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.
Click here to view full article.