22 December 2022 · Article

The revision of the standard contracts – will we see clarification on unforeseen cost increases?

The standard contracts play a large and important role for the Swedish construction industry. At the same time, the current form of the agreements has received some criticism, partly because of the ambiguity that certain provisions entail in practical application. In the autumn of 2016, a revision began, which is still pending. The issue of cost changes during ongoing contracts is one such part that, given the events of the past year, would have needed clarification.

The standard agreements AB 04 and ABT 06 and its predecessors have been of great importance to the Swedish construction industry. They have long been a starting point for the agreements concluded for construction, civil engineering and installation contracts. However, in the almost 20 years since the standard contracts began to be applied, criticism has been aimed at their content, in particular at the ambiguity of certain provisions and a lack of adaptation to dispositive law. In the autumn of 2016, a revision of the standard agreements began with the aim of clarifying these issues and updating the provisions in the light of changed and new conditions.

The first step in the revision has come a long way

The revision work is carried out by representatives of employers, contractors, installer companies and consultants and is led by the Construction Contract Committee (BKK). The work is still ongoing, but BKK says that the work is well underway. However, negotiations are ongoing on certain issues and it remains, among other things, to agree on how annual turnover discounts should be handled in the upcoming standard agreements, an issue that, according to BKK, has proven to be particularly difficult to solve.

Once the parties have agreed on a fully negotiated draft, the draft will be the subject of an open consultation round that is intended to last about three months. After that, a final preparation of the comments received and a final anchoring with BKK remains before contracts can be issued. There is no set date yet for when the consultation round will begin, but it is not expected to begin before the turn of the year 2022/2023.

The management of unforeseen cost increases is often solved through SCB’s Construction Index

One issue that we hope will be clarified in the new standard contracts is how unforeseen cost increases on, for example, materials and other supplies will be distributed between the parties. It is an issue that has received widespread attention over the past year and the standard agreements currently in force do not provide the guidance requested by the parties. It is currently clear that an “unforeseen” and “material” impact on the cost of the contract may cause a change in price, but it does not follow directly from the regulations how they are to be applied.

There is also no comprehensive case law indicating when the criteria are met, but this has largely had to be resolved through intensive negotiations between the parties in each case. A tendency that we have seen is also that the parties try to avoid ending up in the difficult-to-apply rules by increasingly stipulating in new agreements that the contractor’s remuneration should be index-regulated, often through the application of the Construction Index, which today is determined by the Statistics Authority SCB.

However, in October 2022, Statistics Sweden made a policy decision meaning that the authority intends to wind down its index assignments, including the determination of the Construction Index. Given the increased use of indexation that we have seen during the year, we understand that the decision has raised some concerns in the industry. In any case, Statistics Sweden will provide the Construction Index throughout 2023, but what will happen next is not yet clear. It thus remains to be seen whether Statistics Sweden will make a final decision on decommissioning, whether the Construction Index will subsequently be determined via a new supplier and whether this affects the applicability of and the construction industry’s attitude to the Construction Index.

The Swedish Transport Administration’s position on possible indicative

In November 2022, the Swedish Transport Administration announced a decision that attracted attention. The authority decided to adopt a guide on how the authority, based on AB 04 and ABT 06, should handle increased costs in ongoing contracts in order to achieve an equal handling of claims for compensation from its contractors. The Swedish Transport Administration’s guidance states that compensation must be paid for the part of the cost change that exceeds 2.5 percent of the contract amount. The regulation for the cost increase is made at the end of the contract, but the Swedish Transport Administration opens up an opportunity to handle cost increases during the contract period through on-account payments.

It is important to continue to monitor the issue of unforeseen cost increases

The revised standard agreements, which hopefully contain long-awaited clarifications, are thus delayed further. For the time being, the question of cost increases in ongoing projects must be handled based on the ambiguities that exist. However, we can probably expect some influence from the position of the Swedish Transport Administration, Sweden’s largest employer. Regardless of whether the Swedish Transport Administration’s decision is in line with how AB 04 and ABT 06 should really be interpreted, it can contribute to the development of an industry practice that can provide some stability pending clearer agreements. Hopefully, a clarification about the Construction Index will also come soon.

2022 has been a turbulent year and the turbulence will probably continue in 2023, but 2023 is hopefully the year when we get answers to some of the questions that have been asked during the past year.

Read more in the following articles

AB 04/ABT 06 chapter 6 § 3 and price increase – when can the agreed price be adjusted?

Construction index and cost increases in the construction industry