REALWorld Law

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

• Part A: 'General provisions on the procurement of contracts for construction work' – which contains the main regulations on procurement law. 
• Part B: 'General contractual conditions for the performance of construction work' – which contains several provisions differing from those of the Civil Code. However, the provisions of the Civil Code remain applicable up to the extent that they are not replaced by effective provisions of the VOB/B. The goal of the VOB/B is to provide a balanced set of regulations for construction contracts which suits the interests of both contracting parties. 
• Part C: 'General technical contractual conditions for construction work'.

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Principal

The instructing party who develops the construction project.

General contractor (Generalunternehmer)

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.

Prime contractor (Generalübernehmer)

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).

General planner and general contractor / general planner and prime contractor

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.

Sub-contractor (Subunternehmer)

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.

Architect (Architekt)

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

Performance guarantee

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.

Payment/prepayment guarantee

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.

Warranty guarantee

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.

Mortgage

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.

Payment guarantee

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The contracting parties may agree on various pricing arrangements. The following terms are provided for by the Construction Contract Procedures Part B (VOB/B):

• The unit price (Einheitspreis) is a price per unit of measurement of the quantity of work and services. The unit price depends on the estimated total quantity, which is estimated in the specifications and price schedules. 
• A fixed price (Pauschalpreis) is a total price for the entire carrying out and completion of the construction contract without any further assessment of the works actually provided. 
• According to the VOB/B hourly rates (Stundenlohnsätze) are only paid if expressly agreed in the contract beforehand. Such an arrangement is extremely disadvantageous for the principal since it pays for any shortcomings in the organisation, quality and diligence of the workers.

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. 

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

1. Change orders by the principal that is now also expressly regulated in Sec. 650b German Civil Code
2. Additional work subsequently requested by the principal
3. Work which deviates from the contractually agreed specifications and which the contractor performs without any instructions from the principal if the principal subsequently approves the work or if the work was necessary to perform the contract
4. Changes in the quantity of work of more than 10 percent in a unit price contract if either of the contracting parties demands this
5. Hindrance and disruption of the progress of the works caused by the principal

In view of such potential additional claims, variations should be kept to a minimum by means of careful planning in advance.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

• The acceptance may take place formally by the preparation of an acceptance report. Generally such reports contain a schedule of all defects, the scope of the acceptance, a declaration as to whether claims for damages are reserved and as to the commencement of the warranty period. In view of the duty of verification, in the event of a dispute, formal acceptance should be effected in all projects, not only those which are complex.
• Section 12 para. no. 1 of the VOB/B provides for what is known as a 'fictitious acceptance'. The work of the contractor is deemed to be accepted if neither party has demanded acceptance of the work within a period of 12 working days following written notification by the principal. A fictitious acceptance still requires that the work is free from substantial defects and is in compliance with the contract. Due to the fact that an oversight by the principal may lead to such acceptance, it may be advisable to exclude the possibility of fictitious acceptance from the construction contract. 
• Finally, if neither party has demanded acceptance and the principal has started to use the works or part of them the VOB/B provides for acceptance by estoppel. The use of parts of the works in order to continue other aspects of the construction project is not deemed to be acceptance. This implied acceptance also presupposes that the work is free from major defects and in compliance with the contract. It is excluded in most construction contracts.

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).

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

• Five years for building structures
• Ten years for roofs and water-proof concreted basements, and
• Six months to two years for movable or technical facilities

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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:

• Where there is a contractual relationship, the person procuring or carrying out building works is responsible for all physical damage and economic loss (reiner Vermögensschaden) which results from a culpable breach of the contract. The contractual partner of the end user is not only liable for its own conduct but also for the conduct of persons who assist in the performance of its obligations (Erfüllungsgehilfen). Finally, the burden of proof that it has not acted culpably lies with the contractual partner. 
• If there is no contractual relationship, the developer is responsible for damage suffered by the end user only under the law of tort. Accordingly, the end user can claim for damages in case of an intentional or negligent interference with the absolute rights of the end users (ie life, health, liberty, ownership) or a violation of regulations providing for the security of the end users (Schutzgesetze). In principle, mere economic losses are not covered under the law of tort. Although the person procuring or carrying out building works is liable for the actions of its agents (Verrichtungsgehilfen), it can exculpate itself if it has exercised reasonable care when selecting the agent. The burden of proof that the person procuring or carrying out building works acted intentionally or negligently lies with the end user.

Whilst liability under a contract can be limited to a certain extent, liability under the law of tort cannot be excluded effectively.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Many construction contracts lay down rules for arbitration, some are specifically developed for the construction industry:

• Arbitration Rules of the German Institution of Arbitration e.V. (DIS) 
• Rules of arbitration for the construction industry (SGO Bau) 
• Conciliation rules for the construction industry (SOBau) 
• Arbitration rules published by the individual construction industry association of the German states.

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.

Last modified 3 Apr 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

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