A need for security in the context of construction contracts is not only felt by the client, who is concerned about the contractor's ability to perform. There are also frequent cases in which the entrepreneur does not receive any remuneration because his client is insolvent, despite having provided a defect-free service. Particularly in economically difficult times, bad debt losses are almost impossible for craft enterprises to cope with, so that payment claims should be secured and unsecured advance payments should be avoided as far as possible.
An initial step is to agree on installment payments with short payment deadlines. It is advisable to make this explicit agreement because, according to the law of contracts for work and services in the BGB, an installment can only be demanded for self-contained partial services. This means that, for example, no progress payment would be possible for the construction of a shell for an apartment building. However, progress payments are only partially suitable as a means of security, since the partial services can also reach a considerable value and disputes about the service status and defects often delay the payment of the installments.
A suitable security for the contractor is the contract performance guarantee in the amount of a portion or ideally the full amount of the expected compensation for work.
The claim for a contract fulfillment guarantee can be agreed in the construction contract.
In addition, the legislator has created a claim for the granting of security (Section 648a BGB) with the so-called "Bauhandwerkersicherungsgesetz" (Construction Trades Security Act), which came into force on May 1, 1993. The only cases in which there is no such claim are when the client is a public authority or when a private individual commissions construction or renovation work for the purpose of building a single-family house, with or without a granny flat. In these cases, the legislator assumed that the contractor's advance performance risk is low because the private individual is personally liable for the debts and the building plot is available as a liability asset. This assumption often does not reflect reality, so that in these cases, it is advisable for the entrepreneur to agree on a contractual performance bond.
Except in the two cases mentioned above, however, the statutory claim for the granting of security exists. It is crucial that this claim cannot be excluded by contractual agreement. Corresponding exclusion clauses in construction contracts are invalid.
If a building contractor signs a contract for work with a property developer to construct the shell of an apartment building for a flat-rate price of EUR 100,000.00, he can demand security immediately after signing the contract, but also at any time during the construction work and even after acceptance, forfor the advance performance to be rendered or rendered by him up to the amount of the outstanding remuneration claim and any ancillary claims in the amount of an additional 10 percent. In the example case, the client is obliged to provide security, regularly in the form of a surety, in the amount of EUR 110,000.00. The contractor must reimburse the client for the costs of the security, i.e. the guarantee interest for the surety.
If the client does not provide the security in due time, the contractor can give him notice of default and then refuse performance. In addition, the contractor also has the option of setting the client a grace period for providing the security. If this period expires without result, the contract is canceled. An additional termination is no longer required. If the contract is terminated in this way, the entrepreneur can, on the one hand, demand compensation for any partial services provided by him and, on the other hand, claim compensation for the loss of trust. In this context, the legislator has created a presumption for a "minimum damage" in the amount of a flat sum of 5 percent. If the building contractor in the above example does not receive the security despite setting an appropriate grace period, he can demand 5 percent of the contract amount plus 10 percent, i.e. EUR 5,500.00, from the client without having provided any services.
On the basis of the explicit legal mention, garden and landscape architects can also assert this claim when they provide services under a contract for work and services. Architects, structural engineers and other specialized experts who work for the client on the basis of a contract for work and services are also entitled to security.
The legislator has thus taken into account the interests of a contractor, who does not want to be left with his claim after the work has been completed, by providing for the right to a security deposit. However, in practice, this suitable means of security is used far too rarely.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.