Terminating instead of continuing: what it costs the client

The client can end the construction contract without giving a reason. Section 648 of the Bürgerliches Gesetzbuch (BGB, the Civil Code): "The client may terminate the contract at any time until completion of the work" (unofficial translation, as are all quotations here). The VOB/B contains the same right in s. 8(1) no. 1: "The client may terminate the contract at any time until completion of the work."

The contractor keeps its claim to pay, reduced by what it saves. Under s. 648 BGB, it is entitled "to demand the agreed remuneration"; however, it must give credit for "the expenses it saves as a result of the cancellation of the contract", and for what it earns by using its labour elsewhere or maliciously fails to earn. Under s. 8(1) no. 2 VOB/B too, the contractor is entitled to the agreed pay, with credit for what it has saved.

The law supplies a starting value for the unperformed part. "It is presumed that the contractor is accordingly entitled to 5 per cent of the agreed remuneration attributable to the part" of the work not yet performed. This is a presumption, not a fixed amount. For the budget calculation it is a starting figure, not a certain amount. For the budget, termination at will therefore means three items: pay for the part performed, 5 per cent of the pay for the part not performed under the statutory presumption, and the full cost of the contractor who completes the work.

If continuing cannot reasonably be expected of the client, the calculation changes. Under s. 648a(1) BGB, either party may terminate for good cause without notice if continuation until completion "cannot reasonably be expected". Under subsection 2, partial termination is also possible if it relates to "a severable part of the work owed".

Only what has been performed is paid. Under subsection 5, the contractor is entitled only to the pay "attributable to the part of the work performed up to termination". The 5 per cent presumption of s. 648 BGB does not apply. In addition, under subsection 6: "The right to claim damages is not excluded by the termination." The successor's extra costs can therefore in principle be the subject of a damages claim, if its conditions are met.

The state of the work must be established jointly. Under s. 648a(4) BGB, either party may require the other after termination to cooperate in a joint record of the state of the work. A party that refuses bears the burden of proving the state of the work. For the client, this record is also the basis for reconciling interim payments already made with the actual value of what has been performed.

The risk lies in the cause itself. Whether a cause holds up is often disputed. What consequences a termination has when its good cause is not upheld must be examined legally in the individual case before it is given. In the budget, this case appears as a scenario of its own, not as an assumption.

A termination without proper form is an avoidable risk. Section 650h BGB: "Termination of the construction contract requires written form." Here the law expressly requires written form, whereas text form is enough for a change order under s. 650b(2) BGB. Anyone weighing a change against termination should know this difference: ordering a reduction is formally easier than terminating part of the contract, but follows different pay rules.

The budget target can often be reached without termination. A change to the agreed result of the work under s. 650b(1) no. 1 BGB can also be a reduction of the work; the parties then seek agreement on the reduced pay, and without agreement within 30 days the client can order the change in text form. Pay then follows s. 650c BGB, not s. 648 BGB. The procedure is described in the article on changes under section 650b BGB.

Which route is cheaper is decided by the figures, not by principle. A reduction keeps the contract and the warranty with a single party. Termination ends the commitment but opens up interfaces, standstill and a new award.

The following example is entirely invented and serves only to show the arithmetic. A construction contract is for EUR 1,000,000 net. Work worth EUR 600,000 has been performed; the unperformed part corresponds to EUR 400,000 of the agreed pay. A successor would take over the remaining work for EUR 460,000; on top of this come a fictitious EUR 25,000 for standstill, retendering and additional design services.

In this example, termination at will costs EUR 105,000 more than continuing on the 5 per cent presumption. It only pays off if continuing would become more expensive for other reasons, for instance because of work the client no longer needs and which cannot be reduced. Termination for good cause is cheaper, but only if the cause holds up and damages can be enforced; both are uncertainties, not figures. In this example, the reduction is the only route that actually lowers the budget.

A special case concerns contracts based on a Kostenanschlag (cost estimate) by the contractor. If the contractor has not guaranteed the accuracy of the estimate, and it turns out that the work cannot be carried out without "a substantial overrun on the estimate", and the client terminates for that reason, the contractor is entitled only to "the claim specified in section 645(1)" (s. 649(1) BGB). If the contractor foresees such an overrun, it must "notify the client without undue delay" (s. 649(2) BGB).

The law does not say what "substantial" means. It gives no percentage, and nor does this article. For the budget it follows that a contractor's cost estimate is not a fixed price; the duty to notify is, however, a lever if the client asks early whether the estimate is being kept to and documents the answer.

There is a separate, early right of termination against the designer. Under s. 650r BGB, the client can terminate the architect's or engineer's contract after submission of the planning basis and the cost assessment under s. 650p(2) BGB; the right lapses 2 weeks after submission, and only pay for the services rendered up to then is owed. Details are covered in the article on the target-finding phase in this guide.

A buyer from a Bauträger (developer) does not have this option. Section 650u(2) BGB excludes for the Bauträgervertrag (developer contract), among others, ss. 648 and 648a and ss. 650b to 650e. The buyer can therefore neither terminate at will nor order changes under s. 650b. The budget must therefore be right at signature.

Four questions belong in every decision paper before a termination is given.

Payments and security in detail are covered in the article on the payment plan with instalments and security. The effects of acceptance are explained in the article on handover and its effects under the VOB/B; the VOB/B contract as a whole in the article on the construction contract under the VOB/B.