Time and cost overruns are a common problem in the construction industry anywhere in the world especially when it comes to large-scale projects. Even projects that have been planned for optimum quality construction and delivery are not exempted from this. There are prominent examples that clearly illustrate this problem within the German context.
Berlin Brandenburg Airport
For example, the Berlin Brandenburg Airport began construction in 2006 after 15 years of planning. It was originally planned to open in 2010 and keeps encountering delays and cost overruns thanks to poor planning, execution and management. The opening date has been pushed back to 2017 and now to October 2019 and cost estimates have risen from 2.5 billion euros to 6.9 billion euros (as of May 2016).
Stuttgart 21 is a railway and urban development project that is part of the Stuttgart-Augsburg new and upgraded railway. The project was officially announced in April 1994 and construction started in February 2010. The official cost was 2.5 billion euros in 1995 but as of March 2013, total costs are now estimated at 6.5 billion euros. The start of operation was estimated to be in 2019 but has now been pushed back to 2021.
The Elbphilharmonie is a concert hall in Hamburg and is one of the largest advanced concert halls in the world. Construction started in 2007 and was scheduled to finish in 2010 with an estimated cost of 241 million euros. In 2008, the contract was changed and costs were estimated at 450 million euros and by 2012, the cost was re-estimated to be over 500 million euros. Construction finally ended on October 2016 at a cost of 789 million euros and the Elbphilharmonie was finally inaugurated on January 11, 2017.
Several factors cause time and cost overruns but can be generalised with the following:
Failed attempts of employing digital solutions
Digital solutions are generally and relatively more expensive than the traditional and standard solutions that the industry has been used to. The old mindset is that digital solutions take time to implement and risks will more or less be attributed to the client alone.
However, with newer technology and latest understanding of new software, this is proven to not be the case. In fact, with construction management tools, BIM, BIM tools, and related technology, support an integrated delivery system and attribute responsibilities accordingly to the appropriate shareholders through real-time data sharing and transparency. For a deeper understanding of this specific case, supplement with this article about embracing new ideas in construction collaboration.
Poor procurement law guidelines that drive public bodies to get the cheapest bidder
In Germany, public projects require following public procurement laws which provide for formal tender processes to be observed. Neglecting the lowest bid may result in a lawsuit that can be filed by the lowest bidder. It would be difficult to refuse the lowest bidder even if the planning/building team do not necessarily agree with their plans.
Political influence in large-scale projects
With large-scale projects in Germany, politics can influence late changes in design, which can incur additional time and cost.
Poor administrative structure/poorly defined responsibilities
As of 2014, how Germany project management worked still fell under the “classic” distribution of roles and responsibilities wherein the client is responsible for the entire design. Even if planning is assigned to a contractor, the client does not have someone internally or externally in charge of controlling the design and construction processes. Issues related to this aspect may be central in the cause of delays in the Berlin airport project.
Inadequate planning and preparation
Inadequate planning and preparation obviously lead to delays. As of 2014, it was common for design details to be left open during contract signing and that the design process is not really planned out until the construction process starts. This practice resulted in the implementation of altered designs that required changes with domino effects impacting contract programs and unwanted additional time and cost. Unless the risk structure is outlined in the contract, it would be difficult to set proper planning because there is no clear declaration of who is responsible for said risks.
Legal framework for time and cost overruns
In the light of the German Civil Code and the standard building rules (Verdingungsordnung für Bauleistungen Teil B – VOB/B), Dr. Markus Beaumart asks these timely questions:
- Who bears the risk for changes?
- What is the legal basis for a contractor pursuing EoT (extension of time) and associated cost claim?
- What is necessary to pursue such claims? What safeguards are available?
- What are guarantees regarding completion possible? What liquidated damages can be agreed?
He answers these questions with a great essay which I will try to summarise as succinctly as I could. According to Beaumart, the risk for changes is dependent on the contract. If the contract is based on unit prices (Einheitspreisvertrag), the client is responsible for the risk of additional work.
More often though, the parties decide on a lump sum agreement (Pauschalpreisvertrag). The lump sum does not entirely protect the risk of claims for additional payment by the contractor – only the risk of increased work will be with the contractor. For other alterations/changes, these may or may not be covered by the lump sum. For unforeseeable changes, the courts usually rule that the contractor does have a claim for additional remuneration as these were not covered by the lump sum arrangement.
Some go a step further to define the scope of services with the Funktionalausschreibung. With this type of contract, the contractor is obligated to assume all necessary work to reach the building goals. However, with this set-up, it is impossible to claim additional remuneration. Claims, however, are possible if the design was the client’s responsibility and if it was either incomplete or faulty.
What clients do sometimes to manage design risks is to impose contractual clauses where the contractor agrees that he has thoroughly reviewed the design and accepts it as feasible. These clauses are only valid as they modify the risk for incomplete design. The courts often rule that risk be shared for cases of faulty design prepared by the client even if the contractor could have spotted any design error upon meticulous inspection.
There are two legal foundations for contractor claims in Germany: Section 2, Paragraph 5 Verdingungsordnung für Bauleistungen Teil B – VOB/B, and Section 642 of the Civil Code.
Section 2, paragraph 5 Verdingungsordnung für Bauleistungen Teil B – VOB/B
This provides an instruction from the client changing the contract terms and usually becomes the case when a client asks for additional features, which until the request, are not within the scope of the contractor’s services. With cases like this, the contractor can ask for additional time and budget.
Section 642 of the Civil Code
This provision addresses the issue from another angle – this covers issues other than instructions or requests for change from the client. Section 642 protects the contractor’s interests in situations like late delivery of design documents, late completion of works commissioned by the client from a third party contractor, that cause delays that impact the project all the same.
It is important to note, though, that Section 2, Paragraph 5 Verdingungsordnung für Bauleistungen Teil B – VOB/B entitles the contractor to a proportionate profit sharing while Section 642 of the Civil Code only allows compensation without profit sharing.
Claiming time and cost reimbursements
According to German laws, pursuing claims for additional time and remuneration is not that easy. Claims must be substantiated with the following (Beaumart, 2014):
- The prices taken as a basis for the compensation claim must be the same as those applied in the original contract. That requires the contractor to disclose its bid calculations. Hence, advantageous prices remain advantageous prices whilst disadvantageous prices will remain so.
- The impact on the planned project must be demonstrated in detail for each incident. This also requires the contractor to demonstrate where and to what extent it could have mitigated idle times and delays in certain areas of the site by possible measures in other areas. Where possible the contractor must reschedule works and use alternative ways of working to lessen the impact of hindrances.
- If a delay is attributable to the contractor, the contractor will sometimes try to avoid responsibility by invoking “concurrent delays” by other contractors retained by the client. In Germany, the legal position is different from that in certain other jurisdictions: various contractors responsible for a project delay are jointly and severally liable, so that the client can sue one of the contractors for the whole sum. The contractor will then have to seek recourse against the other contractors to recover in proportion to their share of the responsibility.
Most building contracts in Germany require a viable completion date – there will be fixed or guaranteed completion dates. If the completion date is not met and delay is due to the contractor, the client can pursue a claim for damages against the contractor.
Claims like this are quite difficult to prove so it’s a common practice in Germany to agree to liquidated damages clause at the outset. Liquidated damages are usually capped at 5% of the contract price with daily caps of 0.1% f the contract price. Shareholders who do not observe these run the risk of voiding the liquidated damages clause.
Germany’s construction sector is currently on the rise with building goals to cope with by 2020, especially to address the current low-cost housing shortage. With an aging population and a deficit in high-skilled tech professionals, having the capability to cut time and cost overruns in construction projects will be a huge advantage in an emerging digital economy.
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