtaining the Operation License Certificate (OLC) and establishing a Project Management Office (PMO) are essential steps for foreign contractors looking to operate in Vietnam. The key steps include completing necessary documentation, navigating regulatory processes, and ensuring compliance with local laws. Once the project is completed, contractors must prove their compliance with all relevant laws and tax regulations for a successful project termination.
Vietnam offers significant opportunities for foreign contractors, particularly in its growing construction and infrastructure sectors. By overcoming initial challenges and positioning themselves strategically, contractors can thrive in this dynamic environment.
To ensure smooth entry and sustained success, foreign contractors are strongly advised to seek professional legal assistance. Our legal and tax experts can help navigate the complexities of the regulatory landscape, ensuring compliance and avoiding costly delays.
