Germany: Construction

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This country-specific Q&A provides an overview to construction law in Germany.

It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Germany is a code-based civil law jurisdiction. Its civil law has been subject to a wide array of influences from Roman law (Corpus Juris Civilis), the Prussian Civil Code (Allgemeines Preußisches Landrecht, 1794) to Napoleonic law (Code civil, 1804). Germanys most important body of civil laws is the German civil code (“Bürgerliches Gesetzbuch- BGB) which was in development since 1881 and became effective on January 1, 1900. The German civil code contains five books (general part/ law of obligations/ law of property/ family law/ law of succession) with roughly 2.450 articles (“Paragrafen”).

  2. What are the key statutory/legislative obligations relevant to construction and engineering projects?

    In Germany, construction and engineering projects are governed by a large number of legislative provisions such as the German Federal Building Code (Baugesetzbuch), the building regulations of the federal states of Germany (Landesbauordnungen), the German Civil Code (Bürgerliches Gesetzbuch - BGB) and the Standard Building Contract Terms (Part B) (Vergabe- und Vertragsordnung für Bauleistungen – VOB/B), to name just a few.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.

    (a) Health and safety;

    Most German health and safety laws apply to the employment sector (e.g. Labor Protection Law (Arbeitsschutzgesetz), social security code (Sozialgesetzbuch - SGB) and workplaces ordinance (Arbeitsstättenverordnung, Occupational Safety Act (Arbeitssicherheitsgesetz), Ordinance on Hazardous Substances (Gefahrstoffverordnung) Safety regulations of the professional associations (Sicherheitsvorschriften der Berufsgenossenschaften) Construction Site Ordinance (Baustellenverordnung)).

    (b) Environmental;

    The protection of the environment is anchored in German constitutional law (Article 20a of the German constitution). However, there is no central body for environmental law. Legislative provisions concerning environmental issues are widely scattered across many laws. A central provision of German environmental law is the Federal Nature Conservation Act (Bundesnaturschutzgesetz - BNatSchG), another the Federal Pollution Control Act (Bundesimmissionsschutzgesetz - BImSchG).

    (c) Planning;

    Planning law in Germany consists of the technical planning and construction planning law. In accordance with special regulations (Federal Highway Act - FStrG, General Railway Act - AEG, Air Traffic Act - LuftVG, Energy Industry Act - EnWG), a plan approval procedure must be carried out regularly. Otherwise, the regulations of the Building Code (BauGB) apply to "normal" construction projects.

    (d) Employment;

    The employment sector is highly regulated in Germany. Many German employment laws are based on European legislation. German employment law is codified in the German Civil Code (Bürgerliches Gesetzbuch – BGB), in the German Protection Against Dismissal Act (Kündigungsschutzgesetz - KSchG), in the German Labor Protection Act (Arbeitsschutzgesetz) and in many other laws and regulations.

    (e) Anti-corruption and bribery.

    The most relevant anti-corruption provisions are laid down in the paragraphs 331 seqq. of the German Criminal Code (Strafgesetzbuch – StGB). However, there are anti-corruption provisions in other laws like the law on combating international corruption (Gesetz zur Bekämpfung internationaler Bestechung).

  4. What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Non-EU citizens need a residence permit before starting work in Germany. Other permits may be needed depending on the type of work (e.g. health certificate in medical or in gastronomy professions). Penalties for non- compliance can be severe.

  5. Is tort law or a law of extra contractual obligations recognised in your jurisdiction?

    The German equivalent to tort law is “Deliktsrecht” which is incorporated in the German Civil Code (Bürgerliches Gesetzbuch” - BGB). The German equivalent to law of extra contractual obligations is called “culpa in contrahendo”. It is codified in section 311 (2) 2, section 280 (1) and section 241 (2) German Civil Code.

  6. Who are the typical parties to a construction and engineering project?

    On the client side of large infrastructural projects like federal highways, state highways, port facilities or power train paths you will often find the Federal Republic of Germany or a federal state of Germany. Airport and Port authorities and public-owned SPV’s also act as principals of building contracts. Deutsche Bahn (German Railways) is a major player in the field of railroad construction.

    Contractors of construction and engineering projects are usually large and mid-sized privately owned construction companies. There are no publicly owned contractors.

  7. What are the most popular methods of procurement?

    In Germany procurement processes are governed by many different laws. To name just the most important ones: German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB), German Regulation on the Award of Public Contracts (Vergabeverordnung - VgV), Sector Ordinance (Sektorenverordnung – SektVO), Procurement Regulation for Contracts related to Issues of Defense and Security (Vergabeverordnung für die Bereiche Verteidigung und Sicherheit (VSVgV), Standard Building Contract Terms Part A (Vergabe- und Vertragsordnung für Bauleistungen, VOB/A).

    The Contracting authorities must apply these rules if they wish to award construction works. As a rule, a public invitation to tender must be carried out.

    Private clients can also use the tendering method to select the contracting party.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    Any construction project is unique. So standard forms can not sufficiently address the particular situations occurring in the course of a construction project. However, experienced legal advisers have a great deal of experience in contract drafting and in finding adequate contractual solutions for their client’s construction projects.

    Due to the fact that many construction contracts incorporate the Standard Building Contract Terms (Vergabe- und Vertragsordnung für Bauleistungen – VOB/B), there is some standardization in German construction contracts.

  9. Are there any restrictions or legislative regimes affecting procurement?

    The procurement process is highly regulated and quite formalised. For laws that apply to procurements see answer to question 7.

  10. Do parties typically engage consultants? What forms are used?

    In Germany parties usually engage law firms that are highly specialized in public procurement law. However, not many firms have more than one or two lawyers with profound expertise in this area.

  11. Is subcontracting permitted?

    Subcontracting is a widely used practice in the construction industry. However, most contracts require the customer’s agreement beforehand. In case a subcontractor is hired, the project's general contractor continues to have full responsibility for project completion within the parameters and deadlines stipulated in the main agreement. Many contracts contain subcontracting clauses that define precisely the requirements a subcontractor has to fulfil.

  12. How are projects typically financed?

    Building projects are often financed by medium-term and long-term loans. Projects commissioned by public sector entities (“Öffentliche Hand”) are usually funded by the public treasury. In some cases building projects are also financed by public-private- partnerships (PPP).

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    Customers usually retain 5-10 percent of the agreed contract price until the project is completed or the contractor has to provide a performance bond that secures the same amount. Bank guarantees are also widely used. After completion of the project the customer usually withholds around 3-5 percent of the agreed contract price until the end of the warranty period, which usually lasts 4-5 years. Instead, the customers warranty claims can also be secured by a warranty bond (“Gewährleistungsbürgschaft”).

  14. Is there any specific legislation relating to payment in the industry?

    Payment obligations depend on the respective contract. According to VOB/B-conditions, installment payments are to be granted in the shortest possible time intervals or at the agreed points in time to the amount of the value of the respectively proven contractual services. The claim for final payment will be due soon after examination and determination, at the latest within 30 days after receipt of the final invoice.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    While pay-when-paid clauses are not illegal under German law, they are not commonly used in building contracts. They are deemed to be invalid if used in standard business terms (section 305 ff. BGB).

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Retention provisions are very common in German building contracts. Usually the customer withholds 5-10 percent of the agreed contract price until the project is completed. After completion of the project the amount retained is reduced to 5 percent of the agreed contract price. The last portion of the retained amount is paid to the contractor after the warranty period expired (usually 4-5 years after completion of the project).

  17. Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?

    Delay liquidation damages provisions are quite common in German construction contracts. Under a standard delay liquidated damages provision, the client can recover a specified sum as soon as the work completion date has been missed, without having to prove actual losses. In most cases the client will be able to deduct or offset the liquidated damages against sums owed to the contractor. Delay liquidation damages provisions are usually upheld by the courts. However, if delay liquidation damages provisions are part of general terms and conditions (Allgemeine Geschäftsbedingungen – AGB) they may be declared void if the grossly and unfairly disadvantage the contracting party. Hence, delay liquidation damages provisions that are incorporated into general terms and conditions may not award damages exceeding 5% of the contract value to the customer.

  18. Are the parties able to exclude or limit liability?

    Liability for damages caused through wilful intent or gross negligence cannot be limited. If the construction project is being carried out under the conditions of the standard building contract Terms (VOB/B), liability for construction defects can be limited only in exceptional cases (see section 13 subsection 7 (5) VOB/B).

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Under a construction contract governed by the Standard Building Contract Terms (VOB/B) the customer can terminate the contract any time until completion of the work even in the absence of any breach of contract on the contractor’s side. However, if he does so, he has to pay the contractual remuneration to the contractor minus expenses saved.

    Both parties can terminate the contract if the other side does not fulfil its contractual obligations. However, the party willing to terminate the contract usually must grant the contractual partner an appropriate period of grace.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    A contract constellation that is typical of building law is the so called building promoter contract (Bauträgervertrag), in which the construction company builds with its own money and at its own risk. Subsequently, the purchaser is provided with both the ownership of the property and the building placed on it. The money of the buyer is usually secured by an exemption statement of a bank. This contains a clear regulation for dealing with already paid installments in case of insolvency of the building promoter.

    In general rights granted to third parties depend on the individual contract between the third party and the contractual party.

  21. Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Under construction contracts governed by the Standard Building Contract Terms (VOB/B) the contractor has to notify the customer as soon as he becomes aware of circumstances that may lead to higher costs or that may delay the project. If he fails to do so, he will most likely get no additional payments from the customer but will nevertheless will be obliged to complete the project as contractually agreed. However, several exemptions to this rule apply.

  22. What insurances are the parties required to hold? And how long for?

    The public liability insurance (Betriebshaftpflichtversicherung) covers the liability risks of traders and industrial companies, freelancers and craftsmen. Such insurance is required by most clients and made a condition of a contract. It is common to have a construction all risk insurance (Bauleistungsversicherung) on large projects, provided for by the customer.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    Some disputes can be settled by out of court negations. Most disputes will go to the state courts. However, over the last several years, arbitration has become increasingly popular and arbitration provisions appear in more and more construction agreements. Like in the United States or in Great Britain, also in Germany arbitration can be compelled only by agreement. Some construction contracts contain arbitration clauses that compel one or both parties to submit disputes to arbitration. In the absence of a contract clause, arbitration is available only by the agreement of both sides.

    Litigation is always an available method to resolve a dispute, unless there is a binding arbitration clause or a mandatory administrative proceeding. Though slow and costly, the process of the trial best eases the fleshing-out of complex issues, ensuring they are thoroughly dealt with.

    Public authorities unusually reject arbitration clauses.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    In Germany, arbitration tribunals are formed on the basis of contractual agreements. The arbitral tribunal can rule on its own jurisdiction and on the existence or validity of the arbitration agreement (section 1040, Code of Civil Procedure - Zivilprozessordnung - ZPO).

    The duration of arbitration depends on the subject matter and the scope of the dispute. Procedures usually last between 6 months and 1 year.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    The standard limitation period is three years (section 195 of the German Civil Code (BGB)). Unless another date for the beginning of a limitation period is prescribed, the standard limitation period begins to run at the close of the year in which the claim arose and in which the creditor obtained or, in the absence of gross negligence, had to have obtained knowledge of the facts supporting the claim and knowledge of the identity of the debtor.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Disputes between several parties are common. There is the legal institution of the so called "Streitverkündung“ (third-party notice), which involves other parties in the process and is easily admissible in state courts. There is no special division of liability in Germany. Net contribution provisions are not common in Germany.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    One of the biggest challenges in the construction sector is the legal handling of construction delays, which are especially commonplace in larger construction projects. Many disputes between builders and contractors revolve around the question of who bears the additional costs for building contractors incurred by the delays. German courts are very strict about how to prove extra costs due to delays. As a result, the willingness of customers to pay for delay costs is very low. In particular, public customers, who are controlled by audit courts, tend to accept only those claims, that would be approved by a court.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    The coalition agreement of the new government envisages investing heavily in social housing construction. Investments in transport infrastructure will continue to be very high. Commercial construction is currently benefiting strongly from rising demand for office workplaces and an investment offensive by Deutsche Bahn.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    As in almost every other industry, digitization is also progressing in the construction and engineering industry. An example is the development of the so called Building Information Modeling (BIM), which describes the integrated digitization of all planning and building information that are relevant for realization as a virtual building model. The responsible federal ministry has developed a phased plan according to which BIM will be applied to infrastructure projects from 2020 onwards. In particular, the new form of joint processing of the model by several participants will lead to new legal issues in the area of liability, remuneration and copyright.