New trends in construction contracts


The following article was written by Eszter Kamocsay-Berta, LL. M. (Vienna), managing partner at KCG Partners Law Firm.

The contractors are still generally punished under the commonly used contracting mechanisms in Hungary instead of being motivated, although in Western Europe contractual clauses facilitating the cooperation of the contractors are already widely applied – as highlighted in the sector specific summary of KCG Partners Law Firm.

Although in the last year the construction sector, by reaching an annual 26.7% increase, has performed well from a quantitative perspective, the sector specific contractual safety is still below the EU level. According to the summary of KCG Partners Law Firm, one of the reasons for this difference is that contract templates are still commonly applied and several times reapplied in the sector, and such contracts primarily punish the non-contractual performance of the contractor instead of motivating good performance. Since construction investments may typically be carried out only under the cooperation of several contractors specialized in different sectors, well-functioning contractual mechanisms tailored to the given project would be crucial to interconnect the contractors’ work and support their cooperation.

“Traditional Hungarian construction contracts usually apply different provisions for the performance of each contractor instead of handling the works in an interrelated way. This is an absolutely obsolete, inefficient structure which generates complex legal disputes if difficulties arise,” outlines Eszter Kamocsay-Berta, managing partner of the KCG Partners Law Firm.

It is a frequent mistake that instead of looking for an immediate solution, the parties postpone the resolution of their dispute to a later date, so that the possible disputes do not obstruct the construction process. This strategy is however wrong, since this is why the impact of the non-contractual performance on completion time and budget cannot be recognized in due time.

In such cases the contractors face the sanctions regulated by the construction contracts, like late performance penalties, or penalties for defective performance, or even deductions for defects by construction closing. It occurs in numerous cases that the rights and obligations negotiated at the closing of the project turn into financial and settlement disputes, or worse, terminate in court.

Investors and contractors could certainly also do a lot to establish a contractual system that ensures the successful completion of an investment. Thus, in addition to the traditional contractual securities (such as phased payments of  contractor’s fee upon reaching the milestones set out in the time schedule, good performance retentions, good performance guarantees or penalties), other forward-looking instruments could have an enhanced role during the construction period.

These instruments are for example the “real-time” project management method,  the key points of which are the continuous communication and the active contract management. The real-time project management instruments enable the immediate, continuous and safe recording of the events of the construction process, the immediate access to the recorded data from anywhere with more equipment enabled. Such instruments may also show the possible impact of a proposed additional work on the construction schedule and on the investment costs.

KCG Partners’ experience is that incentive schemes are getting more and more popular worldwide, whereby instead of imposing penalties, “benefits” are offered in the case of the successful execution of the projects. Incentive mechanisms show that the communication and cooperation between the contractors is essential for the successful completion of the project.

In Western Europe, the idea of joint risk-sharing is already an established practice. In this case the motivating factors for the parties for the increased cooperation are the shares obtained, in a portion determined before, from the savings achieved during the construction, or, on the contrary, bearing the possible losses jointly. Establishing a bonus framework is also a commonly used motivation tool, from which the contractors can also benefit from the successful implementation of the completed investment.

Last but not least, the contractors can be motivated for continuous and outstanding performance if they may share the social appreciation, the “glory” derived from a major investment and their firm names can be mentioned in connection with the investment. Unfortunately major investors usually limit this possibility by strict regulations, and they do not consider that publicity may have a huge incentive force that inspires better performance.

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