If the construction of a larger building is commissioned, high financial risks arise for both the client and the contractor. From the contractor’s perspective, for example, it can happen that the customer is suddenly no longer willing or economically able to pay the agreed price.

If the contractor therefore demands corresponding advance payments, the customer in turn runs the risk that his building will not be completed and that he will have a repayment claim against the contractor, but that the latter will have become insolvent in the meantime. When concluding corresponding purchase or construction contracts, special care must therefore be taken with regard to the payment terms.

Common security in construction projects: contract performance bond

In the construction industry, it is generally customary for the contractor to provide security, e.g. in the form of a contract performance or advance payment bond, to secure advance payments. This protects the client from the contractor’s insolvency.

This is because the guarantor, a bank or insurance company, must pay on the guarantee if the contractor no longer fulfills or can fulfill his obligations under the contract. Under certain circumstances, the guarantor may be able to defend himself against the payment, e.g. because he – like the contractor – can raise objections to the repayment claim. Whether this is the case depends on the form of the guarantee.

Advance payments for the purchase of photovoltaic systems

If a company is commissioned to construct a photovoltaic system, the interests of the parties are similar. The contracts usually used in this case, which combine purchase and work contract regulations, currently often provide for high advance payments after conclusion of the contract.

It is true that advance payments of a certain amount are appropriate, since a certain amount of advance financing is often necessary in order to be able to realize the project. However, very high advance payments are also a sign of an “overheated” market in which it is too easy for suppliers to impose one-sided conditions on buyers willing to invest.

Depending on the size of the plant and the proportion of the advance payment, this can easily amount to six-figure sums. Further installments are often due after delivery of the modules and other system components.

Risk: Default of the supplier

From the buyer’s point of view, it can become problematic if the advance payments are not matched by adequate collateral. If the project comes to a standstill and/or the supplier as a whole gets into difficulties, orders may not be completed.

The client then generally has a claim to repayment under the general provisions of the Civil Code, but can no longer enforce this due to the (impending) insolvency of the project developer. Depending on the form of the construction contract and the status of the project, it may be possible to demand at least the transfer of ownership of the components (modules, inverters, transformer station) which the contractor has already acquired and brought to the plant site.

However, their value is often far below that of the plant still to be erected and, if applicable, the components themselves are still encumbered with a reservation of title by the upstream supplier.

Conclusion: Agree on securities!

From the buyer’s point of view, it is therefore generally advisable to demand a guarantee to secure advance payments when purchasing photovoltaic systems and to negotiate this issue with the supplier of the photovoltaic system.

In many cases, project planners will point out the high costs of such a guarantee. This is because, depending on creditworthiness and the guarantor, these costs range between 0.75 and 5 percent of the guarantee amount. To counter these concerns, however, contractors may offer to cover all or part of the cost of the surety.

If the project developer is not prepared to provide security despite bearing the costs, or is unable to offer a guarantee at a reasonable price due to a lack of creditworthiness, careful consideration should be given from the buyer’s point of view as to whether the risk of default by the seller should still be taken.

In addition, it should at least be ensured that the progress of the project is carefully documented and that installments are only due when significant milestones of the project have been demonstrably achieved.

The contractual provisions should also stipulate that all plant components are transferred to the customer immediately after delivery and not only after full payment of the purchase price. In any case, it is advisable to pay sufficient attention to the issue of securing advance payments in order to avoid potentially high losses.

This is a free translation. To read the original article in German: click here.

Author: Dr. Katrin Antonow, von Bredow Valentin Herz