Time and cost overruns in large- scale construction projects are common these days. A number of prominent examples illustrate the issues which generally arise in these types of projects.
The new Berlin Airport (BER) was scheduled to start operating by the end of 2011 however even an opening date in 2017 now looks unlikely and cost estimates have risen from €2.5 billion to around €8 billion.
Stuttgart’s current railway station is a terminus. Creating an underground line through the city centre would shorten travel times to Munich considerably. Amidst public protest at the works to be undertaken, official cost estimates have increased from €2.5 billion (in 1995) to €6 billion (in 2013).
The contract for the construction of a new concert hall in Hamburg (to be named the “Elbphilharmonie”) in 2007 allowed for a price of €114 million payable to the general contractor, Hochtief, with completion in 2010. The contract price is now €575 million and completion is planned for 2016.
Factors contributing to time and cost overruns
Generally, time and costs overruns are caused by one or several of the following factors: (i) attempts to employ technically advanced solutions that are not feasible; (ii) guidelines in public procurement law which drive public bodies to instruct the cheapest bidder; (iii) political influence in large- scale projects; (iv) poor administrative structure/ no clear responsibilities; and (v) insufficient preparation.
- Technically advanced bespoke solutions are generally more expensive than standard solutions and can take time to implement. Depending on how the risk is attributed in the building contract it is often the client who will find itself responsible both for additional time and cost.
- Public projects require public procurement laws to be observed and a formal tender process to be held. It is difficult or even impossible to neglect the lowest bid because the lowest bidder may sue.
- Political influence can lead to late changes in design, incurring additional time and cost.
- The project must be governed by an appropriate management structure. There should be a clear distribution of responsibilities attributing risk appropriately. There should always be a clear distinction of who is responsible for design/ planning and who has responsibility for execution. Under the “classic” distribution of roles and responsibilities the client would be responsible for the entire design. Even if some or indeed all of the planning is awarded to the contractor, the client needs someone—be it internal or external—to control the design and construction process. Issues in this area may be the cause of the delays in the Berlin airport project.
- Insufficient preparation leads to delays. Quite often certain design details are left open at the time of the signing of the contract and the design process is postponed until construction begins. The result will sometimes be that implementation of the altered design requires changes which may have an impact on the contract programme and therefore triggers additional time and cost. Again, the risk structure outlined in the contract itself will decide whether the contractor or the client is to be responsible for such additional time and cost.
Legal framework relevant for time and cost overruns
The following questions may become relevant for time and cost overruns, in the light of the German Civil Code and the standard building rules (Verdingungsordnung für Bauleistungen Teil B (VOB/B)) which are often adopted:
- Who bears the risk for changes?
- What is the legal basis for a contractor pursuing an EoT (extension of time) and associated cost claim?
- What is necessary to pursue such claims? What safeguards are available?
- What guarantees re completion are possible? What liquidated damages can be agreed?
We will look at each of these questions in turn.
- The risk for changes depends on the type of contract chosen. If the contract is based on unit prices (Einheitspreisvertrag), it will be the client who bears the risk of additional work. Therefore the parties often decide on a lump sum agreement (Pauschalpreisvertrag). The mere notion of the “lump sum” does not entirely hedge the risk of claims for additional remuneration by the contractor. Only the risk of increased work will be with the contractor. For any other changes required, these may or may not be covered by the lump sum remuneration; for unforeseeable changes, the courts usually rule that the contractor does have a claim for additional remuneration as these were not covered by the lump sum arrangement.
Sometimes the parties go one step further and opt for a “functional” description of the scope of services (Funktionalausschreibung). In this scenario, the contractor is obliged to undertake all work necessary to achieve the functionally described building, making it very difficult to claim additional remuneration. Such a claim may still be possible however if design was the client’s responsibility and this was either incomplete or faulty.
In order to manage the design risks clients sometimes try to impose contractual clauses by which the contractor confirms that he has thoroughly reviewed the client’s design and accepts it as feasible. Courts have ruled that these clauses are valid insofar as they shift the risk for incomplete design. In relation to faulty design prepared by the client, the courts often rule that the risk be shared even if the contractor could have detected any design error on thorough review.
- The two legal foundations for contractor claims are § 2 paragraph 5 VOB/B and § 642 of the Civil Code. The concepts underlying these provisions are different:
§ 2 paragraph 5 VOB/B requires an instruction by the client changing the contract terms. This will usually be the case if the client requests additional features which have until then not been within the scope of services. In these cases the contractor can request additional time and additional compensation.
§ 642 of the Civil Code addresses the issue from a different angle. Often, it is not an instruction for change that triggers the delay; there are other hindrances which may have a similar impact on the building programme. These could be the late delivery of design documents from the client, or the late completion of works commissioned by the client from a third party contractor. § 642 of the Civil Code merely requires that the client is late in complying with one of its obligations. It does not matter whether the delay is due to the client’s negligence or not so this is a fairly stringent liability which protects the contractor’s interests.
One key difference between these two legal bases is that § 2 paragraph 5 VOB/B also entitles the contractor to a proportionate share in profits whereas § 642 of the Civil Code allows for compensation only, without profit share.
- Pursuing such claims for additional time and remuneration is not easy. They must be substantiated with the following:
- The prices taken as a basis for the compensation claim must be the same as those applied in the original contract. That requires the contractor to disclose its bid calculations. Hence, advantageous prices remain advantageous prices whilst disadvantageous prices will remain so.
- The impact on the planned project must be demonstrated in detail for each incident. This also requires the contractor to demonstrate where and to what extent it could have mitigated idle times and delays in certain areas of the site by possible measures in other areas. Where possible the contractor must reschedule works and use alternative ways of working to lessen the impact of hindrances.
- If a delay is attributable to the contractor, the contractor will sometimes try to avoid responsibility by invoking “concurrent delays” by other contractors retained by the client. In Germany, the legal position is different from that in certain other jurisdictions: various contractors responsible for a project delay are jointly and severally liable, so that the client can sue one of the contractors for the whole sum. The contractor will then have to seek recourse against the other contractors to recover in proportion to their share of the responsibility.
- As viable completion dates are vital to the client’s interest, there will be fixed or guaranteed completion dates in most building contracts. Should the completion date not be met and should the delay be attributable to the contractor, the client may pursue a claim in damages against the contractor. Such claims may often be difficult to prove, so it is common practice to agree a liquidated damages clause at the outset. As German courts largely apply the rules which affect standard forms to construction contracts, the specific rules applicable to standard terms must be observed. Under these rules, liquidated damages must be capped at 5 per cent of the contract price and daily caps of 0.1 per cent of the contract price are common. Parties who do not observe these caps run the risk of having a court rule that the entire liquidated damages clause is void.