Hungary: new construction rules

New construction rules are being introduced to facilitate greater accountability and better controls within the construction sector.

One of the major changes is the requirement for principals to engage (and pay the fees of) an escrow agent (“fedezetkezelő”) on construction projects that:

• are subject to the Public Procurement Act and have a value of at least of HUF 90 million, or
• have a value at or above the community value provided by the Public Procurement Act (currently €5.15 million)

The rules on escrow agents take effect from 1 January 2010 for projects under the Public Procurement Act and from 1 April 2010 for other projects.

The escrow agent’s main function is to ensure proper use of the principal’s funds allocated to construction and performance and advance payment bonds offered by the general contractor.

The principal is required to open an escrow account for use by the escrow agent to pay fees to the general contractor (or withhold them where fees are due to a subcontractor but have not been paid).

If the principal does not deposit the necessary amounts in the account on time, the general contractor is entitled to suspend its activities and later to terminate the contract.

Another major change is the requirement for the principal to notify the authority of all known general contractors and subcontractors at the start of works, to be included in a contractors’ registry.

This includes an online registration system for subcontractors whenever an escrow agent is involved in the project, so that he is aware of all subcontractors, can monitor whether or not they are being paid on time and can notify them if the general contractor is not paid by the principal and therefore becomes entitled to suspend its activities (and later to terminate the contract).

From 1 October 2009:

• the requirement to notify the authorities 10 days in advance of the start of construction now applies to projects with a value of at least HUF 50 million (previously HUF 30 million) and projects where an escrow agent is involved
• notification to the authorities must include information about the general contractors or, where that information is lacking, information about all known contractors at the time
• a new public register of construction businesses is to be established by the Hungarian Chamber of Commerce and Industry. All contractors must register to be permitted to do construction work
• any unregistered contractor carrying out construction work may be issued with a fine by the Hungarian Chamber of Commerce and Industry
• there are new conflict rules affecting the various parties in construction projects, such as the responsible technical manager, building supervisor and architect
• there are new rules governing the content of construction agreements and completion certificates issued by the general contractor or subcontractor.