Financing

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 projects are generally financed by construction loans (or mortgage loans) granted by banks or insurance companies and secured by a mortgage encumbering the property on which the project is erected.

Some restrictions apply to financing methods for construction projects, in particular pursuant to legal or regulatory provisions regarding bank and insurance loans (eg, minimal amount of equity to be brought by the employer) or pursuant to the Federal Statute on the Acquisition of Real Estate by Foreigners (known as ‘Lex Koller’) which limits the possibility of financing a construction project through foreign funding.

Security

What forms of security are used in construction project financing?

Construction loans granted by banks or insurance companies are usually secured by a mortgage note encumbering the property on which the project is erected, and/or with the assignment of rent proceeds once the construction loan is consolidated into a standard mortgage loan.

Payment

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?

As typical methods and timing of payment for construction work, the parties generally provide for a payment schedule either set forth in the core of the construction contract or attached to the construction contract as an appendix forming an integral part of the contract. The payment schedule usually provides for down-payments due according to the actual advancement of work, specifying that it is common practice to provide for a first down-payment when executing the contract. Further, a holdback amount of 5% to 10% usually applies, either on each down-payment or on the last down-payment in order to secure the reparation of defects affecting the work at delivery – such an amount is retained until the defects are duly repaired.

‘Pay-when-paid’ and ‘pay-if-paid’ provisions are permitted, but are not commonly used in practice.

Non-payment

How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?

At the beginning of the work, the contractor may secure itself against non-payment by the employer by requiring a formal confirmation or warranty from the employer, stating that the employer benefits from appropriate and sufficient funding during the entire construction project. A payment schedule providing a first down-payment at execution of the construction contract and then down-payments according to the actual advancement of construction work allow for the funds to be well managed and reduce the risk of non-payment by the employer. A bank guarantee is rarely required from the employer.

Unless otherwise contractually agreed between the parties (according to Article 82 of the Code of Obligations), either party may withhold the performance of its own obligations if the other party has failed to perform its corresponding obligation. In other words, the contractor may suspend work if the employer has not paid the down-payments according to the terms of the contract.

Further, in the event that it has not been paid, the contractor may register a construction lien (ie, a ‘tradesman’s or building contractor's lien’ within the meaning of Articles 839 ff of the Civil Code) on the property on which the construction work is carried out.

How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?

Unless otherwise contractually agreed between the parties (according to Article 82 of the Code of Obligations), either party may withhold the performance of its own obligations if the other party has failed to perform its corresponding obligation. In other words, the subcontractor may suspend work if the contractor has not paid the due payments according to the terms of the contract.

Further, in the event that it has not been paid, the subcontractor may register a construction lien (ie, a ‘tradesman's or building contractor's lien’ within the meaning of Articles 839 ff of the Civil Code) on the property on which the construction work is carried out.

On what grounds can payments be withheld?

Unless otherwise contractually agreed between the parties (according to Article 82 of the Code of Obligations), either party may withhold the performance of its own obligations if the other party has failed to perform its corresponding obligation. In other words, the employer may withhold payment if the contractor has not fulfilled its own obligations under the contract.

In addition, it is common practice for the parties to set forth conditions to be fulfilled (ie, achievement of a work stage, confirmation that all subcontractors have been duly paid and that no construction lien is registered in the property) before the payment is made by the employer. In such cases, payments may be withheld until the conditions have been met.