INTERNATIONALIZING THE JAPANESE CONSTRUCTION INDUSTRYISSUES OF OPENING THE MARKET AND RECOMMENDATIONS
Shunji KUSAYANAGI
Kochi University of Technology

often seen in international construction contracts.

1. PREFACETo deal with the WTO requirement related to theAs such the construction contracts do not envisage

procurement of public projects is now becoming one“the mutual mistrust” among the contracting

the most essential issues in the Asian countries.

parties and are accordingly prepared to complement

Japan is the one of the countries who has accepted

the confidence of the contacting parties. The

WTO requirements when the issues were shifted

Japanese construction management assumes “thefrom GATT to WTO. It was in January 1996 whenmutualJapansignificantly lacks management technology required

implemented

the

now

systemofthetrust”

inimplementing

projects

andprocurement of public rejects in accordance withfor managing “the mutual mistrust area”.

WTO. It has already past over 10 year’s time since

The internationalization of the market necessitates

then. However, the construction industry in Japan

bringing the management field of mutual mistrust

still keeps many matters that shall be maintained

into the core place. If the Japanese construction

and/or restructured. Very few people in themarket is opened without doing so, there will be aconstruction

strong likelihood that Japan’s construction industry

industry

andthegovernmental

managed with inadequate protective functions would

organizations have become aware of its necessity.
business

suffer great loss. Moreover, if the present system,

practices between Japan and the other nations

which has many unsuitable matters to WTO

underlies in the recognition of a contract. Unlike to arequirements, remains unchanged, confusion willcontract prepared with the aim of managing the area

reign amongst Japanese owners, contractors andof the mistrust in other nations, a contract in theforeign construction firms leaving Japan in a very

Japanese society is comprehended as a thing thatdifficult position in relation with other countries.

complements “the confidence” in the contracting

A foreign contractor may feel uncomfortable toparties.

accept the unclear provisions and one-sided clausesThe

fundamental

differenceinLooking at the stipulations of the standard

in the Japanese construction contracts, and mutual

conditions of construction contract being applied

confidence assumption in the contract is not practical

now in Japan, although it incorporates necessary

to be the basis of international contract. Openprovisions to respond various problems to becompetitive

encountered during the execution of construction

provisions and clear procedure for the claim andwork, the settlement of disputes is left todispute settlement are necessary in order to fully

deliberations between the parties. The provisions

internationalize the Japanese construction market

have not been developed to describe the methods ofand to make the industry fair, transparent andsettling the disputes as specifically as possible asattractive to the global players of the construction.
1

tenderingsystem,fair

contractualThe problems for implementation in accordance

2. THE HISTORY AND CONTEMPORARY

with WTO requirements are not the existence of the

SITUATIONS OF OPENING THE

unique business philosophy but many systems

CONSTRUCTION MARKET

established based on the unique business practices.

The issue of entry for foreign firms into the

The contents of the standard conditions of contract,

Japanese construction market was triggered when thethe tendering system, awarding and contracting

USA demanded US contractor participation in thesystem, quality management system, payment

tendering for the Kansai International Airport

system in Japanese construction industry are all

construction project in 1986. The negotiations in theestablished based on the “the mutual trust”.

Japan-US Construction Arrangements in May 1988

Thereforenot

had reached to Major Project Arrangement regarding

structured with the mind of the defense and/or

the participation of the foreign firms in Japaneseprotection from other parties. Once some one who

public works.

has no idea to respect “the mutual trust” system, andpublic construction projects in order to provide

tries to treat those systems with offensive mind, heopportunities for foreign firms, mainly the US

easily will be able to manipulate the systems. This isconstruction firms to enter the Japanese market.

thosesystemsbasically

were

The talks had listed some specificthe essential problem that is seen in the JapaneseOn the other hand, through negotiations over aconstruction industry. The author made a study

long span from1986 to 1994 in the Uruguay Rounddescribing contemporary situation of opening market

negotiations of the General Agreement on Tariffs andand those problems and the counter measures. Some

Trade (GATT), a final comprehensive proposition forof the characteristics of the Japanese construction

Agreement

market which would be the major concern to theadopted on 15 December 1993 and it was become

foreign

Contrasting

effective in Japan form January 1996. The result offeatures of the Japanese construction market which

Uruguay round negotiations made the opening of theare not encouraging foreign contractors as comparedJapanese construction market more realistic. The

to the international market are presented. Necessary

extent to which the agreement is to be applied in thechanges required for internationalizing the Japaneseconstruction sector as decided by the GATT is shown

construction market are recommended.

in Table-1.

contractors

arediscussed.

onGovernment

Procurement

Table-1. Standard amounts stipulated by GATT on Government Procurement Agreement
Organization
National Government

Local Government

Governmental

Work classification

Organization
Construction Services

DesignandConsulting services

Contract amount SDR

Contract amount SDR 15

Contract amount SDR 15

4.5 million (JPY 730

millionmillionmillion) or more

million) or more

million) or more

Contract amount SDR

Contract amount SDR 1.5

Contract amount SDR 0.45

0.45 million (JPY 73

million (JPY 250 million)

million (JPY 73 million) or

million) or moreor more

more

2

(JPY

2,430

(JPY

2,430

was

Although the Japanese construction market is one

means the authorized sub-contractors. This systemof the largest in the world the flow of foreign firms

shall be big barrier for foreign contractors when theyto Japanese construction market was not so exciting.

want to start business. The problem for foreign

The number of foreign firms registered in Japan forcontractors entering the market is not limited todoing construction business since 1988 is shown inabove mention matter. The main problem shall be “aFigure 1. Some of the problems which have inhibited

culture gap”. In consideration to the reality in thein internationalizing the Japanese construction

international construction market place operating

market are discussed below.

under the principle of fierce competition, theJapanese construction market seems very strange.

3. Fundamental issues in internationalizing theJapanese industry has maintained and still functions

Japanese Construction Industry

under the business environment stabilized by thea) Recognition of foreign firms

principle of cooperation. Because of such unique

As shown on the Fig-1, 94 foreign firms haveculture foreign firms have been received as guests,

already got license for construction in Japan as ofwhich mean the guests are not regarded as

year 2007. However, the number of licensed firms

competitors on an equal footing. As the matter of

had not drastically changed since early 1990s, and it

fact, all most all of foreign contractors had not got

did not change even though after the Agreement on

project by themselves. They became member(s) of

Government Procurement was become effective.

Joint Venture or Consortium led by Japanese firms.

Why the number of licensed firms had not drasticallyThis is the situation so far we can see about foreignchanged?

firms’ issue. Many people in Japanese construction

One of the reasons that can be considered is that theindustry say that the foreign firms’ issue will not big

Japanese construction industry is very conservative

problem because they can not expand their businessto accept foreign contractors. Almost all of big

easily.

contractors have their own grouped sub-contractors

opinion. There is other way to expand business in the

who will work for them but not work for othermarket for them foreign firms.

contractors. They should be called “Meigi-nin” thatis not only to get projects as a contractor but also to

However, the author has the different
To expand businessmerge or to acquire a Japanese construction firm. It
100
90

83

81
80

75

77

80

83

70

and hammers but with management techniques and

83
79
74

70
number of licensed firms

means they do not come into the market with scoops

95 94 9490

88

money. That is much realistic and safer way for

72
68

64

expanding business in the foreign markets. Actually60

many EU contractors are using this way for entering

50

foreign markets. This scenario will not only be

40
40 34

talked about Japanese construction market but also

30

in other countries.

2010b) Business practices

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

0

The fundamental difference in business practicesYear

between Japan and the western nations underlies in

Fig-1. Number of foreign firms licensed for constructionin Japan.

Source: Hand Book of Kensetsu Gyo 2007

the recognition of a contract. Unlike to a contract
3

prepared with the aim of managing the area ofcompetitiveness in the international construction

mistrust in the western and other nations, a contract

marketplace, even though they possess manyin the Japanese society is comprehended as a thing

capacities such as high degree of engineeringthat complements the confidence in the contracting

prowess, quality control, safety control, timely

parties. Looking at the stipulations of the Standard

completion, etc. appreciated by their owners.

Conditions of Contract being applied now in Japan,

present system of management in the Japanesealthough it incorporates necessary provisions toconstruction industry on the basis of mutual

respond various problems to be encountered duringconfidence where problems are coped with through athe execution of construction work, the settlement ofspirit of cooperation between the client anddisputes is left to deliberations between the parties.

contractor can be understood spiritually but would

The provisions have not been developed to describe

hardly be accepted practically by foreign firms

the methods of settling the disputes as specifically asentering the Japanese market.

possible as often seen in international construction

The internationalization of the market necessitates

contracts.

bringing the management field of mutual mistrustThe

into the core place. If the Japanese construction
market is opened without doing so there will be ac) Management in the construction businessAs such the construction contracts do not envisagestrong likelihood that Japan’s construction industry

the mutual mistrust among the contracting parties

managed with inadequate protective functions would

and are accordingly prepared to complement thesuffer great loss. Moreover, if the present system

confidence of the contacting parties. The Japaneseremains unchanged, confusion will reign amongst

construction

Japanese

confidence

managementinassumes

implementing

mutualprojects

owners,contractors

andforeignconstruction firms leaving Japan in a very difficult

andposition in relation with other countries.

significantly lacks management technology required
for managing the mutual mistrust area. Doingbusinessunder

confidence

circumstances

cannotbewhereestablishedmutualrequires

4. IMPROVEMENT REQUIRED IN OPENINGa

THE CONSTRUCTION MARKET

management system that always takes into accountSome of the unique systems prevailing in Japanesethe potential risk of being attacked by acontractually opposite party and one that is

Management field mutual distrust exists anmutual confidence exists.

equipped with the functions of protecting from such

Schedule
control

attacks.
Figure-2 conceptually illustrates the project
management

functionsasin

Cost control

Management field wheremutual confidence exists
Labo
contr

Information
controlinternational

Management field
where mutual
mistrust exists

construction market with the mutual mistrust at its
core. However, the Japanese management system
Subcontractor
controldoes not envisage the mistrust area and will behollowed out at its core in fig-2 if used in

Equipm&matercontrol
Qualitycontrolinternational market place. This is one of thereasons why it has been difficult for Japanese

Procurement
control

Fig-2. Management field mixed
with mutual confidence and distrust

construction and consulting firms to gain real4

construction market that may not be equally valued

higher tender (than the target contract price) outrightby other sense of values, the western for instance,are very unusual practices as compared with otherwhich prefer clear stipulations on the roles andnations’. The incorporation of a transparent system

responsibilities of the contracting parties with legal

forprotection, are discussed below.

evaluation are prerequisite for making the industrya) Tendering systemtransparent and providing fair opportunities for the

The tendering system in Japanese public works

foreign contractors.

consisted of selective designated tendering in which

Now days the public project owners led by MLIT;an owner selects certain number of contractors from

the Ministry of Land, Infrastructure, Transport andhis list and the designated tenderers require to tender

Tourism, started to change their tendering system.

for a lump sum contract. The tenderers estimate their

They stopped the selective designated tendering

tendering amount with the basis of the amount thatsystem and started new system so call “Openthe project owner set up as the project budget.

competing tender” that has no limitation of tender

However, this project budget will not be simple

participation. They also started to ask tenderers tomeaning of the budget.

It is called “Yotei Kakaku”

submit a short statement explaining idea related toin Japanese. It can be translated to “the scheduled

execution of the works and the breakdown of theprice”, actually it is “target contract price”. The

tender price. The problem is that this kind of actions

interest of the listed contractors in tendering for the

are not restructuring the system for opening the

project is not considered in advance, and if amarket, but it is for getting back the publicdesignated contractor declines to tender for a project

confidence. Therefore, it will not be the measure

the contractor may not be selected by the owners fordevised to deal with the issue of internationalization

certain period of time to tender for future projects.

of the construction industry.

selectingcontractors

anddetailed

tenderMoreover, the tender is rejected outright without any
negotiation if the tender price is greater then theb) Standard conditions of contract

owner’s target contract price for the project, and inProcedures for settling issues

case of that all tenderers put prices more than the

The standard conditions of contract for public

target contract price, they shall be asked to put new

construction works incorporates provisions forprices without changing the tendering conditions.

mutual deliberations between the parties to settle the

The submission of tender requires a contractor toissues such as change in scope, completion date,submit a single page tender document stating theadjustment to the contract amount due to design

total tender price without breaking down the cost.

change, etc. without stipulating clear provisions for

The client evaluates the total tender price with thesettling the claims and disputes. The settlement oftarget contract price without assessing the details of

issues is limited only to arbitration referred to a

the items of work and corresponding rates. The“dispute settlement committee for construction

tender is awarded to the lowest tenderer.

works”. However, a supplementary clause followed

A designated competitive tendering is not anby the arbitration provision dictates that “matters not

unusual system in international construction market.

prescribed in contract documents shall be settled by

However, the contractor selection method in Japan isthe parties through deliberations as required”.

less transparent, and penalizing the contractor for not

As such mutual confidence is the basis ofsubmitting tender for a project and rejecting theJapanese contracting system both the parties (project5

owners and contractors) considering their positions

distinct provision on contractor’s claim.

make efforts to find their bearings throughsituation in Japanese construction contracting systemdeliberations without clearly specifying the methods

might have arisen from the idea that the contract hasof settling the issues. However, if in case the base of

been made on the basis of mutual confidence,

respecting

off-balanced

however such stipulations restricts the contractor

deliberations may turn into collision of feelings

rights to demand for his rightful due where amaking it more difficult to settle the issues.

contract is made on legal basis.

Internationalizing a market allows the entry of

There is strong likelihood of demanding moredifferent ideas and sense of values. The deliberationrights than realities through use of unilateralused for settling the issues in traditional Japaneseconditions intentionally and is done as a routine

practice can not function well as the different sense

matter in the international marketplace. The Japaneseof values enters the market. Clear and transparent

client will suffer a great deal from the inflow of themethods of settling disputes become necessary inforeigninternationalizing the market. The author has been

conditions are remained uncorrected properly to

explaining this matter in his papers since WTO

protect the rights of the contracting parties and tomatter was started to discuss but very few people

block contractor’s unfair demands.

other’spositioniscontractors

if

the

current

Suchunilateral

could understand the magnitude of the problem.
Diversified contractual provisions
Unilateral conditions in the standard conditions of

In Japanese, public construction contracts are madecontractin lump sum basis and there are only a few contract

Unilateral conditions are observed in the standard

documents from which the scope of work can beconditions of contract for public construction work.

grasped systematically. Bill of quantities (BOQ) is

These provisions are mainly related to the contractor

not a binding document and the drawings are only

right to demand for addition cost and/or time aroused

the sources to estimate quantities. Thus the actual

due to change in design, conditions, etc. For instance, scope of work remains at large and the contractor
the article on procedure for adjustment of contract

estimate depends on the quality of drawings

price reads as follows

prepared for the project. The contract do notincorporate provisions for re-measurement, progress‘Adjustment of the contract price shall be

payment, value engineering and do not accept

determined through consultations between the owneralternative proposal in the tendering. In addition, theand contractor. However, if an agreement on

Japanese public construction contracting system has

adjustment of the contract price is not reached

not envisaged the CM; construction management

between the owner and the contractor within (…)

contracting system.

days of initiating consultations, the owner shallIn order to improve the efficiency in the execution ofdetermine the adjustment of the contract price, andthe construction project through the use of

the owner shall notify the contractor of thediversified foreign as well as local contractors andadjustment’.

consultants Japanese contracting system need toreform to incorporate provisions for re-measurement,

Similar provision can be seen on adjustment ofprogress

construction period also. In addition, there is noconstruction management.
6

payment,

value

engineeringandcontractors with different sense of values entered thec) Process Control system

market. In order to track the changes and

The bill of quantities, the method statement andmaintaining the required progress the critical path

construction

importantmethod (CPM) scheduling and it’s computer soft

documents for the execution of project are not awares should be employed and be made binding on

binding document on the contractor or owner inboth the contractor and client.

schedule

chart,

these

Japan. Why are these documents not binding in thecontract? The explanation note of the standard

5. CONCLUSIONS

conditions of contract says that since the contract is

A foreign contractor may feel uncomfortable tothe lump sum, it is not reasonable to contractuallyaccept the unclear provisions and unilateral clauses

bind the process of each activity but only contract

in the standard construction contracts, and mutual

amount and completion date shall be contractuallyconfidence assumption in the contract is not practicalbound. The idea may be understandable by the

to be the basis of international contract. Openpeople who do not have an experience working atcompetitive

tenderingsystem,the actual project site.

provisions

andprocedure

Since the construction schedule chart is not a

management including claim/dispute settlement arebinding document, it will not be the common

necessary in order to fully internationalize thepractice to use CPM schedule method but a simple

Japanese construction market and to make thebar chart method has been employed as the common

industry fair, transparent and attractive to the global

scheduling practice in Japanese public works

players of the construction. It is not only for the new

execution.

comers from other countries but also the local people

The supervision and progress monitoring depends

working in the industry as well.

clear

fair

contractualforchangeon the client’s interest and if the specifications or
drawing requires the client to observe the works and6. REFERENCES:

materials. The contractor can change the work

1) "Agreement on Government Procurement," Apr.
15, 1994
2) Central Council on Construction Contracting
Business, "Standard Stipulations of PublicWork Construction Contracts," Revised on Jan.
24, 1989
3) Hand Book of Kensetsu Gyo 2007 Japan
4) Keiichi Tadakazu, " Foreign Legal Business and
Lawyer System: History of Acceptance andScope of Business," NBL-Nos. 375-378
5) Shikai Rengo (the Japan Federation of Four
Construction
Associations),"Standard
Stipulations for Construction Work Contracts,"
Revised in Sept. 1981
6) Shunji Kusayanagi and P. B. Hatlry, "LookAgain at Quality Circles," ASCE Civil
Engineering Magazine, Apr. 1984

sequence freely provided that the completion date is
ensured.

Thus supervision and monitoring ofworks is not systematic because the completion dateis the only milestone of the project, and the qualityof the works depends on the honesty of thecontractors.
The change management in Japanese public works
is more abstract as the BOQ and work schedule are
not the binding on the client or contractor, and thetime and/or cost compensation for the change
conditions of the contract depends generally on themercy of the owners. The mutual confidence
between the client and contractor in Japaneseconstruction industry may be lost due to unclear
process control system when significant number of77) Shunji Kusayanagi, Ken Watanabe and Tutomu
Kumamoto, "Problems in Overseas Projects andConstruction Cost Control," 47th JSCE's
Annual Scientific Lecture Meeting, Group No.
6, General Lecture VI-16, Sept. 1992
8) Shunji Kusayanagi, Tutomu Kumamoto, and
Ken Watanabe "Structuring Task Systems forOverseas Projects," 48th JSCE's Annual
Scientific Lecture Meeting, Group No. 6,
General Lecture VI-246, Sept. 1993
9) Shunji Kusayanagi, "Contract Management
Technology of International Construction
Projects Related Closely to Daily Tasks," 49th
JSCE's Annual Scientific Lecture Meeting,Group No. 6, General Lecture VI-278, Sept.
199410) Shunji Kusayanagi, "Cost Control Technology
Aiming at Systematizing Project Management
on International Construction Marketplace,"
JSCE Proceeding No. 504, VI-2, Dec. 1994
11) Y. H. Chiang, Michael Anson & John Raftery,;
The Construction sector in the Asian
economies; 2005

8