Construction contract: a guide to building contracts

What is a construction contract?

A construction contract (entreprisekontrakt), also called a building contract or works agreement, is a written agreement between a client (the one ordering the construction work) and a contractor (the one carrying it out). The contract governs everything from price and timetable to liability for defects.

Construction law is a specialised area of law in Denmark, and it is an area where even experienced businesspeople can go wrong. A construction project is rarely a simple service, these are complex projects with many parties, long timelines and large sums of money. An unclear or deficient construction contract can lead to disputes, delays and unexpected costs.

This guide gives you a solid overview of what a construction contract should contain, which standard conditions apply in Denmark, and the pitfalls to avoid.

Three types of contract: what is the difference?

Before you draw up a construction contract, it is crucial to know which type of contracting is involved. The choice affects both the content of the contract and the allocation of responsibility.

Trade contracting

In trade contracting, the client hires a range of specialised tradespeople themselves, bricklayers, carpenters, plumbers, electricians, etc., and coordinates the work themselves or via a client adviser. The client has many separate contracts and bears the coordination responsibility.

Advantages: The client retains great control and can choose tradespeople freely. Disadvantages: The client bears the risk of coordination and interface problems between the trades.

Main contracting

Here the client hires one main contractor who takes on the responsibility for coordinating and carrying out the construction. The main contractor typically engages subcontractors (trade contractors), but the client deals with only one party.

Advantages: Simpler contract management for the client, one point of responsibility. Disadvantages: The client has limited influence over the choice of subcontractors and typically pays a coordination surcharge.

Turnkey contracting

The turnkey contractor takes on both the design (drawings) and the execution. The client provides a building programme with their requirements and wishes, and the turnkey contractor solves the rest. AB 18 is here supplemented by ABT 18, the agreed norms specifically for turnkey contracting.

Advantages: Full responsibility with one party, potentially cheaper than a split tender. Disadvantages: The client loses some control over the design process, and it can be harder to make changes along the way.

AB 18 and ABT 18: the standard conditions you should know

AB 18 (General Conditions for works and supplies in building and construction 2018) are the industry's standard conditions and the most important reference in Danish construction law. AB 18 replaced the previous AB 92 and contained a number of updates, including:

• A strengthened focus on cooperation and conflict prevention
• A requirement of ongoing documentation
• More detailed rules on additional works and changes
• Extended regulation of insurance and security
• Improved regulation of extension of time and delay

ABT 18 (General Conditions for Turnkey Contracts 2018) is the counterpart to AB 18 and applies specifically to turnkey agreements where the contractor also designs.

Does AB 18 apply automatically?

AB 18 does not apply automatically, they are voluntary, agreed standard conditions (an "agreed document"). They must be adopted expressly, either by the contract stating "AB 18 applies", or by AB 18 being attached as an appendix. In professional construction it is, however, the norm to use AB 18, and many tenders require it.

If AB 18 is not agreed, the contract is governed by general contract law and the general rules of Danish law, because there is no coherent construction-law legislation in Denmark. That gives far more uncertainty.

Advice: Always use AB 18 as the basis, and only deviate from specific provisions where the project has special needs.

Key clauses in a construction contract

A professional construction contract should as a minimum cover the following elements:

1. The parties' identity and project description

• The client's and contractor's full names, addresses and CVR numbers
• A precise description of the work to be carried out (tender material, drawings, descriptions)
• The building address and cadastral number

2. The contract sum and payment terms

The contract sum is one of the most conflict-prone points. State clearly:

• Fixed price (lump sum) or work on account (time + materials)?
• What is included, and what is not included?
• Payment plan (interim payments based on progress)
• Invoicing frequency and payment deadline
• Handling of additional works: a requirement of written approval before execution

Under AB 18, the contractor can demand interim payment for work carried out and delivered. The client can withhold a reasonable amount as security for remedial work, but the rules for this are specific, know them.

3. Timetable and delivery deadline

• When does the work begin?
• When is it to be delivered?
• Milestones and partial deliveries

The timetable should be attached as an appendix and be detailed enough to serve as a reference in the event of delays.

4. Delay and liquidated damages

Delay is one of the most frequent causes of conflict in construction projects. AB 18 contains rules on:

• Extension of time: The contractor can demand an extended deadline for client circumstances (changes, delayed deliveries from the client), force majeure and extraordinary weather
• Liquidated damages (dagbod): A pre-agreed penalty amount per day of delay. The liquidated damages are compensation for the delay and normally do not require documentation of an actual loss

The amount of the liquidated damages is freely agreed but is typically 0.1 to 0.5% of the contract sum per working day. A liquidated-damages clause is strongly recommended, without it the client must document their actual loss, which is far harder.

Note: Under AB 18, the contractor can conversely have a claim against the client for delay caused by the client's circumstances, the rules protect both parties.

5. Defects and the right to remedy

AB 18 carefully governs what happens if the work is defective:

• Handover meeting: The client and contractor hold a formal handover, where defects are noted in minutes
• Duty to remedy: The contractor has the right, and the duty, to remedy defects within a reasonable time
• Liability for defects: The contractor's liability for defects under AB 18 as a rule ends 5 years after handover. Note that claims may otherwise be subject to the general rules of the Limitation Act (as a rule 3 years, but an absolute deadline of up to 10 years)
• Right of retention: The client can withhold a reasonable amount corresponding to the cost of remedy

It is crucial to hold a proper handover meeting with written minutes. Defects that ought to have been discovered at handover and are not noted can risk being lost.

6. Insurance and security

AB 18 requires:

• The contractor's insurance: Construction insurance covering the work during execution, and customary professional and product liability insurance
• Security: The contractor must, under AB 18 § 9, provide security corresponding to 15% of the contract sum. The security is reduced to 10% on handover and to 2% one year later, unless defects have been notified
• The client's security: The client must also provide security for their obligations towards the contractor

Do not forget to check that the insurance is actually taken out and provides cover before construction starts.

7. Changes and additional works

One of the most conflict-generating points in any construction project is additional works. AB 18 governs this:

• The client can demand changes to the nature and extent of the work (right of variation)
• The contractor is, however, as a rule not obliged to carry out changes that increase or decrease the contract sum by more than 15%
• Writing is crucial: Additional works should always be agreed in writing with a price before execution. Oral agreements on additional works lead to countless disputes

Practical advice: Introduce a fixed procedure: no additional works without a written order confirmation with a price.

Dispute resolution: the Building and Construction Arbitration Board

Construction disputes are a specialised field, and AB 18 points directly to the Building and Construction Arbitration Board (Voldgiftsnævnet for Bygge- og Anlægsvirksomhed) as the primary forum for dispute resolution.

Expert appraisal

Before actual arbitration, a party can request that an expert be appointed to carry out an expert appraisal (syn og skøn), a technical assessment of the points in dispute such as defects, causes of delay or pricing. Expert appraisal is cheaper than arbitration and resolves many conflicts, because an impartial expert assesses the matter technically.

Arbitration

Arbitration at the Arbitration Board differs from litigation at the ordinary courts:

• Confidentiality: Arbitration awards are not public (unlike judgments)
• Expertise: The arbitration panel can be composed with technical experts
• Speed: Often faster than the courts
• Finality: Arbitration awards as a rule cannot be appealed to the courts

AB 18 also contains a number of deadlines, among other things for inspections and for when disputes can be brought. Be aware of these deadlines during the project, as a claim can be weakened or forfeited if notification and referral do not happen in time.

Written contract vs. oral agreement: when is a construction contract required?

There is no formal requirement in Danish law that a construction contract be in writing. But in practice a written contract is crucial for these reasons:

1. Burden of proof: Without a written agreement it is word against word in any dispute
2. AB 18 attachment: AB 18 must be adopted expressly, which in practice happens in writing
3. Additional works and changes: Without written documentation it is hard to handle project changes
4. Insurance and financing requirements: Banks and insurers typically require a written construction contract

As a rule of thumb: all construction of significance should have a written contract. For commercial construction there is no excuse for omitting it.

Frequent mistakes for the client

1. Insufficient tender material An unclear project description leads to high tender prices (because contractors price the uncertainty) and subsequently many extra bills. Invest in a thorough project description.

2. No client adviser Many private clients throw themselves into larger projects without professional advice. An architect or building adviser representing the client can be worth the price many times over.

3. Choosing the cheapest tender uncritically The cheapest tender is rarely the cheapest project. Abnormally low prices often signal that something has been left out, and you pay for it as additional work.

4. No liquidated-damages clause Without liquidated damages it is hard to compensate for delay. Always include liquidated damages.

5. Forgetting the handover meeting Handover is the legal cut-off point, liability for defects is counted from there. Ensure a formal handover with written minutes.

Frequent mistakes for the contractor

1. Signing a contract that deviates from AB 18 without noticing Many clients, especially professional clients and public authorities, use modified standard contracts that deviate from AB 18 on important points. Read the contract thoroughly or get legal assistance.

2. A lack of writing on additional works Extra bills without a prior written agreement are regularly rejected. Never take on additional works without a written order confirmation.

3. Insufficient documentation of the causes of delay If the delay is due to the client's circumstances, you must document it on an ongoing basis, send notes, emails and minutes. Afterwards it is hard to reconstruct.

4. A lack of security and insurance If you fail to take out the required insurance, you can expose yourself to loss and liability.

5. Ignoring AB 18's deadlines AB 18 contains deadlines for notification, inspection and the bringing of disputes. If you miss a deadline, you can weaken or lose your claim.

The construction contract in practice: what you should do

Whether you are the client or the contractor, these steps are a good framework:

1. Clarify the type of contract, main, trade or turnkey?
2. Adopt AB 18 (or ABT 18) as the basis
3. Prepare a detailed project description with drawings and a specification
4. Agree the contract sum clearly, fixed price or work on account?
5. Include a detailed timetable as an appendix
6. Insert a liquidated-damages clause with a reasonable amount
7. Establish a procedure for additional works, writing is required
8. Require documentation of insurance before the start
9. Hold a formal handover meeting with written defect minutes
10. Know the Arbitration Board's and AB 18's deadlines and observe them

Create your construction contract with LegalDock

A professional construction contract requires precision and knowledge of AB 18's provisions. With LegalDock you can create an agreement that covers the most important terms, from price and timetable to additional works and dispute resolution.

If you need a more specialised construction contract for a larger project, we recommend consulting a lawyer with experience in construction law.