More than three quarters of construction companies have encountered unexpected cost increases during construction, roughly in one fifth of the constructions carried out in the last ten years. The average amount of these costs is CZK 62 million for large companies. A quarter of companies keep a five per cent reserve to cover unexpected costs, while 74 per cent of companies have no reserve. This results from a survey of 105 Czech construction companies conducted by the analytical company CEEC Research.
According to 37 percent of construction companies, unexpected cost increases in construction projects are most often caused by errors in project documentation. These can cause complications and delays, leading to financial losses. Almost the same number of companies think that changes in material prices are a common problem. These can affect the overall cost of a project. But costs can also be increased by, for example, changes in the project specified by the investor or unexpected geological conditions.
According to the survey, the Public Procurement Act plays a key role in the regulation of the construction process and therefore in the area of construction costs. This was amended last year to make public tenders more transparent. The amendment introduced, for example, a more stringent requirement for contractors to have criminal records or to store and make available tender documentation in electronic form.
Four per cent of builders in the survey rate the impact of the law positively. 59 per cent of respondents think that the law brings some benefits, but its solutions are only partial and there are still shortcomings. This group perceives the existing regulations as insufficient in the fight against overpriced construction. 37 per cent of construction companies think that the law is completely ineffective and needs to be revised.
“Fair contract terms should include a compensation mechanism in case there is an unexpected increase in costs. It is not possible for everything to fall on the shoulders of the contractor, who must pay 100% of his obligations to contractors, including liability for wage claims. A possible solution is, for example, the mandatory inclusion of an inflation clause in contracts for public contracts above the limit,” said Moritz Freyborn, Chairman of the Board of Directors of Strabag.
According to 40 percent of respondents, introducing an obligation for contracting authorities to include risk reserve clauses in contracts to cover unexpected costs would reduce costs and losses. Almost a quarter of the companies surveyed would recommend simplifying the process for contract variations. The proposal to set maximum limits for budget overruns is supported by 12 percent of respondents, which would help predictability of costs and streamline financial planning, and nine percent see the advantage of legislative support for quick dispute resolution, which would reduce time and financial losses.
Source: CEEC Research and CTK
