Building in Costa Rica? Understanding Your Construction Contract Options

The final word in legal matters is in the hands of the Supreme Court. In Costa Rica the Supreme Court is composed of four chambers, each one of which handles different areas of the law. Each one has a main area and then secondary legal issues they address. The First Chamber of the Supreme Court (Sala Primera) deals mainly with Civil and Commercial Law and therefore is the ultimate authority on civil and commercial contracts. Contracts is a vast area of the law because the contracting parties have ample freedom to establish their wishes and agreements. Furthermore, contracts can get more complicated because it is left up to the parties to set down the language they wish to use, which can be inappropriate, incorrect, inaccurate or even, unwittingly, against the law. Lastly, once a contract is finalized and signed, the execution can be haphazard, disorderly or the parties can behave in manners not even contemplated in the agreement they just signed. These issues are especially true for construction contracts, in which the attempt to set down on paper that to which the parties agree can be extremely challenging due to the complex nature of a construction effort. Also, it is not easy to regulate what responsibilities correspond to each party, how payments will be made, what quality of materials will be used, how inspections will work, what happens if there is a temporary setback, how guarantees will operate, who is responsible for workers and all that entails, what is considered a breach of the contract and many other important issues. In Costa Rica, in January 2016, the Civil Chamber of the Supreme Court set down in a decision that there are mainly three types of general contracts for construction projects specifically. The first point that is very important is that the builder must belong to the College of Architects and Engineers (like the Bar Association for Lawyers). This professional college oversees the activities of its members. If the builder is not a professional (architect or engineer) then he or she or the building corporation must have a registered professional that is legally responsible for the project. There is a real question, in many circles, as to whether non-professionals should even be allowed to build, considering that Costa Rica is a highly seismic country and public safety must be considered. People tend to think that they can regulate the construction of a building through a contract. Technically that is not possible because the technical aspects of constructing a building (house- condominium- high rise and others) are all established by law. Costa Rica has one of the strictest construction codes in the world. What can be regulated by contract is how the client will pay the builder for his work and how the responsibilities will be shared. Here are the main types of contracts. BY UNIT OF MEASURE– The first type of contract would be one in which the parties agree that the client will pay by unit of measure. This normally means that a certain price will be paid per finished square meter. Of course, the construction plans of the building should be completely in order before signing any contract and those plans will indicate exactly how many square meters the building should have. The parties can agree that the client will pay a certain sum of money up front as an initial deposit so the builder can get going. The builder will need to calculate how many workers they need, they will have to transport tools and equipment to the site, build a shed for storage, build a cafeteria for the workers, restrooms and many other items. The parties can further establish how much time the project should take and how often the client will make partial payments until the project is done. It is usually agreed that the client will reserve 5% or 10% of each disbursement and deposit that into a separate account as a guarantee from the builder until the project is successfully finalized. At the end of the project the full number of square meters will be determined, and the price will be settled based on the price per unit of measure. Any outstanding balance will be paid by the client upon successful completion of the building. This type of contract gives the customer a certain amount of clarity as to the final price he or she will end up paying. CONSTRUCTION BY ADMINISTRATION (Cost Plus)- In this type of contract the client hires a supervisor that will manage the actual construction work that will be done by the supervisor himself or by a third party. The construction party could be the supervisor himself but, in these cases, there could be a conflict of interest because the supervisor would be overlooking his own work. If this is the case the courts will be much more strict with the supervisor/builder because they are playing both parts. In this type of contract variation the client will pay the supervisor all the actual costs of materials, labor, taxes, insurance, transportation and all other expenses plus a certain fee or percentage of all these expenses as the income or profit for the supervisor. The client can choose a professional builder he prefers, and the supervisor will oversee their work, but more often, in smaller projects, the supervisor will be the builder and must handle all aspects of the project and must therefore assume responsibility for all decisions made, including the wording of the contract. In this type of contract, the supervisor must furnish regular reports for the client as to how the project is advancing, any issues or problems that arise and a clear accounting of expenses and invoices. BY FIXED PRICE– In this type of construction contract the parties will settle upon a certain structure to be built and they will also establish a definitive price for the entire structure (house- building- other). In this variation, the builder does not need to account for invoice or explanations over expenses because his responsibility is to deliver the structure agreed upon for the price that was negotiated. In this case the builder cannot demand an increase in price even if his expenses have risen, for he has assumed that risk. If the client wishes to change or even increase the size or other aspects of the project (luxury items, solar panels, etc.), it is up to the builder to either refuse these changes or negotiate new conditions because, if he accepts the changes that will increase the cost, he cannot pass on those cost increases to the client unless a new contract has been agreed upon by both parties. Of course, what happens in the real world is that no builder will continue to build an ever-increasing structure if the client does not pay the rising costs and when that happens, then the fixed price that the parties negotiated has changed. This can have important legal consequences. In a construction contract, no matter which contract variation is used, there is always one party that will be clearly defined and that is the client. The client is the person that has a clear objective, which is the successful completion of the project and clear responsibilities, which are: a) telling the professionals what he wants and b) paying the price agreed upon. On the other hand, the other side, the other party, is not always that clearly defined in many contracts. The other party can be composed of many persons: designer, builder, inspector, manage, supervisor and others. The wording, such as supervisor, consultant, builder, professional, etc., does not in and of itself clearly define the role of this party. Nevertheless, it is clear that this party is under the obligation of executing a professional activity that is regulated by law. That professional activity is architecture and/or engineering. Just like a doctor or a lawyer, architects and engineers are professionals whose activity is regulated by law. Having a builder who is not a professional take charge of a project is like having someone who is not doctor performing surgery. In Costa Rica the law has established every phase of a construction project: a) preliminary studies, blueprints and technical documents; b) organizing and directing the project; the direction of the project is the actual building of the structure and c) Operation and maintenance which is the professional guidance for the proper operation and maintenance of the structure once it has been completed. When a construction contract is signed there must be a registered professional architect or engineer that will he held responsible for the technical aspects of the project. These technical aspects are based on the approved plans and permits of the project. This architect or engineer must be registered in the College of their profession for each individual project contract. Construction projects require construction blueprints and other technical documents such as structural designs, electrical plans, mechanical plans and many others. All these documents will become part of the supporting documentation for the contract relationship and, in the event of a serious dispute, will help to prove the reality of the situation. A construction contract is a serious, complex matter which requires order, care and knowledge. A well-designed construction contract will help to avoid deeper complications as the project progresses. About the Author Lic. Jorge Montero B. was educated in the U.S.A. and in Costa Rica. He holds various specialties and master’s degrees in criminal, Commercial, Environmental and Agrarian Law from the University of Costa Rica and has over 35 years of litigation, contract and counsel experience. Email: acmbalaw@gmail.com; Tel: (506)- 8384- 2246; WhatsApp: (506) 8384- 2246