Two bodies of laws regulate the material legal relationships between the parties to a construction contract:
Whilst the provisions of the Civil Code apply automatically, the application of the VOB/B must be expressly agreed as an integral part of the contract between the parties. However, a simple Civil Code contract is rarely used for complex building projects. Since 1 January 2018, the Civil Code has defined a construction contract, consumer construction contract, architect and engineer contract and the construction developer contract and partly provides special provisions for each of those contracts. For the first time, building contract law was codified as a separate area of law, taking into account the complexity of the construction process and its specific requirements.
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In principle the erection, alteration, change in use or demolition of a building requires a building permit in accordance with state building regulations (Bauordnungen der Bundesländer). Such a permit will contain a declaration by the competent authority that the building project is in compliance with the provisions of public law. In detail the project must comply with:
Since the permit procedure can take a considerable amount of time, all state building regulations provide for fast-track procedures. In these cases, however, the building projects must still comply with any public law regulations.
Building permits must be obtained by the developer before the commencement of the construction works and expire within a period of between one and four years, unless the work has been started.
It should be noted that for special building projects additional permits under public law may be required (eg permits for power plants and industrial facilities).
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Apart from the general duty to maintain safety the Ordinance on health and safety on construction sites (Baustellenverordnung – BaustellV) sets out the main requirements with regard to health and safety on construction sites:
These requirements refer only to the construction site during the construction phase and not to the use of the development after completion.
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In particular, the following legal frameworks deal with environmental assessment and sustainability with regard to various aspects of construction projects, mainly as a consequence of stipulations made by the European Community:
In compliance with the EU Construction Products Directive aimed at encouraging the sustainable use of natural resources, the Construction Product Law (Bauproduktengesetz 2015) regulates the use of construction products and the application of the CE conformity mark in relation to the free movement of construction products within the European Community. In addition, other legal frameworks setting out requirements for the actual use of construction products, such as the building codes of the Federal States (Bauordnung), remain applicable.
The Energy Saving Ordinance (Energieeinsparungsverordnung – ENEV), which is based on the Energy Saving Law (Energieeinsparungsgesetz) sets out a framework to calculate the energy performance of buildings and the setting of minimum energy performance requirements. Separate requirements are set for new and existing buildings. In addition a new scheme of energy certificates has been introduced.
In May 2010, the European Parliament passed a Directive concerning the improvement of the energy efficiency of all buildings from 2021. Thereafter, the European Member States must introduce legislation securing the high standard for all buildings from 2021. Under others new buildings must be supplied with a higher share of renewable energy. This applies for public buildings already from 2018.
The German government worked on a new energy concept with a 10-point immediate action programme (28 September 2010). However, energy saving in buildings is a longer-term project and is therefore not covered in the immediate action programme. It is anticipated to reduce the demand for energy for building by 20% until 2020 and by 80% until 2050. New buildings must comply with the new high standards. Existing buildings have a grace period. The state will introduce incentives, but there will be no penalties. In case the redevelopment of a building to the high standards is uneconomic it is discussed to provide incentives for replacement building.
Both the Energy Saving Law and the Energy Saving Ordinance have been amended in order to achieve higher standards in the energy performance of buildings (the most recent version in force being dated 28 October 2015). The provisions of the Energy Saving Law,the Energy Saving Ordinance and the Renewable Energy Heating Law (Erneuerbare-Energien-Wärmegesetz) have been merged in the Building Energy Act (Gebäude Energie Gesetz), which came into effect on 1 November 2020. The Building Energy Act creates a uniform, coordinated set of rules for the energy requirements for new buildings, for existing buildings and for the use of renewable energies to supply heating and cooling to buildings. It fully implements the European requirements for the energy performance of buildings and defines the requirements for a low energy building. The Building Energy Act applies to construction projects for which a building application has been submitted with effect as of 1 November 2020. For all construction projects for which a building application has been submitted by 31 October 2020, the provisions from the Energy Saving Ordinance, the Energy Saving Law and the Renewable Energy Heating Law still apply.
In addition, the Renewable Energy Heating Law (Erneuerbare-Energien-Wärmegesetz), which applies to buildings erected after 1 January 2009 as well as to buildings held by public authorities and fundamentally refurbished after 1 May 2011, ensures that by 2020 at the latest 14% of the heating and hot water energy in Germany will be provided by renewable energy sources. In order to achieve this, the law contains obligations to use renewable energy sources and provisions relating to financial promotion and the expansion of heat networks by local authorities. It entitles the Federal States to implement laws which provide also that existing buildings must use renewable energy sources. From 1 November 2020 this law was replaced by the Building Energy Act as well.
Since the beginning of 2022, solar energy for buildings has been mandatory in some federal states. In Baden-Württemberg, for example, since 1 January 2022 there has been an obligation to install photovoltaic systems on all newly built non-residential buildings. From 1 May 2022, this regulation also applies to residential buildings that are newly built. Other federal states, including Berlin and Hamburg, have already passed corresponding laws. However, they will not apply until 2023.
The Energy Heating Law in its most current version from 2023 provides for an even more consistent switch to renewable energies and including an increase in the share of electricity from renewable energies to 80%, by 2030. Also, there are further regulations regarding the reduction of the permissible annual primary energy requirement for new buildings, adjustment of the simplified verification procedure for residential buildings, introduction of a primary energy factor for electricity for the operation of large heat pumps connected to the heating grid etc.
The German Institute for Standardisation (Deutsches Institut für Normierung e.V.) as a member of the ISO releases standards which become binding administrative regulations for construction works and products by virtue of references in legal frameworks.
The German Society for Sustainable Construction (Deutsche Gesellschaft für nachhaltiges Bauen e.V.) has, together with the Federal Ministry of Transport, Building and Urban Affairs, developed a certification system for buildings with regard to energy efficiency, hazardous substances and environmental requirements etc (Deutsches Gütesiegel Nachhaltiges Bauen). This certification system is not (as) yet binding, but may, however, give a competitive advantage. Besides the DGNB certificate, other certificate can be found on the German market such as BREEAM or LEED.
There are several more statutory regulations dealing with dangerous substances and chemicals (ie contaminated sites and ground water) which are, however, not directly linked to sustainable buildings.
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Any plot of land on which a development is planned must be connected to public infrastructure and utilities, otherwise the building authority may refuse to issue a building permit or may impose a building ban. In order to connect the project to the utility networks, the developer enters into an agreement with the relative utility supplier.
As for the connection to public roads, the municipalities may impose dues for the connection and may require the developer to transfer land to the municipality to facilitate the construction of a road. In this regard, it is particularly common for developers of large building projects to enter into agreements under public law which oblige them to construct the relevant connection at their own cost and then to transfer the areas on which the roadway has been constructed to the authorities free of charge.
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German law contains many mandatory provisions which cannot be summarised here. It is important to note that the Construction Contract Procedures Part B (VOB/B) are regarded as the model for general terms and conditions and if those are substantially departed from, individual provisions of the contract are likely to be checked by courts with the result that a court may declare one or more particularly onerous provisions to be invalid.
An important mandatory provision in construction contracts is section 650e of the Civil Code. Section 650e allows the contractor to get the benefit of security mortgage registered on the land register where the principal is the registered owner of the property. Contractors always have a right to ask for a bank guarantee covering the total outstanding amount due to them. Even if the parties agree on a 10% payment guarantee in the contract, the contractor may come back to the principal again and ask for appropriate security for the remaining 90% of the amount payable. Principals should usually comply with such requests because contractors are entitled to cease work if the payment guarantee is not provided within reasonable period of time.
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The Construction Contract Procedures (VOB) were developed by the German Procurement Committee for Construction Works (formerly the German Procurement Committee for Public Works Contracts). Due to the fact that the general law on contracts for work and services contained in the Civil Code is only of limited suitability in equally satisfying the interests of the contractor and the principal in construction law, the VOB was put in place. It is regarded as a useful instrument for properly reconciling the interests of the parties to a construction contract (principal and contractor).
The VOB consists of three parts:
Provisions released by FIDIC (the International Federation of Consulting Engineers) have limited relevance for construction contracts in Germany since the VOB/B has been shown to be a useful instrument. Public authorities are obliged to use the VOB/B in construction contracts they enter into. However, in contracts for engineering, procurement and construction services and in relation to projects in foreign countries FIDIC is widely used by German contractors.
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The instructing party who develops the construction project.
A contractor who has to provide all construction works and services to produce the entire building project and to perform the main part of the construction work itself.
A contractor who must provide all construction works and services required for the entire building project but only performs minor works or no work at all itself: most of the work is performed by third parties (sub-contractors).
A general or prime contractor who must not only provide all construction works but also all the planning work required for the construction project at the point the contract is entered into.
A contractor assigned by the general or prime contractor to perform parts of the construction works; sub-contractors may again contract other sub-contractors (sub-subcontractors) etc.
The party responsible for all matters relating to the planning and implementation of the building project, in co-operation with contractors, engineers and technical specialists, the architect develops the project and brings it to completion. At the same time the architect can be regarded as an agent promoting the interests of the principal.
The principal has no direct contractual claims against any subcontractor. Claims must always be asserted down the contract chain. The contractor may, however, assign his contractual claims against the subcontractors to the principal.
The principal may conclude the contract with a single contractor or with a consortium (ARGE), ie several companies. Whereas a single contractor is generally engaged for small construction projects or for the performance of some parts of larger construction projects, a consortium is normally involved for larger projects.
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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:
Last modified 3 Apr 2023
Although state and federal governments try to promote public private partnerships, the concept is not as common in Germany as for example in the United Kingdom. A number of public bodies have developed master documents for public private partnership schemes. There are quite a number of examples of public private partnership projects in Germany, for example schools and other public administrative buildings, but the concept is still not as widely spread as some of the larger construction companies would wish. Public perception is still influenced by the fact that a scheme for the imposition of a toll on lorries on motorways (Toll collect) was procured by the federal government in a manner which may or may not have been competent and effective.
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In Germany it is possible for parties to enter into fixed price contracts (Pauschalvertrag), in which the parties agree on a total price for the carrying out and completion of the contract for work and services. In this case the remuneration of the contractor is determined before the start of the construction works. The relevant sections of the Construction Contract Procedures Part B (VOB/B) under which the remuneration is adjusted if additional costs exceed 10% of the amount originally agreed upon are not applicable. The contractor is paid the price irrespective of the actual work, unless the principal has made a request for additional services.
Fixed price contracts are usually agreed in relation to turnkey projects (schlüsselfertige Bauvorhaben). However, for large projects, a combination of fixed and unit prices may be agreed leading to a guaranteed maximum price.
From a practical standpoint, it is important to know that, although the law allows parties to agree on a fixed price, contractors are usually quite skilled at finding ways around the fixed price limit. In a typical construction project the contractor will issue several change requests and notifications of delay both aiming at establishing a reason to increase the price payable. The arguments are usually that there were unforeseen changes which require extra payment and that the principal delayed works by withholding decisions or not providing plans in time, etc.
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There are various ways for a contractor to insure itself against risk in the construction process. It can obtain contractor's liability insurance (Haftpflichtversicherung). In addition, works in progress can be covered by contractor’s all risks insurance (Bauleistungsversicherung) including cover against damage and theft. Damage to works in progress caused by natural disasters such as storms, earthquakes and flooding can also be covered by advance building insurance (Gebäudeversicherung).
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The Construction Contract Procedures Part B (VOB/B) dealing with security are mostly supplemented and detailed in the construction contract. In particular, the contracting parties commonly agree on the following types of security:
Generally the contractor must provide a performance guarantee amounting to 10% of the gross contract value. However, it should be noted that under the jurisdiction of the Federal Court of Justice an on demand performance guarantee cannot be stipulated in general terms and conditions.
The amount of any payment/prepayment guarantee is also generally 10% of the gross contract value. In order to ensure that claims for the remaining remuneration are not unsecured at the end of the construction process, it is advisable for the contractor to agree that the prepayment guarantee only expires at the completion of the construction project.
Where agreed, the principal may hold back an amount of up to 10% of each instalment and the final payment as security. Generally the parties agree that at the time the final invoice is issued, the retention is reduced to 5%. This is then paid into a blocked account unless the contractor provides a contractually agreed warranty guarantee in order to release the amount. An on-demand warranty guarantee cannot be agreed on in general terms and conditions.
Under the German Civil Code the contractor is entitled to register a builder's security mortgage on the relevant plot of land owned by the principal.
Again under the German Civil Code the contractor has a claim against the principal for the delivery of a guarantee in the amount of the total remuneration owed – including remuneration for any variations – so far as not yet paid but contractually agreed plus 10% for ancillary claims. The guarantee, which can be issued by a bank or a credit insurer, is of more practical relevance than the builder's security mortgage. In the event that the guarantee is not provided the contractor may cease work.
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The contracting parties may agree on various pricing arrangements. The following terms are provided for by the Construction Contract Procedures Part B (VOB/B):
Payments are usually made in instalments according to the progress of the works already carried out. In relation to defects, the principal can make retentions or even refuse to pay instalments, Section 16 para. no. 2. Usually the construction contract sets out the payment schedule, the instalments and the effects of defects to the payment claims. Advance payments are usually secured by bank guarantees. The final account (Schlussrechnung) ensures the final settlement of the project, and precludes any subsequent claims.
The principal is only obliged to remunerate the contractors engaged by it directly. Where sub-contractors are engaged, these are not remunerated by the principal but by the relevant contracting party (ie the general or prime contractor or other sub-contractors). Sub-contractor agreements mostly follow the payment arrangements described above.
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In principle, the tender documents contain the deadlines in respect of which observance is of major importance to the principal. Once engaged the contractor is in most cases obliged to provide the principal with a detailed time schedule for execution and control management in accordance with the deadlines set out by the principal.
The contracting rules for the Construction Contract Procedures Part B (VOB/B) draw a distinction between binding and non-binding deadlines. Generally, a binding deadline must be expressly indicated as a contractual deadline in the construction contract. However, the start and finishing dates for the performance of the works are always contractual deadlines. On the other hand, non-binding deadlines only facilitate the principal in control the building work and monitoring progress.
Whereas a culpable failure to meet a contractual deadline may entitle the principal to claim against the contractor for damages and/or a penalty, failing to observe non-binding deadlines will only give the principal a claim for damages or even a termination right in certain cases. The principal may first ask the contractor to take immediate action if there is a shortage of labour, equipment, scaffolding, materials or elements which are endangering the contractor's ability to observe the performance deadlines.
From a practical standpoint, it is important to note that contractors normally try to find justifications for extending the applicable deadlines. They have a right to do so if they can prove that the principal issued instructions which delayed the works or withheld decisions or failed to supply plans in time, etc.
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The scope of works and services to be provided by the contractor depends on the specifications (Leistungsverzeichnis) which usually give all necessary information.
In principle variations can be made in the scope of the performance set out in the specifications at any time. Agreements on supplementary performance or variations or follow-up orders (Nachträge) are of great practical importance. However, subsequent modifications to the scope of performance or to other circumstances may lead to a change in the contractor’s right to remuneration. Under the contracting rules for the Construction Contract Procedures Part B (VOB/B) the following five reasons may result in a contractor being entitled to demand additional remuneration:
In view of such potential additional claims, variations should be kept to a minimum by means of careful planning in advance.
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The law does not specify when completion under a construction contract is achieved; this depends on the contractual agreement between the parties. The civil law term which indicates that building works are completed in accordance with the contractual agreement is 'acceptance'. Acceptance is a statement by the principal to the contractor that the contractor has substantially performed the work contracted for in compliance with the construction contract. A work shall also be considered as accepted if the contractor has set the principal a reasonable deadline for acceptance after completion of the work and the principal has not refused acceptance within this period, stating at least one defect (so called 'fictitious acceptance'). The principal must reserve the right to assert claims for damages at the time of the acceptance unless otherwise agreed in the construction contract.
Under the Contracting rules for the Construction Contract Procedures Part B (VOB/B) the principal is obliged to accept the work if after completion the contractor demands that it is accepted. The principal can deny acceptance where there are material defects until they are remedied.
The VOB/B provides for three types of acceptance:
In contrast to acceptance under civil law, public law provides that the completion of a building in accordance with the building permit must, in principle, be certified and submitted to the competent building authority by the principal or the construction manager (Bauleiter).
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Under the German Civil Code claims in respect of construction contracts become statute-barred after two years in relation to works whose result consists in the manufacture, maintenance or alteration of a moveable asset or in the rendering of planning or monitoring services for this purpose, and after five years in relation to works whose result consists in the manufacture, maintenance or alteration of a building or works consisting of planning or monitoring services for this purpose, and apart from this, after the regular limitation period of three years.
Where the contracting parties have agreed to apply the contracting rules for the Construction Contract Procedures Part B (VOB/B) it is common not to apply the warranty periods specified there of between one and four years depending on the type of work. In derogation of the VOB/B the parties often agree on different periods on a case-by-case-basis, namely:
In maintenance contracts, the parties usually agree on longer warranty periods. Although in principle the parties are free to agree on warranty periods, indefinite warranty periods or periods of an unreasonable length will not be effective. It is therefore better to agree on the usual time periods.
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Whether the person procuring or carrying out building works is liable for damages or losses suffered by the end user(s) as well as the extent of such liability depends on whether a contractual relationship exists between these parties:
Whilst liability under a contract can be limited to a certain extent, liability under the law of tort cannot be excluded effectively.
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In general, there is no contractual relationship between the parties employed in the design and construction of the development (architects, engineers, other consultants, main building contractor and sub-contractors) and the end users of the completed building. These parties will only be responsible for damage under the law of tort (ie a culpable breach of regulations providing for the security of end users or culpable interference with the absolute rights of the end users). Pure economic losses are in principle not covered by this liability.
Due to the fact that it is in most cases easier and more beneficial for an end user to claim against its contractual partner (ie landlord/developer) or quasi-contractual partner (ie prospective business partner), an end user would usually claim damages from that contractual partner and not enforce damage claims under law of tort against the parties employed in the design and construction of the development.
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In principle, third parties who are not parties to the construction contract are not able to recover financial losses from the original designers and contractors involved in the construction project. However, the party, which enters into the contractual relationship with the designers and contractors, may in theory include rights and safeguards in the construction contract in favour of a third party. Though, the practical relevance of such agreements is in fact low to non-existent.
In addition, the contracting party may assign its rights under the construction contract to the financing bank, eg claims for damages or in respect of any warranty. Even where the claim for damages, which the contracting party may have against the constructor or designer, differs from the damages actually suffered by the financing bank or the purchaser, the bank or purchaser will nevertheless be provided with some security in this way.
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Due to the amounts involved in such cases (usually above €5,000) the Regional Courts (Landgerichte) deal with legal disputes relating to construction projects. The Local Courts (Amtsgerichte) deal with cases involving smaller amounts. Some Regional Courts have special chambers for construction matters. In accordance with the new construction contract law, the Regional Courts and the Higher Regional Courts (Oberlandesgerichte) now have to set up civil chambers and senates which are specialized in disputes arising out of construction contracts.
The local jurisdiction of the civil courts depends on the location of the registered office of the debtor. The location of a branch office of the contracting party may also be chosen as the venue for any disputes. In addition, the location where the construction work is performed may determine the venue for legal proceedings. Because of these various possibilities, the parties usually agree on a specific venue.
Judgements or decisions of the Local Courts can be appealed in the Regional Court or the Higher Regional Court (Oberlandesgericht) and judgments or decisions of the Regional Courts can be appealed in the Higher Regional Court or the Federal Court of Justice (Bundesgerichtshof), depending on the specific matter in question. The ultimate court of appeal in Germany is the Federal Court of Justice.
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Many construction contracts lay down rules for arbitration, some are specifically developed for the construction industry:
In international construction contracts the arbitration procedures which are common in the international environment (such as ICC and others) apply.
The main difference between arbitration and court action is that arbitration is not public and there is no appeal. An arbitration award may not be challenged (except in extraordinary circumstances). In arbitration procedures you may choose your 'judges' to a certain extent and some think that this leads to more professional tribunals. The most compelling reason to opt for arbitration arises where an award needs to be enforced in a foreign country which is a member state of the New York convention. In this respect arbitration awards are much more easily enforced in foreign countries than court judgments.
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ADR by mediation does exist, but is rare. In major construction projects a mediator can be employed to provide for smooth working processes between the various parties involved.
Besides that, construction contracts frequently provide for determination by an expert as a first procedural step in relation to disputes over primarily technical issues (eg completion of the works or existence of defects).
Last modified 3 Apr 2023
What insurances need to be put in place by law or under a typical construction contract?
There are various ways for a contractor to insure itself against risk in the construction process. It can obtain contractor's liability insurance (Haftpflichtversicherung). In addition, works in progress can be covered by contractor’s all risks insurance (Bauleistungsversicherung) including cover against damage and theft. Damage to works in progress caused by natural disasters such as storms, earthquakes and flooding can also be covered by advance building insurance (Gebäudeversicherung).
Last modified 3 Apr 2023