Significant changes in construction law

The main reason of the changes on the construction activity and construction contracts is to provide higher administrative control over construction projects which are financed by state sources. The new provision shall also apply for private projects.

The provisions of the new government decree are compulsory, this means that the parties may not deviate from it. The main goal of the decree is to control the payment of sub-contractors, the calculation of the contactor’s fee, the scope of the employer’s, designer’s, construction supervisor’s, contractor’s duties and set forth the mandatory elements (in details) of a construction and design agreement. As of October 1, 2009 agreements on construction works pursued as business activity have to be made in writing, while those falling under the scope of the Public Procurement Act have to be countersigned by an attorney or in-house council.

If the parties agreed that the contractor’s fee is a lump sum the contractor may not claim the consideration of the additional works (többletmunka). In this case the contractor may be remunerated only in respect of the extra works (pótmunka) if any. The decree set forth the definition of additional works (works contained in the construction documents but not considered in the contractor’s fee) and extra works (works not contained in the construction documents). The additional works may be invoiced only (i) in case the contractor’s fee is calculated based on the bill of quantities (i. e. itemised settlement of account) and (ii) the contractor certifies with the priced bill of quantities that the given additional work was not included in the budget.

In order to put an end to the debt chain in the construction industry, the payment in larger project will be controlled and made via an external third party (i.e. bank). It will involve the investor/employer, the contractor and the subcontractors to sign a special contract through an external party, such as a bank or other financial institution. The payment manager will handle on the one hand the funds provided by the employer and on the other hand the performance securities provided by the contractor. The engagement of a ‘safe hand’ is compulsory if (i) the investment falls under the scope of the Hungarian Procurement act and its value exceeds HUF 90 million or (ii) the value of the investment exceeds the European value threshold for public construction works (currently EUR 5.150.000,-). In the later case the value of the investment will be established based on the calculation method published in the regulation on construction fine (and not the amount specified in the general contractor’s agreement).

The provisions on the payment management agreement – inter alia – set forth that the (i) the completion protocol issued by the construction supervisor (műszaki ellenőr) and (ii) the payment to the general contractor(s) or subcontractor(s) of the amount specified in the invoice issued based on the completion protocol.

The employer must certify that the funds (in form of cash, credit, loan, etc.) covering the entire project are available at the entry into effect of the general contractor’s agreement. Until the date of commencement of the given work phase at the latest, the employer must (i) provide the consideration of the given phase, work part etc. is available on the payment manager’s account or (ii) must ensure that the funds covering the value of the given phase work part is under the exclusive control of the payment manager, in both cases The payment towards the contractor or subcontractors is conditioned to the approval of the completion protocol by the construction supervisor. Therefore, the employer does not have any control over the payments. The amount of the (partial) contractor’s fee may be covered by means of the following sources: (i) treasury bonds/bills issued by one a member state of the EU, (ii) securities, (iii) national or EU funds, (iv) loans or credits or (v) cash deposited on the escrow account of the payment manager.

The payment manager is entitled to retain from the amount payable to the general contractor the consideration due to the subcontractor if the general contractor failed to fulfil its payment obligation towards the subcontractors. Practically, the payment towards the general contractor is conditioned by the subcontractor’s confirmation of receipt. The fee of the payment management and all costs related to the payment management is payable by the employer.

If the involvement of a payment manager is compulsory, the subcontractors will be registered in an electronic registry forming a part of the construction diary (log book). The general contractor will enter the data on each subcontractor in the electronic registry. The payment manager will be entitled to retain the amounts due to the subcontractors from the payments towards the general contractor. If employer does not provide the payment manager with the required funds within the pre-agreed deadline, the contractor is entitled to suspend the works for 30 days. If the employer fails to certify that it has ensured the required funds during the time of the suspension the contractor may rescind the general contractor’s agreement.

The new regulation provides inter alia for or changes the compulsory content of the construction documents, construction diary, the design, contractor’s, subcontractor’s and payment management agreement. In addition, if the involvement of a payment manager is compulsory than the employer has to commission a construction supervisor as well. The changes also affect the hand over procedure.

Daniel Kellner
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