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12.12.2022 | KPMG Law Insights

Important federal decrees on current price increases for building materials

Published on 28.03.2022, updated on 12.12.2022

 

Construction companies are currently facing difficulties due to a sharp rise in the cost of operating to the limits of their capabilities. Public clients see these difficulties of their contractors and are looking for legally compliant ways to adapt existing contracts to the new reality and to continue ongoing construction projects in a cooperative manner despite the crisis. This is where the federal decrees come in and show possibilities for action, both in existing contracts and in award procedures:

On December 6, 2022, the Federal Ministry of Housing, Urban Development and Construction and the Federal Ministry of Digital Affairs and Transport extended for a second time until June 30, 2023, the decrees of March 25, 2022, which were initially limited until December 31, 2022. This is intended to cushion the impact of supply bottlenecks and price increases for key construction materials as a result of the war in Ukraine. The decrees apply to the product groups steel and steel alloys, aluminum, copper, petroleum products (bitumen, plastic pipes, foils and sealing membranes, asphalt mix), epoxy resins, cement products, wood and cast iron pipes. Price adjustment should also be allowed for operating materials if their value exceeds 1 percent of the estimated contract amount.

I. Adjustment of existing contracts

The decrees show possibilities to adjust existing construction contracts due to the direct and also indirect effects of the war in Ukraine in order to absorb the consequences of the material shortages and material price increases caused by this.

  1. Extension of contract periods, § 6 VOB/B

If it can be proven that materials cannot be procured by the Contractor, not even at higher purchase prices than calculated, a case of force majeure or another unavoidable event within the meaning of § 6 Paragraph 2 Number 1 Letter c) VOB/B shall be assumed. The execution deadlines are then extended.

  1. Disturbance of the Basis of Business, § 313 BGB

If materials can only be procured at significantly higher purchase prices than those calculated, this may constitute a case of frustration of contract. The question of the reasonableness of maintaining the unchanged contract prices must always be decided on a case-by-case basis. The focus is not on the individual item, but on an overall view of the contract. The smaller the share of an affected item in the total order volume, the smaller the chance of a claim for adjustment under Section 313 BGB .

If a disturbed business basis is to be assumed, the company has a claim to adjustment of the prices for the affected items. However, this does not mean that the client bears all costs exceeding the calculation. The amount of the contract adjustment is to be determined on a case-by-case basis (regularly not more than 50%). The basis for the adjustment is to be the pure material prices. Surcharges for BGK, AGK, risk and profit are not taken into account.

The decrees also indicate what evidence must be requested from the company on a regular basis. This includes, but is not limited to, proof of actual purchase costs and proof of marketability of actual purchase prices through submission of comparative quotes.

  1. Subsequent agreement of a substance price escalation clause

If there is a case of disturbance of the basis of the transaction, the subsequent agreement of a material price escalator clause for parts of the service not yet performed is also possible. For this purpose, the decrees recommend following VHB Form 225 with the proviso that a deductible of 20 percent be agreed with the contractor.

  1. Change of contracts, § 58 BHO

The clarifying comments on Section 58 of the Federal Budget Code (BHO) are particularly important and should be emphasized. Often, meaningful adjustments fail because public contracting authorities want to accommodate but assume that they can only adjust existing contracts in favor of the contractor if the latter has an enforceable claim to adjustment (e.g., under Section 313 BGB). However, this is not always true. There are also possibilities for adjustment below the threshold of disturbed business basis:

According to Section 58 (1) of the Federal Budget Code (BHO), contracting authorities bound by budgetary law may cancel or amend existing contracts to the detriment of the public sector only in exceptional cases. However, the concept of “disadvantage” makes it possible not to have to focus solely on the economic situation of the contractor, but to be able to enter into an overall weighing of the advantages and disadvantages for the construction measure. If this overall assessment shows, for example, that an adjustment of prices promotes the timely progress of the construction measures, avoids disputes elsewhere, saves administrative effort and follow-up costs (e.g. through longer use of a substitute rental object), there may already be no disadvantage within the meaning of budgetary law.

It is important for the contracting authority to carefully document the reasons for the decision!

  1. Change of contract, § 132 GWB resp. § 22 EU VOB/A

In addition to the budgetary hurdle, the contracting authority willing to adapt must also overcome the hurdles of procurement law in order to be able to implement the adaptation. The decrees also provide solutions for this.

If a case of § 313 BGB exists, then there is already a lack of a substantial change in the order within the meaning of § 313 BGB. § Section 132 of the ARC, because the adjustment restores the original economic balance of the contract. A shift in favor of the contractor does not take place.

In addition, a contract amendment is permissible without conducting a new award procedure if the amendment has become necessary due to circumstances which the contracting authority could not have foreseen within the scope of its duty of care, the overall character of the contract does not change as a result of the amendment (Section 132 (2) No. 3 ARC) and the price is not increased by more than 50 percent of the value of the original contract (Section 132 (2) Sentence 2 ARC). The war events in Ukraine and their consequences were unforeseeable for the client in the same way as for the contractor.

Finally, the decrees refer to Section 132(3) of the ARC, according to which the amendment of a public contract is permissible provided that the overall nature of the contract does not change and the value of the amendment (sum of all contract amendments) does not exceed the European threshold and does not exceed 15 percent of the original contract value.

Again, make sure that the decision is carefully documented!

II. New procurement procedures – substance price escalator clauses facilitated

For new procurement procedures, substance price escalator clauses must be included in the procurement documents. Unlike in the past, the agreement of a price escalation clause is already permissible if the period between submission of the offer and delivery or completion is one month. Furthermore, section 2.1 c) of the guideline for form 225 must be complied with (material cost share is at least one percent of the estimated order total). In the absence of offers from relevant traders, the contracting authority may use base values from offers in previous tenders or empirical values to determine base value 1.

III. Ongoing award procedures – make adjustments

Insofar as award procedures have already been initiated but the bids have not yet been opened, the material price escalator clauses are to be included retrospectively. Execution deadlines are to be adjusted to the current situation. The deadline for submission of bids shall be extended if necessary. Bidders’ requests to agree on a substance price escalation clause for the above-mentioned product groups shall be followed, unless the period between bid submission and delivery/completion is less than one month or the substance cost share of the substance concerned is less than one percent of the contract sum estimated by the awarding authority in terms of value. If the bid (opening) has already taken place, the procedure should be returned to the status prior to bid submission in order to avoid disputes during construction, so that material price escalation clauses can be included and, if necessary, execution deadlines can be extended.

 

Our experts will be happy to advise you on the options for adapting your contract and dealing with award procedures in the current situation. The legal principles set forth in the decrees can also be used by contracting authorities that are not the direct addressees of the federal decrees.

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