Author
Christine Weyand

Christine Weyand

Salary partner

Read More
Author
Christine Weyand

Christine Weyand

Salary partner

Read More

14 June 2021

Will the explosion of construction costs lead to a great wave of bankruptcies?

  • Briefing

Since the fourth quarter of 2020, prices for building materials have risen sharply. According to media reports, the price of wood alone increased by 15-20 %, whilst prices for petroleum products and diesel fuel rose by 15 % and 20 % respectively. Styropor insulation materials for facades also cost about 25 % more than in December. Reinforced steel has become 30 % more expensive since September.

Many construction companies are also complaining about supply bottlenecks or actual delivery stoppages of building materials. In some cases, many building materials can no longer even be ordered. As a result, construction stops and interruptions can no longer be ruled out. Even fixed deadlines are currently risky due to the materials situation.

The reasons for this are manifold. A stabilisation of the situation is not to be expected in the short term. Industry representatives even fear a wave of bankruptcies among construction companies or a standstill on construction sites.

What are the consequences of such price increases and supply bottlenecks for builders and construction companies? What should be considered now?

In the case of contracts that have already been concluded, price increases cannot, as a rule, be passed on by the construction companies to the building owners. This is because the contractually agreed remuneration for the commissioned construction work is basically a fixed price for the duration of the contract and does not increase. Furthermore, this applies irrespective of whether the contract is a lump sum, a unit price or an hourly wage contract.

The contractually agreed price can thus only change in the event of additional or changed services or a changed construction period.

Already in the past, in the context of considerable increases in material costs, e.g. steel and copper prices, it was discussed whether serious cost increases might lead to contract price adjustments due to “interference with the basis of the transaction” (Section 313 German Civil Code). In the case law of the higher courts (e.g. Upper Regional Court of Hamburg judgment of 28.12.2005 - 14 U 124/05), however, a price adjustment was rejected, inter alia, on the grounds that the contractors could have purchased in advance or agreed on price escalator clauses.

In principle, the contract prices are therefore to be regarded as a calculatory risk of the contractor, so that it is difficult to pass on price increases occurring after conclusion of the contract to the client. Without additional, special circumstances, price increases in this area cannot therefore lead to a claim for adjustment of the contractor’s remuneration (see Upper Regional Court of Hamburg judgement of 28.12.2005 - 14 U 124/05).

A price adjustment on the basis of Section 313 Civil Code can at most be considered if the contractor has made its price calculation prior to the conclusion of the contract with regard to the relevant material procurement the basis of the business. However, the requirements for this are high. Even a disclosed calculation (e.g. in the context of a lump sum contract) does not automatically become a common basis of business.

However, building owners can by no means breathe a sigh of relief in view of this situation. This is because construction companies will have to react to the price market accordingly. Such price jumps pose considerable problems for the companies, as they turn every calculation into an incalculable risk.

Accordingly, building owners will have to expect that construction companies will increasingly try to hedge against price fluctuations on the commodity market with price escalator clauses in contracts to be concluded in the future, unless corresponding risk surcharges on the prices are accepted alternatively.

Such a price escalation clause is a contractual provision whereby the client partly participates in the price increase in the event of an increase in defined types of costs. Conceivable here are material price escalation clauses as well as wage escalation clauses or price escalation clauses only for certain materials such as e.g. wood, metals or bitumen.

In the case of contracts that have already been concluded, the problem could also arise with regard to the existing supply bottlenecks that the material shortage could delay the construction process.

It is true that procurement, delivery and installation of the materials are also fundamentally within the contractor’s sphere of risk. Accordingly, the client would have a claim for damages for delay-related costs. However, both the VOB/B contract for work and the BGB contract for work require a culpable breach of duty for such a claim. This is not the case, for example, if the lack of procurement of the material is due to “force majeure”. Pursuant to Section 6 (2) no. 1 c) VOB/B, the execution deadlines are also extended in the case of a VOB/B contract.

However, one can only assume “force majeure” if the respective material is actually not available. The shortage of materials must therefore not be due to defective planning or insufficient ordering. Furthermore, the missing materials should also not be obtainable at a higher price - which would be reasonable for the contractor due to its allocation of risk. According to the case law of the higher courts, even exorbitant price increases fall within the contractor’s sphere of risk.

In contracts to be concluded in the future, building owners will also have to reckon with corresponding contractual agreements according to which the building owner will at least partially participate in this risk. This could be done by a corresponding definition in the contract of what is to be understood by “force majeure”.

In addition to the legal options described above, clients and construction companies can also take precautions in other ways. In particular, the timely procurement of liquid funds can be considered here. Likewise, addressing issues such as increasing profit margins through a digital tendering process would be potentials that should be considered.

Finally, it should be pointed out that the above statements are only a summary of the possible legal effects and options for action. Individual advice for the respective case is therefore recommended in order to be able to react appropriately to developments within the building materials market.

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