Contracts as the ‘make or break’: delays of construction projects

Peter Kunz
Kunz Wallentin Rechtsanwälte, Vienna
peter.kunz@kunz.at

Hannah Fadinger
Kunz Wallentin Rechtsanwälte, Vienna
hannah.fadinger@kunz.at

Thomas Seeber
Kunz Wallentin Rechtsanwälte, Vienna
​​​​​​​thomas.seeber@kunz.at

Raw material shortages

Recently, shortages of raw materials – inter alia due to Covid-19 – have affected manufacturing and trade massively: industrial products such as wood, steel and plastic are currently scarce, leading to higher prices of these materials and other negative effects like entire halts in manufacturing.

Apart from these effects that concern different industries, the real estate sector is affected as well: some construction works may have to be stopped completely, in any case supply bottlenecks lead to delays in entire construction projects. At the same time, the price of raw materials have shot up, therefore making these projects not only longer than necessary time-wise, but also more expensive. The delays affect everyone involved in the project: the contractor, the property developer, all sub-contractors and the client. Proper (prior) contract drafting can omit many questions and unclarities following such a delay as well as the price increase due to additional costs that can be attributed to the rising raw material prices.

Additional costs could be considered force majeure

Regarding additional costs, the question poses itself if these can be considered force majeure due to the rise of raw material prices caused, among other things, by Covid-19. In this case, the contractor – or respective sub-contractor – may not have to render their services at all if a more expensive raw material can factually not be bought anymore (‘economic impossibility’). In this regard, it is quite interesting to know if a cost estimate has been provided beforehand. These can be provided in a binding or non-binding form. In case of a binding cost estimate, it is irrelevant if the additional costs are excessive our could not be foreseen: the cost estimate will have to be adhered to. The possible risk will therefore be taken by the contractor. However, in practice non-binding cost estimates are much more common, pursuant to which the prices will have to be paid depending on expenditure. Additional costs will therefore have to be borne by the client. If wood prices have gone up considerably, a carpenter may have to inform the client about the price development. In case the client refuses to pay for the higher price, the carpenter will most likely not have render their services. However, contractual provisions have to be checked for differing provisions. In Austria the so-called ‘ÖNORM B 2110’ is often stipulated in practice, which is a standard that was developed in the competent committee and published by Austrian Standards, or an adopted European standard. This standard provides for certain provisions in case of delays in construction and differs from the Austrian Civil Code. Quite generally, it could be said that pursuant to the Austrian Civil Code, the ‘neutral sphere’ – and  this would most probably include construction delays due to raw material shortages – falls under the contractor's risk, pursuant to the ÖNORM B 2110 it would fall under the client's risk.

Contractual provisions are the ‘make or break’ in construction projects

Regarding possible construction delays, the contractual basis for the project is essential. The possibilities of the consequences of a delay range from ‘bad luck for the client’ to penalty or damages payment by the contractor. A delay in a construction project can have serious consequences and cause an enormous amount of damages due to sub-contractors mostly being dependent on the preceding sub-contractor with their own work. A delay by one sub-contractor, for example due to raw materials not being delivered to them in time, can cause an entire construction site to come to a halt. Sometimes interim deadlines will be stipulated contractually, therefore dividing a construction project into smaller ‘phases’. In case such an interim deadline cannot be met due to a delay, a claim for damages will also be dependent on the fact if the entire project will be delayed or if the final deadline can actually be met regardless. In practice, this case will however be very rare, since – as we mentioned earlier – the collaboration of many sub-contractors makes a punctual finish of the project, despite delays in interim deadlines, quite unlikely. But claims for damages may be difficult to argue due to the current Covid-19 shortages and delays, since a claim for damages also requires a fault by a contracting party. A ‘no fault’ penalty clause can obviously lead to a different result.

In any case, parties of current construction projects that have been affected by Covid-19, raw material shortages and other delays, will be bound to check their contracts to know what the consequences of these events will be for them. Parties currently drafting contracts should not dismiss topics like Covid-19, but rather clarify situations that in the past may have been qualified ‘unlikely’ and draft precise and comprehensible clauses. In our practical experience, some construction sites could eliminate delays and delivery bottlenecks completely due to their clauses being very straightforward – contractors would dread not rendering their services, since they were clear on the possible consequences.