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Construction Insights November 2023: Poland

20 November 2023
Restricting the valorization of construction contractors' remuneration is currently leading Poland to an economic imbalance in the execution of contracts.

Poland's current economic imbalance: The cause and what next?

Restricting the valorization of construction contractors' remuneration is currently leading Poland to an economic imbalance in the execution of contracts and generating significant financial losses on the part of contractors. The Polish government has just promised the construction industry more money for remuneration valorization, but there is no improvement to the situation.

To understand the nature of the problem, it is necessary to go back to the end of 2020 when the effects of the pandemic were slowly receding and there was an "awakening" of the construction market. Demand for construction services was growing rapidly. During this period, a model remuneration valorization limiting the valorization to 5% of the accepted contract amount was introduced into numerous contracts. This limit corresponded to standard market price increases in recent years.

In March 2022, the start of the construction season was further affected by the negative impact of the outbreak of war in Ukraine, in addition to the negative effects of the pandemic. Disrupted supply chains and economic ties, shortages in materials, and the global energy crisis destabilized the construction market.

All the above-described events were sudden, and unexpected and caused a very dynamic increase in the price of construction materials by up to several tens of percent. In response to these problems, the Polish government amended in May 2022 the indexation limit by doubling it to 10% of the contract price. The increase in the valorization limit has partially helped contractors but has not solved the entire problem as the limit has still proven to be too low. 

The current 2023 year has stabilized material prices, which are still at high levels, but it has also brought other challenges related to the significant growth rate of workers' salaries, and the slowdown in investment. Construction contracts entered into before 2020 and beyond still carry a very significant risk of loss caused by the currently high level of material prices. 

In September 2023 the Polish government again announced the allocation of additional cash for valorization. Nevertheless, concrete solutions in the form of an increase in the valorization limit or its abolition have not been introduced. As a result of the failure to cover losses on contracts due to the increase in material prices through appropriate valorization, there may be a halt in the execution of work, withdrawal from the contract, and even the commencement of bankruptcy proceedings by the contractor.

On the other hand, another increase in the valorization limit may not be a sufficient remedy for significant financial losses. In this context, the parliamentary elections in October 2023 in Poland and the very likely change of government will not have a positive impact on accelerating support for construction contractors, who must look for a way to cover losses.

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