How can an investor ensure control over the construction process? | In Principle

Go to content
Subscribe to newsletter
In principle newsletter subscription form

How can an investor ensure control over the construction process?

The investor is the host of a construction project and, in practice, it is the investor who decides on the wording of the agreement with the general contractor, including the contractor’s activity in execution of the project. It is the investor who decides how the construction process is organised. But investors have different preferences: they do not always want to precisely track the course of works, and that may not be feasible. Therefore, the agreement with the contractor should be tailored to the adopted model of cooperation and take into account the possible level of control by the investor of the general contractor’s activities.

The investor’s role in the construction process—different preferences

Before preparing a contract for construction works, the investor should plan the level of its involvement in the project. The investor’s activity usually depends on the scale of the works. In complex infrastructure projects, investors usually secure the support of a project management company to scrupulously check the activities of the general contractor. In less-complex projects, the investor must consider what level of independent oversight of the construction process is sufficient and feasible for it to carry out.

Experience shows that investors are not always willing and able to continuously monitor the general contractor’s actions. This problem applies in particular to foreign investors operating in Poland, coming from countries where there is no joint and several liability for payment of subcontractors. Such investors are accustomed to a different legal and business model and therefore seek to limit their participation in the construction process. They recognise that the need for the investor to account for subcontractors undermines the role of the general contractor, which is after all supposed to assume the burden of carrying out the project and cooperating with the entities engaged in the construction process.

What to report to the investor?

The investor’s agreement with the contractor should be suited to the chosen model of cooperation. In particular, care should be taken to ensure that it includes an appropriate procedure for notice of subcontractors, as joint and several liability will depend on this. At this stage, the investor may decide what level of knowledge about agreements with subcontractors will be appropriate.

The statutory procedure provides for the investor to be notified at least of the detailed subject of works to be performed by the subcontractor before their execution begins. Both the contractor and the subcontractor may provide notice of this scope. However, care must be taken to ensure that such notifications are made by the general contractor, to avoid misunderstandings. At this stage, it is also worth ensuring that the value of the works entrusted to the subcontractor is determined and communicated to the investor. This will set a limit on the investor’s liability for the subcontractor’s fee. This follows from a 2017 amendment which we have written about before.

Such notification is not required if the investor and the contractor have already specified the detailed subject of works of particular designated subcontractors in the main agreement concluded between them. However, this will not always be possible, because at the stage of concluding the agreement with the investor, the general contractor has usually not yet agreed on conditions of cooperation with subcontractors and the scope of their duties.

The investor may also decide at this stage whether it wants to be provided with subcontractor contracts. Knowledge of the terms of these contracts will be helpful in assessing subcontractors’ claims (in particular to determine the handover procedure, payables, work schedules, and delays). However, at this stage investors often waive such access and obtain these contracts only when a claim arises (subcontractors awaiting payment usually cooperate and provide the investor with the required documents). This is justified, among other things, by exclusion of potential risks associated with the investor’s implied acceptance of the way the subcontractors perform work, or the materials used.

The contractor’s obligation to provide more extensive information about subcontractors (their experience, preparation for execution of the project, and financial situation) may be combined with contractual regulation of the investor’s objection to the involvement of a specific subcontractor in the construction project. The current regulations do not provide for a need to justify such objections. Unless a different view develops in the court decisions, the investor will have leeway on this issue. The wording of the amended provisions indicates the investor’s discretion in this respect. This may lead to abuse. Theoretically, nothing prevents an investor from opposing all subcontractors and thus seeking to exclude its joint and several liability. Therefore, it is in the contractor’s interest to ensure that the reasons for opposition are clearly stated in the contract.

Investor’s influence on the terms of subcontractor contracts

The investor can go even further and ensure influence over the wording of subcontracting agreements. It is acceptable to require that agreements with subcontractors be concluded according to a template specified in the agreement with the general contractor. This will not always be possible, but such an action may help to develop a uniform operating scheme for all participants in the construction project, which will facilitate in particular the handover of individual stages of work, final handover, and financial settlements. In such a case, the situation of subcontractors and contractors will be similar and their rights and obligations will be analogous. Therefore, it will be easier for the investor to examine and assess subcontractors’ claims.

The investor may also require that the settlements between it and the contractor be harmonised with settlements between the contractor and subcontractors. This will favour an ongoing settlement of works and avoid a situation where the need to satisfy some subcontractors at the end of the construction project is a surprise for the investor (when the contractor has already received most of the payment).

In particular, this will be facilitated by a provision in the contract that the terms for payment to subcontractors should not be longer than the terms for payment to the general contractor. Additionally, such provisions may be reinforced by a provision that terms for payment to the contractor are extended accordingly if the terms for payment to subcontractors differ. However, this may meet with resistance from contractors, who often finance the subcontractors’ work from amounts received from the investor.

Investors also often include in their agreements with the contractor a provision that the amount of subcontractors’ fees may not exceed the amount of the contractor’s fee. Under the new regulations, this will be of lesser importance, due to the statutory limit on the investor’s liability for particular areas of works. However, this does not change the fact that providing the investor with the possibility of objecting to the subcontractor’s fee may cause practical problems, especially at the final stages of the project. It is often the case that when a considerable time has elapsed since the start of the construction project, it is not possible to provide a subcontractor who would agree to carry out work at the rates foreseen in the main agreement. In such situations, in the event of investor resistance, general contractors have no choice but to engage subcontractors to complete the construction project even though the subcontractors have not been formally approved.

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners