Trends, developments and prospects
What is the general state of the construction sector in your jurisdiction, including current trends, notable recent transactions/developments and future prospects?
Besides the demand for housing, the biggest need and therefore attraction for investment in the German construction sector is infrastructure. This includes:
- railway projects;
- airport renewals and expansions;
- freeway projects; and
- energy-related projects (eg, renewable wind energy).
The growing use of building information modelling is improving construction project management and procedures. Other trends include:
- identifying and managing intellectual property;
- data sharing and its implications; and
- process plans and logistics in the automotive sector, including so-called ‘smart factories’, which connect different construction projects (eg, a plant and the national grid or a supplier).
What primary and secondary legislation governs the construction sector in your jurisdiction?
There are two types of construction law: public and private.
Public law governs the permit requirements for construction projects. Permits must be obtained to begin construction and typically set certain standards that must be complied with. Areas covered by public law include the environment, safety, employment and energy.
From a private law perspective, construction contracts are governed mainly by the Civil Code, which provides for rules concerning the scope of contracts, warranty, acceptance and liability.
Part B (General contractual conditions for the performance of construction work) of the contracting rules for the procurement of public work (VOB/B) provides specific terms which are tailored to civil construction and regularly form the basis of construction contracts. While the Civil Code applies automatically, the application of the VOB/B must be expressly agreed and incorporated into a construction contract by the parties. Simple Civil Code contracts are rarely used for complex construction projects.
Which authorities regulate the construction sector and enforce construction law, and what is the extent of their powers?
Under the relevant public law, competent authorities at both the federal and state level (depending on the nature of the respective permit) may render a decision with respect to a permit or the supervision process of a construction project. Parties (including third parties) affected by construction projects may appeal public authority decisions, thereby triggering administrative proceedings before the public courts.
As regards private law construction contracts, parties enjoy a broad liberty to structure and individualise their contractual relationship (ie, agreeing to terms which are specifically tailored to their project to the extent that the agreement does not violate mandatory laws or public policy).
What licensing requirements and procedures apply to construction projects in your jurisdiction (eg, planning consents)?
The commencement and execution of construction works (ie, excluding engineering and design work) can proceed only once a construction permit has been obtained. The details and extent of the permit depend on the project.
In principle, the erection, alteration, change in use or demolition of a building requires a building permit in accordance with state building regulations. Such permits contain a declaration by the competent authority that the building project complies with public law. The execution of construction works must comply with the relevant permits. Therefore, if variations and changes are implemented during construction, the initial permit may have to be amended.
Besides the construction permit, further administrative permits may be required for the operation of, for example, process plants. Non-compliance with either a construction or operational permits may lead to the closure of the respective process plant or even the demolition of the construction works.
Professional licensing and qualification
What licensing requirements and procedures apply to construction professionals, including any required qualifications?
While construction professionals are not regulated at the federal level, they may be a member of federal or state associations (eg, the Association of German Engineers). No specific requirements apply to general contractors other than the relevant registration to conduct business and operate in Germany.
Do any special rules and restrictions apply to foreign construction professionals?
No specific rules apply to foreign construction professionals. However, exceptions apply to the hiring of foreign workers.
Project structures and relationships
What corporate/formal structures are available for construction projects in your jurisdiction? What are the advantages and disadvantages of each? Are any structures explicitly prohibited?
The most frequently used structures for construction projects are the separate architect agreement and an actual construction contract by means of an agreement between the employer and the general contractor, unless the contractor is also to provide the engineering for the project. Often. several contractors form a single partnership (eg, a joint venture company or consortium (ARGE)) under Section 705 et seq of the Civil Code to carry out construction works.
Public-private partnerships (PPPs) between entities from both sectors are becoming increasingly popular in major construction projects, particularly infrastructure projects. However, due to mandatory rules that apply to public bodies, the respective provisions require careful review and consideration when establishing a PPP.
Are there any special considerations for managing relationships with:
(a) Joint venture partners (where applicable)?
Parties agreeing to a joint venture structuree may exclude the joint and several liability of individual joint venture parties. Further, if required by the employer, they may provide for such liability in addition to the liability of the joint venture itself.
(b) Contracting government entities in public-private partnerships (or other construction projects with a public element)?
Public bodies are subject to special mandatory rules (procurement rules). These rules require, for example, competitive bids where a construction project exceeds a fixed threshold in terms of the investment and contract prize. Specific rules for PPPs exist in this context and trigger in-depth analysis requirements.
The main contract typically specifies that the main contractor may subcontract certain parts of the work (with or without the employer’s prior consent).
However, mirroring the main contract’s relevant provisions in the subcontract poses a significant issue under German law. In case of such back-to-back contracts, the German courts generally consider their provisions to be standard contract terms that may be subject to a more rigorous review limiting the parties' freedom to agree, for example, contract penalties, liquidated damages or limitation of liability. To maintain this back-to-back setup, the parties must show that they did not simply mirror but freely negotiated the respective terms.
(d) Architects, designers, engineers and any other related professionals?
It is important to clearly define the scope of services attributed to the architect and – particularly in projects with multiple contracting parties – the scope of design or engineering work of the contractors. A general contractor usually undertakes some engineering standard services (eg, the works direction), which will be carved out from the scope of services allocated to the architect. Clearly defining the scope of services is key to avoiding ‘double payment’ and ensuring a clear definition of liability.
(e) Any other relevant parties typically involved in construction projects?
In large and complex construction projects, it is common for parties to involve consultants to assist with:
- managing the different contracts;
- supervising construction progress; and
- evaluating any engineering and construction issues.
Contracts and performance
Standard contract forms
What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?
The general contractual conditions for the performance of construction work are set out in the contracting rules for the procurement of public work (VOB/B) and form the basis of the most common German standard contract form for construction projects.
The contracting rules for the procurement of public works were developed by the German Procurement Committee for Construction Works (formerly the German Procurement Committee for Public Works Contracts) and have specific sections tailored and used by architects and engineers. These standards do not form a template, but rather a set of regulations for construction contracts in general.
Being general terms of contract, parties may deviate and alter individual provisions by specific agreement; however, this option is less common when relying on the VOB/B’s terms of contract.
Other than the VOB/B, international standard forms (eg, the International Federation of Consulting Engineers contract) are also used, although commonly with significant changes and adaptions to bring them into line with German law.
Definition of ‘construction work’
How is ‘construction work’ legally defined?
No legal definition of ‘construction work’ exists in German law. However, Section 631 of the Civil Code (“Typical contractual duties in a contract to produce a work”) covers construction work in more general terms and may include:
- alterations; and
Are there any rules or restrictions on the governing law of construction contracts?
As no mandatory restrictions regarding the governing law apply to construction contracts, parties are free to agree on the governing law. Certain aspects of a construction contract (eg, the agreement on a lien on the property of the construction site) may still be subject to German law on the basis of lex rei sitae irrespective of the generally agreed applicable law for the construction contract. When agreeing on the applicability of German law, parties typically exclude principles of the conflicts of laws as well as the United Nations Convention on Contracts for the International Sale of Goods.
Are construction contracts subject to any formal requirements?
Construction contracts are seldom subject to formal requirements. In general, architectural and engineering agreements, as well as construction contracts, are tacitly concluded.
An exception applies where a construction contract includes not only the performance of construction works, but also the sale or purchase of a property (eg, a construction site). Under these circumstances:
- the formal requirements that apply to the sale of property under German law apply to the entire contract; and
- authentication and signature by a notary public is required.
Are there any mandatory or prohibited provisions in relation to construction contracts?
In general, legal provisions governing construction contracts are not mandatory. Therefore, parties are free to amend, delete or change the respective provisions of a construction contract. Parties' freedom to negotiate their contract terms is limited to the extent that such changes may not violate mandatory laws or public policies.
If a contract is signed by a public body, special and mandatory procurement rules may apply (eg, competitive bidding).
Can any terms be implied in construction contracts?
German law does not recognise the common law concept of implied terms. Nonetheless, and given that there are no formal requirements for construction contracts in general, the parties' intentions may be used to interpret and fill certain gaps in a contract if said parties have failed to address certain issues in their written contract. If the parties have not regulated and addressed certain issues in their contract and these issues cannot be otherwise remedied by establishing the parties' intentions, the legal provisions under the Civil Code (particularly Section 631 in seq) will apply.
How are risks typically allocated between parties to construction contracts?
Each construction contract must determine the parties responsible for the planning and engineering stages of the project. In a traditional distribution of responsibilities, plans and drawings are provided by the employer, while the contractor bears the financial risk until the works are carried out. If the works are destroyed prior to acceptance, the contractor must start again at its own cost. Ground risk must also be must also be properly allocated in a construction contract. Unless otherwise contractually agreed, the employer bears this risk.
In general, parties to construction contracts can allocate specific risks to another party (particularly in case of force majeure). For example, contractors may be liable for unforeseeable ground conditions. However, this assumption of risk and liability may be overturned where an employer has withheld information and knowingly shifted risks to the contractor. Hence, risk allocation is limited by the parties’ obligation to negotiate in good faith.
Limitation of liability
How and to what extent can parties to construction projects contractually limit or exclude their liability?
Parties to construction projects can exclude or limit their liability. Limitation of liability is usually effective for both contractual and tort claims. However, any injuries or bodily harm caused to third parties, as well as any breach of contract or tort that causes wilful misconduct or fraud, are excluded from the limitation of liability. In such cases, the limitation of liability is voided, resulting in the full liability of the respective contracting party.
Under Section 276(3) of the Civil Code, the liability for intentional and wilful misconduct (including fraud) cannot be excluded in any case even if the contract is silent in that regard. In the same context, Section 639 of the Civil Code provides – as a sub-category of ‘wilful misconduct’ – that a limitation of warranty is voided if the contractor intentionally defrauds or fails to inform the employer about certain defects in the works.
How are liquidated damages typically calculated and to which liabilities are they usually applied?
Liquidation damages are usually agreed during the execution or on completion of a project and often apply to a project’s performance parameters (eg, production output).
In general, parties will provide for an amount per day, week or month of delay with respect to the work’s completion date (or intermediate stages of construction work). The total liquidated damages must be capped at a percentage of the total contract prize. Parties' considerations with respect to estimated actual losses need not be documented (as under common law).
In addition to liquidated damages, parties may also apply penalties. Both employ the same calculation method.
As such provisions effectively constitute a contractual limitation of liability, they are subject to court review. This review is more rigorous where the terms are considered general terms of contract, in which case the amount of permissible liquidated damages is lower. Penalties in general terms of contract are prohibited.
How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?
As a general rule, ‘force majeure events’ are only external events caused by elemental forces or actions of third parties that are:
- unpreventable using any reasonable means or utmost care; and
- unaccepted by either party because of their effect and unpredictability.
Despite this definition, there is no enumeration on what qualifies as a ‘force majeure event’. Therefore, contracts must contain an explicit list of such events. While force majeure clauses can contain so-called ‘umbrella clauses’ to extend the list of events to “events of similar effect", such broadening of force majeure clauses is typically not valid. In fact, a contract's risk allocation structure may limit the interpretation of what events qualify as force majeure.
Force majeure events need not be permanent, but must be long enough to affect the performance of the one party’s contract in whole or in part. As the concept of force majeure must be explicitly included in the contract, so must its legal consequences. Consequences due to a force majeure event may apply only automatically or where the event and its consequences could frustrate the contract, in which case the contract’s terms may be adapted according to Section 313 of the Civil Code.
General performance obligations
What are the general performance obligations of contractors and employers?
In general, contractors are responsible for carrying out and performing construction works according to the definition of the scope of works (ie, technical descriptions and plans of the work) in accordance with the work schedule and price agreed by the parties. On the other hand, employers are responsible for paying the agreed contract price in accordance with the payment schedule (eg, certain milestones as agreed by the parties).
These main obligations can be altered or amended significantly. For example, parties may agree that certain obligations of the required scope are carved out and provided by the employer or additional contractors of the employer; thus, the timely performance of these services and works rests with the employer. Another key area of amendment in regard to risk allocation is the project’s design or architectural services. Often, a design (at least a basic design) is provided by the employer at the beginning of the project. Parties may agree to implement the design into the overall construction contract with the contractor assuming liability for the correctness and completeness of the initial design obtained by the employer.
How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?
In principle, tender documents contain the deadlines whose observance is of major importance to the employer. The contractor is in most cases obliged to provide a detailed schedule for execution and control management in accordance with the deadlines set out in the contract.
In the event of a culpable delay by the contractor, the employer may be entitled to damages (usually liquidated damages). In the event of a culpable delay by the employer, the contractor may be entitled to a time extension. It is best practice to provide detailed provisions for such delays in the contract. Absent such provisions, and in case of major delays, the courts may consider ‘time at large’ with the effect that deadlines and penalties or liquidated damages no longer apply.
There is no general obligation for contractors to accelerate works unless so provided in the construction contract.
To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?
In principle, variations can be made to the scope of the contract at any time. Such agreements (Nachträge) are of great practical importance – they may trigger a contractor’s right to remuneration or a time extension.
While the contracting rules for the procurement of public work (VOB/B) and Section 650b of the Civil Code provide rules on the consequences of variations, construction contracts often provide detailed procedures and deadlines for submitting and agreeing variations. Pre-agreed unit prices for certain works may also be included in a construction contract.
What are acceptable grounds for the termination of a contract?
Typically, a contractor’s termination rights are excluded; however, both parties remain entitled to terminate the contract for cause (ie, in the event of a breach of a material contractual obligation by the other party that makes continued performance of the contract unacceptable or unreasonable). Therefore, construction contracts usually list the circumstances that entitle the employer (and/or the contractor) to termination for cause, such as the contractor’s insolvency. Extended force majeure events may also entitle parties to terminate the contract.
Further, as per Section 648 of the Civil Code, employers are usually entitled to terminate a construction contract for convenience; however, in in this scenario, the contractor is entitled to compensation for works rendered and lost profits.
Remedies for breach
What remedies are available for the breach of construction contracts?
In the event of a breach of contract (ie, delay or non-performance), the parties may be entitled to damages or even termination (or suspension) of the contract (Sections 280 et seq of the Civil Code). However, construction contracts usually provide for specific remedies, such as liquidated damages or time extensions in the event of a delay or termination for cause.
During the warranty period, the remedies available to employers include the entitlement to make good and repair (ie, work substitutions where contractors fail or refuse to make good).
Under German law, contractors owe specific performance. Employers can claim specific performance as an equitable remedy and enforce performance in the event of a breach of obligations.
Types of financing
What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?
Construction financing may be structured through construction loans (or mortgage loans) granted by banks or insurers, or through shareholder contributions depending on the structure of the project. The means of collateral vary to fit each project’s structure.
What forms of security are used in construction project financing?
Different forms of security are used and the following rules typically apply:
- Contractors must provide a performance guarantee of up to 10% of the contract price.
- Where agreed, employers may withhold up to 10% of each instalment and the final payment as security for the further performance. Parties may agree that when the final invoice is issued, the retention is reduced to 5% or replaced by a warranty bond of the contractor.
- Under the Civil Code, contractors have claims against employers for delivering a guarantee in the amount of the total remuneration owed, including remuneration for any variations.
- Contractors may register a construction lien under Section 648a of the Civil Code on the property on which the construction works will be carried out.
Methods and timing
What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?
Construction contracts usually provide for a payment schedule that, by implementation into either the contract terms or in one of the appendices to the construction contract, sets out a schedule of payments alongside the progress of construction work. These schedules usually provide for a significant down payment and further milestones (eg, for the completion of significant sections or steps of the overall construction work, such as mechanical completion or the start of commissioning). An amount between 5% and 10% of the overall contract price typically constitutes the final payment that is due at acceptance, but this is usually held back and only paid out in exchange (eg, for the provision of a warranty bond to cover the obligations during the warranty period).
Pay-when-paid and pay-if-paid clauses are generally committed; however, their use in domestic projects is limited.
How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?
Construction contracts rarely provide security for contractors in case of non-payment by employers due to, among other things, the general system under the Civil Code that contractors must perform their works before getting paid in full at the end of a project. Payment schedules which provide for down and milestone payments reflect a shift in favour of contractors securing themselves payments throughout construction projects. However, it is typically the contractor who must provide a guarantee or bond as security for either its performance of the works or potential repayment of any advanced payments received.
In addition to and in contrast with the above Civil Code principle, contractors may register a construction lien under Section 648a of the Civil Code on the property on which the construction works will be carried out. This right cannot be derogated from by the parties.
How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?
In general, the same principles that apply to a relationship between an employer and contractor apply to a relationship between a contractor and subcontractor with the exception of the availability of the construction lien. However, either party may withhold the performance of its own obligations (ie, suspend its works if due obligations, such as the payment, will not be affected).
Further, subcontractors may register a construction lien under Section 648a of the Civil Code on the property on which the construction works will be carried out. This right cannot be derogated from by the parties.
On what grounds can payments be withheld?
Under the general principle of the Civil Code (pursuant to Section 273), a party may withhold the performance of its own obligations to the extent that the other party has failed to perform its corresponding obligations. Therefore, where construction works do not progress, the employer would not have to make payments to the contractor. As construction contracts typically provide for payments to be made only on the achievement of certain milestones, this scenario is more hypothetical.
What recourse is available to employers in the event of the contractor’s insolvency?
A contractor’s insolvency is a standard termination ground in a construction contract's termination clause. Further, contracts often provide employers with the option of taking over an insolvent contractor’s agreements with its subcontractors.
What mandatory insurance coverage applies to parties involved in construction projects? Is any additional coverage recommended?
Architects and contractors are required by law to obtain professional liability insurance. A construction contract typically obliges employers or contractors to take on or provide for all risk insurance coverage which, as an umbrella, may also cover the works performed by subcontractors. Especially in the event of financed projects, such insurance must be in place during the entire performance of the works.
Other insurance schemes, although optional, include delay in start-up insurance and warranty insurance.
What tax liabilities arise in relation to construction projects?
Value added tax is levied on construction works and is usually paid by the employer on top of the construction work price. A construction contract may also identify in its contract price clause both net and gross values of the respective unit prices.
Are there any tax incentive schemes to promote construction and development in certain areas?
There are no particular tax incentive schemes in place that aim to promote construction and development in the commercial sector.
What environmental protection legislation and regulations apply to construction projects in your jurisdiction?
A variety of public laws apply to construction projects. These laws may set minimum requirements, such as noise and other emission or energy-related regulations providing for particular safety, permit or other requirements, as well as general state regulations addressing general ordinances (eg, fire protection requirements).
What environmental authorisations and certifications are required for construction projects and how are they obtained?
All major construction projects must comply with the requirements established by the respective permit. This permit is to be applied for and must be granted prior to the start of construction.
Parties are free to agree on higher standards (eg, the emission values of a process plant or additional certifications or procedures that exceed the legal requirements).
‘Green’ regulations and incentives
Are there any regulations or incentive schemes in place to promote the construction of energy-efficient and low-carbon buildings?
The Construction Product Law 2013 regulates the use of construction products and the application of CE marking. Additional legal frameworks setting out requirements for construction products, such as the building codes of the federal states, may apply. Other laws and ordinances in that respect include:
- the Energy Conservation Act;
- the Energy Conservation Ordinance;
- the Buildings Energy Act; and
- the Renewable Energies Heat Act.
Additional regulations provide building standards with regarding energy efficiency, hazardous substances and environmental requirements.
Employment and labour law
What employment and labour legislation applies to construction projects in your jurisdiction? What rights and protections are provided to construction workers?
Standard employment and labour legislation applies to construction projects. Further, contractors must comply with general principles, including those relating to:
- equal treatment and non-discrimination (further specified in the Anti-discrimination Act);
- foreign workers;
- pension funds; and
- social security.
Occupational health and safety
What occupational health and safety regulations apply to construction projects?
Apart from the general duty to maintain safety, the ordinance on health and safety on construction sites sets out the main requirements with regard to construction site health and safety.
What types of employment contract are typically used for constructions work? Are there any mandatory or prohibited provisions in relation to employment contracts?
There is no specific employment contract used for construction work. Instead, the standard rules of employment contracts apply to construction employment contracts. However, short fixed-term contracts and freelancing contracts are often used in the construction sector.
The labour laws provide for mandatory provisions that cannot be waived or amended through an employment contract (eg, rules on work duration and holiday entitlement). In addition, collective bargaining agreements are mandatory for employers. Such agreements often address minimal conditions to be complied with (eg, regarding salary and work duration).
What rules, restrictions and considerations apply to the hiring of foreign workers?
Nationals of non-EU member states or the European Economic Area require a residence title for entry and residence in Germany. Other relevant regulations include:
- the Act on the Residence, Economic Activity and Integration of Foreigners in the Federal Territory; and
- the Regulation on the Employment of Foreigners.
What regulations and procedures are in place to combat corruption, bribery, fraud, collusion and other dishonest practices in the construction sector in your jurisdiction?
There are no specific regulations or procedures against corruption, bribery, fraud, collusion and other dishonest practices that apply solely to the construction sector. Instead, Germany’s standard anti-corruption and bribery laws and regulations apply.
What best practices are advised to ensure compliance with the relevant anti-corruption rules?
Construction contracts generally include an obligation imposed on the contractor to put in place, maintain and enforce policies and procedures to ensure compliance with anti-corruption laws.
What courts are empowered to hear construction disputes in your jurisdiction? Are there any specialist construction courts?
Disputes relating to public law issues, such as a construction project’s permit, are heard before the administrative courts. These proceedings are usually between the employer of the project seeking the permit and the respective authority.
Major construction disputes are heard before the regular district courts. Some courts provide for specialised chambers that have greater expertise and familiarity with construction disputes. However, there is no centralised jurisdiction and therefore court body that judicates major construction projects on a regular basis.
What issues are commonly the subject of construction disputes?
In respect of public law, disputes typically relate to construction permits (ie, validity, changes, conditions and compliance with the respective provisions).
Civil law disputes typically revolve around primarily completion of the construction work, payment of the contract price and defects.
Statute of limitations
What is the statute of limitations for filing construction-related claims?
The key limitation period which applies for money, remuneration or damages is three years from the end of the year in which a claim arises (Section 195 of the Civil Code). For warranty claims, Section 634a of the Civil Code provides for a staggered warranty or prescription period of between two and five years depending on the scope of the construction works.
Parties may deviate from such prescription periods, which is usually done in construction contracts for works not pertaining to buildings. The prescription period for works on and in connection with buildings is usually not reduced, as such defects are typically discovered only after a longer period. Limitation and prescription periods are governed by the substantive law. Nonetheless, issues pertaining to the statute of limitations will be considered by the court or arbitral tribunal only on a corresponding objection or plea of a party.
Is pre-litigation mediation required or advised for construction disputes?
There is no legal requirement or provision for pre-litigation mediation for construction disputes. Construction contracts typically provide for dispute resolution mechanisms, such as escalated negotiation clauses requiring first negotiation among the project teams, steering committee and (later on) board members of the respective parties. Mediation is rarely used. Other dispute resolution mechanisms (eg, dispute boards) have become more popular in recent years, but are still the exception in pre-litigation dispute resolution cases.
How often is arbitration used to resolve construction disputes? What arbitration forms and institutions are typically used?
Arbitration is available and often used to resolve construction disputes. Foreign public authorities are included as contract parties. However, litigation is still the predominant form of dispute resolution. However, arbitration in infrastructure and plant construction disputes is increasing. While the cost of arbitration may exceed litigation costs, the option to choose experienced arbitrators with relevant expertise is often seen as a means to resolve a dispute faster, more efficiently and at a lower cost compared with litigation.
In the domestic context, the Court of Civil Procedure provides for ad hoc arbitration. However, arbitration under the rules of the German Arbitration Institute are agreed in most cases. Naturally, if international parties are included, the parties are more likely to agree on an international place of arbitration and different arbitration rules.