WIDEN Latvia provides an opinion on the compensation of construction cost overruns

september 21, 2023

The military aggression launched by the Russian Federation in Ukraine on 24 February 2022 and the reaction of the international community to this aggression led to a sharp increase in prices in Latvia and elsewhere, including a sharp increase in construction costs. The increase affected not only construction products but also machinery costs. Labour costs also rose sharply in some sectors.

In most cases, contracts concluded in the Latvian construction sector did not provide for contractual provisions covering the possibility of revising construction costs in the event of such circumstances.

To date, not all construction projects carried out as a result of public procurement procedures under the Public Procurement Law or the Law on the Procurements of Public Service Providers have allowed the contractors to reach a mutual agreement on the elimination of the effects of the cost increase or on a mechanism for its compensation.

Accordingly, in July 2023, WIDEN Latvia issued an opinion to the client assessing the admissibility of compensation for the overrun claimed by the contractor under the combined Design & Build contract. In the opinion, WIDEN assessed whether it was permissible, in the present case, under the provisions of the contract and the Public Procurement Law, to amend the contract to compensate the contractor for the construction cost overrun of more than EUR 1 million by increasing the original contract price by almost 15%.

The opinion concludes that the construction cost overrun identified in the construction project is the result of military aggression by the Russian Federation, which could not have been foreseen by the contractor at the time of conclusion of the procurement contract. Therefore, in order to ensure the further realisation and completion of the project, the construction initiator is justified in deciding to amend the procurement contract in order to compensate the contractor for the cost increase.