It is becoming increasingly difficult to build new houses and simultaneously offer reasonable rents. Inflation is leading to increased prices for materials and investment support is being abolished, which is leading to increased uncertainty for construction projects. Public Housing Sweden has sent out a questionnaire to its members in order to investigate price increases within the construction industry. Among other things, the report emphasises that AB 04/ABT 06 chapter 6 section 3 is such a major uncertainty factor that it is having an adverse impact on housing construction. In this article, we have summarised parts of the report.
PUBLIC HOUSING SWEDEN
Public Housing Sweden is an organisation for private and municipal (so-called public housing) companies throughout Sweden. The organisation was set up in 1950 and some 300 housing companies are currently members. Together, these companies own over 950,000 homes in Sweden.
Public Housing Sweden has sent out a questionnaire to its members in order to investigate how price increases in society are affecting the housing companies' new production. The responses to the survey have been summarised in a recently published report.
AB 04/ABT CHAPTER 6 SECTION 3 IS LEADING TO UNCERTAIN CONSTRUCTION PRICES
The report emphasises AB 04/ABT 06 chapter 6 section 3 as a major uncertainty factor. The provision makes it possible for contractors to negotiate compensation for abnormal, unforeseen and significant cost changes, even in contracts where a fixed price has been agreed.
There is uncertainty surrounding when and how the paragraph can be applied. As things stand, the clause has not been assessed in court since the 1970s. The negotiations are important and complex, which means that they are taking time. The surveys' respondents believe that the uncertainty factor is so major that it is having an adverse impact on housing construction. The uncertainty surrounding the application is partly due to case law. For it to be possible to establish case law in the area, it generally requires the contract to be completed for an overall assessment to be conducted. Further, it presupposes that the parties are both in disagreement, and willing to pursue litigation in court. It is also common to have arbitration clauses in construction contracts (where disputes shall be settled by an arbitration tribunal), which means that judgements are not made public and the exceptional arbitrations that are made public do not set a precedent. However, taking into account the prevailing circumstances in the market, we presumably do not need to wait another 50 years before the provision is subject to examination in court, though it will probably take a couple of years.
LOU (THE PUBLIC PROCUREMENT ACT) IS FURTHER COMPLICATING THE ASSESSMENT
The uncertain situation in the market (such as prices, interest rates and rental rules) is contributing to difficulties setting budgets and reluctance to invest while waiting for prices and assets to return to stable levels. Despite procuring authorities/purchasers trying to factor in price increases in the market in connection with procurement, 53% of the winning tenders are more expensive than expected. The report shows that for 56.7% of these projects, the difference between the expected price and the winning tender price is up to 10%. In 33.3% of cases, the difference amounts to 10-20% and in 10% of cases, the price difference amounts to 35% or more.
The report shows that 44% of current construction projects have received notifications of cost changes. Those projects where the contractor has requested a change to the agreed price, and where the housing companies have also reported the size of the requested change, amount to a total of 35 projects. For these projects, in 68.6% of cases, the contractor requests a change of up to 10%. In 25.7% of the projects, the contractor wishes to change the agreed price by 10-20% and in 5.7% of cases the requested change is 25% or more.
Further, the report shows that in 29 construction projects, the developer and the contractor have agreed on a new price. For these projects, in 72.4% of cases a change to the agreed price of up to 10% has been agreed. In 20.7% of cases, the agreed change amounts to 10-20% and in 6.9% of cases, the agreed change amounts to 20% or more.
The lack of clarity surrounding AB 04/ABT 06 chapter 6 section 3 is also contributing, in combination with the procurement legislation, to uncertainty and frustration concerning when the provision shall be applied. In the tender phase, it is common for tenders to vary substantially in price. The knowledge that pricing varies substantially as early as tendering makes it hard to assess in a later phase what is regarded as constituting a normal or foreseeable price increase. The uncertainty surrounding the application of AB 04/ABT 06 chapter 6 section 3 means that it is not possible to establish in advance what the final construction cost will be, and the report states that it is ”irrational” to order housing under uncertain conditions.
HOW CAN THIS BE RESOLVED? AND BY WHOM?
Public Housing Sweden believes that the building contractors should manage the cost increases through streamlining and quality assurance of their contractors instead of uncritically passing on the cost to the purchaser. In addition, Public Housing Sweden believes that the politicians should exempt Public Housing Sweden from LOU, facilitate the construction process through type approval of standardised houses, construction systems and products, reduce VAT on rent and also stop micro-managing house building so that it can be standardised and industrialised.
The report observes that there is uncertainty surrounding material prices, both in terms of the price trend per se and how this should be managed within ongoing projects. This is consistent with our recent experience. Like the rest of the industry, we are eagerly awaiting legal guidance, even though it might take time.
We have previously written about increased material prices in contracts and how this should be managed correctly according to construction law and procurement law, which you can read more about in this article (in Swedish).
Want to know more about the management of increased material prices prior to and during contracts?
Lindahl is keenly monitoring developments surrounding AB 04/ABT 06 chapter 6 section 3, and can assist with both review of administrative provisions and advice during an ongoing discussion on change of agreed price. If there is any interest, we are also able to develop training courses and seminars on AMA AF, AB 04/ABT 06 and cost changes. You are very welcome to contact us using the contact details below.