Construction business is booming in Hungary, fuelled by increasing demand for housing, low interest rates on loans, a flourishing real estate market with ever increasing prices for housing, numerous government incentives and large scale public construction projects.
The rapid boom of the construction industry has resulted in a shortage of workforce and craftsmen, and even a shortage of building materials and resulted in a surge of subcontractors in the industry. In such environment, understanding the Hungarian rules for subcontracting in the construction industry is vital for successful projects.
The most important general rules for subcontracting are laid down in the Hungarian Civil Code, under which subcontracting is in principle allowed and neither the general rules for contractor agreements (Articles 6:238 – 6:250), nor the specific rules for construction-type contracts (Article 6:252) rule out subcontracting. Both under the general rules in the Hungarian Civil Code and other, more industry-specific regulations in other laws, the main contractor let a subcontractor do any amount of the construction projects (with a few exceptions of course). It is important to note that the main contractor shall be still ultimately responsible for the performance of the construction work: organisation and supervision the work of subcontractor(s) remains the main contractor’s responsibility and liability. Subcontractors may also employ additional subcontractors to perform the work, under similar legal liabilities. However, the employer has the right to specifically rule out the use of subcontractors in the construction contract.
In case of construction contracts, however, the new Civil Code only lays out the general rules and numerous limitations for subcontracting are found in the laws specific for the construction industry, primarily in Act LXXVIII of 1997 on the protection of the constructed environment, and its executive Governmental Decree 191/2009 (IX.15.) on the rules of activities in the construction industry.
When employing subcontractors, it should be also kept in mind that in order to prevent ‘chain reaction defaults’ in payment in the subcontractor chain, guarantee rules have been added to Hungarian construction law in 2013, providing financial guarantees that the main contractor will pay the subcontractors employed by him.
Where the employer is the Hungarian state or an entity subject to public procurement regulations, the regulations and limitations for subcontractors laid down in Act CXLIII of 2015 on Public Procurement also apply. Under Public Procurement laws, subcontracting may be subject to additional limitations, as individual subcontractors may prove incompatible or even banned from participating in public procurements, and subcontracting may be even completely ruled out or limited. As an example, Article 138 of the Hungarian Public Procurement Code specifically limits the main contractor in case of construction contracts to employ no more than 65% of the value of the construction contract to be subcontracted as a general; this 65% limit is also valid for subcontractors who would wish to employ further subcontractors themselves.
We hope that that enterprises engaged in either large- or small scale construction projects in Hungary would find this overview as a useful starting point to lay the legal foundations of cooperation when engaging subcontractors and will decide to make us of our professional experience in the field of Hungarian Construction Law.