REALWorld Law


Allocation of risk

What risks in a construction or engineering contract are normally borne by the contractor? To what extent is force majeure relevant in such contracts?



Construction contracts have to deal with quite a number of instances where risks have to be allocated between principal and contractor. The following examples may be highlighted:

  • Each construction contract must determine who is responsible for providing planning and engineering. In a traditional distribution of responsibilities plans and drawings should be provided by the principal. If such plans contain matters which the contractor could not reasonably be expected to find out about, the risk will be born by the principal. Hence, the principal will have no warranty claim against the contractor if the building is not fit for purpose after completion. The same rule applies if the contractor realises that the drawings contain an error, notifies the principal about this in writing but is given an instruction to continue on the basis of the existing plans. 
  • In a construction contract which is subject to the Civil Code, the contractor bears the financial risk involved in being responsible for the works carried out until they are accepted by the principal. Should the works being carried out be destroyed prior to acceptance, basically the contractor must start again at its own cost. This rule is slightly changed in contracts subject to the contracting rules for the procurement of public works (VOB/B) – the contractor is entitled to claim remuneration for the parts of the work which it has already carried out. However, there is no responsibility on either party to compensate for other damage incurred in the event of force majeure. 
  • The practical relevance of the issue is limited. Mostly, parties agree who should take out insurance for the construction works. 
  • Under VOB/B, the contractor is entitled to an extension of the construction period in the event of an interruption by force majeure. Force majeure includes an act of God, war, an uprising or other circumstances which are beyond the contractor's control and for which the contractor is not responsible.
  • Another feature where a proper allocation of risk has to be considered in a construction contract is 'ground risk' (Baugrundrisiko). Unless otherwise contractually agreed the principal bears this risk. The principle of ground risk under German law refers to the person which bears the risk (in terms of additional time requirements or additional costs) in a situation which is influenced by the actual ground conditions on the site of a proposed building being different from those expected at the time of the instructions. These risks are often attributed very specifically to one or the other parties by contractual provisions.