Today is a special day for us, as it marks the 100th article in our "Tuesday Mornings for Construction" series. We'd like to thank you for subscribing to our newsletter and for the inspiration you provide. We hope the topics discussed address your concerns and practical concerns.
Moving on to the substantive issues, the issue we addressed today is the issue of wage indexation in construction contracts. This topic has already been widely discussed in the context of public procurement law. However, we would like to focus on the investor-contractor relationship in private relationships.
Given the rapidly changing economic climate, more and more construction participants are considering indexing fees for completed construction work. The need to utilize this mechanism most often stems from sudden increases in the prices of building materials and other costs associated with construction. Interestingly, this issue arises both in construction contracts that have already been signed and during the negotiation phase of new contracts.
Until recently, parties commonly agreed on a lump sum fee with no option to change it. In such agreements, the only remaining option is to attempt to negotiate the introduction of an appropriate indexation clause or to act based on the provisions of the Civil Code, namely Article 632 § 2 of the Civil Code, according to which, if, due to an unforeseeable change in circumstances, the performance of the work would expose the contractor to a significant loss, the court may increase the lump sum or terminate the contract. As this provision indicates, the court would decide on this matter, meaning the interested party would face a tedious and lengthy civil lawsuit. These circumstances are often unclear and difficult to prove, and the main purpose of the contract – the construction of a building – is not fulfilled. This is a particularly difficult situation for investors, who in most cases have obligations to buyers, tenants, or other contractors to whom they have committed to deliver the building or premises within a strictly defined timeframe.
For obvious reasons, contractors who are still negotiating contracts are in a more favorable position. Furthermore, even the public procurement legislator, in Article 439 of the new Public Procurement Law, has imposed an obligation on contracts concluded for periods longer than 12 months to include indexation clauses in the event of changes in the price of materials or costs related to the execution of the contract. This obligation does not apply to contracts concluded for periods shorter than one year, although the use of such practices is not restricted in any way.
In the above provision, the legislator indicates that indexation clauses should include the level of changes in material prices and costs, which will entitle the contractor to request a change in remuneration. The contract should also specify the method for determining the change in remuneration, e.g., based on the price change index published in the announcement by the President of the Central Statistical Office (GUS) or another method specified by the parties. Furthermore, the contract should specify the initial date for determining the change in remuneration and the periods during which subsequent changes in the contractor's remuneration may occur. The contract must also specify the maximum value of the change in remuneration resulting from the application of the indexation clause.
While the above provision does not apply to relationships between private entities, there is nothing to stop you from using the guidelines provided when drafting indexation clauses. In this regard, depending on whether the investor or contractor is conducting the negotiations, it's worth paying attention to the deadlines for remuneration indexation and the indexation rate used.
In summary, the proposed indexation clause in the Public Procurement Law provides a good benchmark for the private market. However, each party to a construction contract will need to pay close attention to specific solutions and apply them to its specific economic situation.
Next week we will move on to another topic that raises many doubts, namely the issue of contractors' security deposits, especially when they are withheld from remuneration.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of April 25, 2022.
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