Drafting Contracts Under the Amended HOAI: Tips for Planners
In July 2019, a ruling by the European Court of Justice (judgment of July 4, 2019 – C-377/17) overturned a key principle of German planning law. As the culmination of an infringement proceeding lasting several years, the judges in Luxembourg ruled that the mandatory pricing under Germany’s HOAI is incompatible with EU law. Originally, the Fee Schedule for Architects and Engineers (HOAI), which came into effect in 1977, was intended to guarantee planners appropriate compensation. To this end, it established maximum and minimum rates, whereby remuneration fell within fixed ranges depending on construction costs. This was intended to prevent price and quality dumping in the interest of construction quality.
However, the European Court of Justice (ECJ) ruled that the chosen instrument of maximum and minimum rates was incompatible with the Services Directive (2006/123/EC). In its view, the rigid pricing structure made it more difficult for planners from other EU member states to access the German market. The national legislature was therefore required to act and amended the HOAI in 2021. The mandatory minimum and maximum rates were removed from Section 7(1) of the HOAI and replaced with the option to freely agree on fees. While the HOAI still contains provisions on pricing, these now serve only as non-binding guidelines.
New Freedom, New Compensation Models
When commissioning planning services, the parties involved now have the choice of whether to use the guidelines provided by the HOAI or to structure the compensation independently of these guidelines. If they opt for the latter approach, the following compensation models, among others, are available to them:
Hourly Rates
Remuneration based on hourly rates is a good option when the amount of work required for a project is difficult or impossible to estimate in advance. For the planner, this model has the advantage that the actual amount of work performed is fully compensated—even if it was inaccurately estimated at the start of the project.
For the client, this model carries the risk of unforeseeable cost increases. This can only be partially mitigated through clear guidelines regarding transparency in billed services and time tracking.
Flat Rates
When a flat-rate price is agreed upon, the risk allocation described above is reversed. For the client, the flat-rate fee provides complete cost certainty, while the planner runs the risk of not receiving compensation for unforeseen additional work if the calculation is inaccurate. Against this backdrop, this compensation model is particularly suitable when the scope of a project is clearly defined from the outset.
Performance-Based Compensation
Performance-based compensation can provide the planner with an additional incentive to deliver high-quality services. The particular challenge with this compensation model lies in defining goals realistically and clearly so that achieving them is actually possible and measurable.
Combinations
However, combinations of the aforementioned models are particularly attractive. This is because a fee structure tailored by the parties can combine a lump-sum fee, hourly rates, and performance-based fees, taking into account the individual project phases. If this approach succeeds in creating the right incentives, it can be a key building block on the path to the success of the entire project.
Georg Willem Büchler
Georg Willem Büchler studied law and economics in Bayreuth. He is a partner at the law firm Schlatter and, as a specialist attorney in construction and architectural law, advises construction companies, real estate developers, architects, and engineers on all legal matters related to real estate. Advising property owners and commercial lease law are additional areas of focus. As a “digital native,” he also regularly handles IT law matters.
Do you have any questions? Attorney Georg Willem Büchler will be happy to assist you:
A Breath of Fresh Air for the Industry
With the elimination of mandatory maximum and minimum rates, a breath of fresh air is sweeping through the planning industry. Planning firms operating in the German market are now faced with a new set of challenges. Before providing their (specialized planning) services, they must address new issues related to contract drafting. If they decide to take advantage of this new pricing flexibility, they must accurately assess the value of their own services and clearly communicate this to the client. Mastering this new task requires both technical and business management expertise.
However, compensation is only one aspect of the contract that planners should address. It is likely to be just as important—and significantly more challenging—to draft contracts with the foresight and clarity needed to prevent misunderstandings and disputes surrounding project implementation. It will also be crucial to be able to draw on sufficient business and legal expertise in addition to technical expertise.* Without the protection provided by minimum and maximum rates, a balanced risk management strategy plays a greater role in contract drafting. Otherwise, the breath of fresh air brought by pricing freedom could quickly turn into an unpleasant headwind.
At the same time, however, this new freedom in pricing also sparks competition. Without predetermined price ranges, the profitability of projects will vary more widely in the future. Quality and innovation will be the decisive factors for economic success as planners, because more than ever before, value for money will be the deciding factor in awarding contracts. Planners can stand out by adopting innovative approaches and utilizing new technologies. This may include, for example, the introduction of digital planning tools, the application of sustainable construction techniques, the use of artificial intelligence, or the implementation of efficient project management methods.
However, the prospect of innovation and development must not obscure the fact that this new freedom to set prices could also lead to price and quality dumping—something the “fathers of the minimum rates” feared so much. In order to remain competitive, inexperienced planners in particular will be tempted to keep their prices as low as possible and will be forced to cut costs. There remains the (naive?) hope that the quality of services will not suffer as a result.
Impact on General Planners
The abolition of mandatory minimum and maximum rates has a particular impact on general planners. This is because they are the ones who pull the proverbial strings on which the success of a project depends. Accordingly, they must not only demonstrate expertise in contract drafting vis-à-vis their own client but also vis-à-vis the specialist planners involved in the project who are acting as their subcontractors.** The greater flexibility resulting from the elimination of minimum and maximum rates increases the complexity of these negotiations—which, depending on the project’s size, may number in the dozens. An additional challenge lies in establishing a uniform pricing structure for the various specialist planners involved in the project.
Ultimately, however, the increased complexity of contract drafting brings primarily positive outcomes. If general planners position themselves well in this area, contract and pricing models can be tailored to the respective client and supplemented with appropriate additional services. This allows for better consideration of the importance of individual service areas or project phases and ensures their success through additional incentives. From the general planner’s perspective, this applies both in their relationship with their subcontractors and in their own relationship with their clients.
Conclusion and Outlook
The removal of minimum and maximum rates from the HOAI has fundamentally changed the planning industry in Germany. The freedom in pricing offers opportunities for innovation and flexibility. At the same time, increased competition and price pressure present challenges for many planners. In the future, they will need to focus more on issues of pricing and contract structuring. If they succeed in this, they can strengthen their market position and ensure long-term success. It should be noted that the industry is now entering a new chapter that, in addition to risks, offers above all scope for growth, innovation, and further development. It will therefore be fascinating to see what ideas emerge and how this scope is filled in the coming years.
* It’s certainly worth taking a look at the guest article by attorney Dr. Klingmann in //plus 1.
2022** Unless, as in the case of io, they have in-house specialist planners.
