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30.06.2023 | KPMG Law Insights

Special regulations for dealing with supply bottlenecks in the construction industry expire

The special arrangements for dealing with the supply bottlenecks and material price increases that have prevailed in recent years will expire on June 30, 2023. This was declared by the Federal Ministry of Housing, Urban Development and Construction and the Federal Ministry of Digital Affairs and Transport in a decree and circular dated 20.06.2023 respectively. This decision represents a turning point for the construction industry and raises questions about the potential impact on ongoing and future construction projects across Germany.

The special rules should ensure the continuity of procurement procedures

The special procurement rules were originally introduced in response to challenges in the construction sector, particularly with regard to the availability and rising cost of key construction materials. In recent years – exacerbated by the Corona crisis and most recently by the war in Ukraine – the industry has been confronted with considerable price fluctuations and temporary supply bottlenecks. This has led to delays and higher project costs. To mitigate these problems and ensure the continuity of current and future procurement procedures and existing contracts, the federal government introduced temporary procurement rules. It thus enabled alternative procurement and pricing mechanisms.

The possibility for public-sector customers to grant price adjustments in deviation from the standard procedure or to include price adjustment mechanisms in the contract enabled important procurement measures to be driven forward and ongoing projects to be stabilized. The flexibility these regulations offered proved critical at a time when supply chains around the world were disrupted and markets were fluctuating.

The expiry of the special arrangements entails both opportunities and risks

With the expiration of these special arrangements, contractors face the (old) challenge of having to forecast future price increases and factor them into contract prices. The federal department’s decision reflects the government’s confidence in stabilizing supply chains and material availability, as well as its belief that market conditions have normalized sufficiently to warrant a return to regular procurement practices.

The expiration of the special regulations presents both opportunities and challenges for contractors, suppliers and project participants. On the one hand, it means restoring market dynamics, where prices and supply are determined by normal market forces. This can foster a more competitive environment, which can lead to cost reductions in the long run. Contractors could become more flexible in sourcing materials, and suppliers will need to adapt to changing market conditions. On the other hand, the expiry of the special arrangements also brings new imponderables. It remains to be seen whether the construction industry has fully recovered from the supply chain disruptions and price volatility observed in recent years. Contractors will need to carefully consider the potential impact on project timelines and budgets. Returning to regular procurement practices may also require reevaluating supply strategies and contractual arrangements. If this does not succeed, any remaining risks will be reflected in supply prices.

The construction industry should closely monitor the development on the market

To effectively manage the upcoming transition, industry players should closely monitor market trends and developments. Maintaining open communication with suppliers and working closely with project partners is critical to mitigate potential disruptions. In addition, sustainable sourcing practices and exploration of alternative material options can help reduce dependence on certain resources and mitigate future supply chain risks.

The German construction industry has proved resilient and adaptable in the face of challenges. The expiration of the special procurement rules represents a milestone in the recovery process and signals a return to normalcy in the market. While uncertainties may arise, proactive measures, prudent decision-making and a focus on long-term sustainability will be critical to navigating the evolving landscape of the construction industry.

Award guidelines were adjusted

For future awards, Guideline 225, Forms 225 and 225a as well as the information sheet on the effectiveness of the material price escalator clause according to Form 225a are to be applied, which have been (editorially) adjusted because the Federal Statistical Office has discontinued the update of the Fachserie 17 Reihe 2. The update is now made via the “Statistical Report – Indices of Producer Prices of Industrial Products (Domestic Sales)” and via the Genesis-Online database. Guideline, forms and information sheet are to be used in the amended version and are made available for download by the BMWSB and the BMVG here(VHB (fib-bund.de)).

In ongoing award procedures, a decision on the inclusion of a material price escalator clause shall be made at the due discretion of the contracting authority, if requested by bidders. It should be noted that the Contractor may not be saddled with an unusual risk for circumstances and events over which it has no control and whose effect on prices it cannot estimate in advance.

In the case of existing contracts, an amendment to existing contracts remains permissible within the limits of Section 313 of the German Civil Code (BGB) or Section 58 of the Federal Budget Code (BHO) following a case-by-case examination, in the context of which the statements in the decrees of March 2022 and June 2022 (Item IV in each case) constitute an aid to interpretation. In this respect, the exemptions continue to apply.

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