Construction Completion Insurance

Construction Completion Insurance - Construction completion insurance provides financial protection for the building owner if the contractor or developer becomes insolvent or permanently ceases operations during the construction phase. It covers the additional costs incurred when another company must complete the construction project, thereby protecting against significant financial losses.

How It Works and Legal Basis

Construction completion insurance is a type of construction warranty insurance and is often referred to in practice as a completion bond, contract performance bond, or construction completion guarantee. Legally, since the 2018 reform of construction contract law, it has been closely linked to § 650m BGB: In consumer construction contracts, the contractor is obligated to provide the client with security in the amount of 5 percent of the agreed-upon total remuneration. This security can be provided in the form of a guarantee from a financial institution or, indeed, construction completion insurance.

In the event of a claim-i.e., in the event of the contractor’s insolvency or final refusal to perform-the insurer covers the additional costs for the completion of the building by a third-party contractor. These additional costs can be substantial, as a new contractor must first familiarize themselves with the construction site, inspect existing work, and, if necessary, remedy any defects left by the previous contractor before actual completion can begin.

Costs and Scope of Coverage

Parameter	Typical Value
Premium	1-2% of the construction cost (one-time payment)
Coverage Amount	10-20% of the construction cost (additional costs)
Term	Start of construction to final acceptance
Insured event	Insolvency, final refusal to perform

Cost example: For a single-family home with a construction cost of 400,000 euros, premiums range between 4,000 and 8,000 euros. In the event of insolvency, additional costs of €40,000-€80,000 may arise-solely due to downtime, expert inspection of the construction progress, tendering and hiring a new contractor, as well as rectification of defects by the previous contractor. The premium thus pays for itself with just a single claim.

Distinction: Completion Insurance, Surety Bond, and Retention of Security

Instrument	Timing	Function	Legal Basis
Construction Completion Insurance	During the construction phase	Additional costs in the event of the contractor’s insolvency	§ 650m BGB
Contract performance bond	During the construction phase	Insolvency + defects + default	§ 650m BGB
Retention of security (5%)	From final invoice	Protection against warranty claims	§ 641 (3) BGB
Warranty bond	From acceptance	Release of retention of security	§ 641 (3) BGB

The 5% retention of security is due to the client upon the final invoice and serves to cover warranty claims after acceptance-it thus provides protection after completion. Construction completion insurance, on the other hand, provides protection during the construction phase. Both instruments complement each other and should be used in parallel for larger construction projects.

Developer Insolvency: A Particular Risk Situation

In developer projects, the risk of insolvency is particularly relevant because, under the MaBV payment schedule, the buyer has already made significant down payments before the building is completed. While the MaBV limits payments and requires the registration of a priority notice of conveyance, it does not provide complete protection against additional costs in the event of insolvency. A completion guarantee or insurance from the developer offers a crucial level of security here.

In the Nuremberg metropolitan region, several developers have run into financial difficulties in recent years-the combination of sharply rising material costs, supply chain issues, and rising interest rates has put the construction industry under considerable pressure. We recommend that builders check a developer’s creditworthiness before signing a contract (e.g., via a Creditreform credit report or an extract from the commercial register) and insist on a completion guarantee.

Practical Tip for Nuremberg and the Metropolitan Region

We recommend that building owners in Nuremberg, Fürth, Erlangen, and the surrounding area insist on construction completion insurance or an equivalent bank guarantee for every new construction project-regardless of the contractor’s company size. This protection is particularly indispensable for contracts with smaller, regional construction companies that lack substantial capital reserves. Include the provision of the completion guarantee as a contractual requirement in the construction contract-this obligates the contractor to provide it even before construction begins. Consulting with a specialist attorney for construction and architectural law in Nuremberg (Nuremberg Bar Association) can help ensure the construction contract is properly secured.

Frequently Asked Questions

Is the contractor legally required to provide construction completion insurance?

In consumer construction contracts under Section 650i of the German Civil Code (BGB), the contractor must offer the client security in the amount of 5 percent of the remuneration (Section 650m BGB). The contractor may choose the type of security-they may provide a bank guarantee, an insurance policy, or an equivalent form of security. If they refuse to provide the security, the client may withhold payment of the first installment until the security is presented. For real estate development contracts, the special provisions of the MaBV apply, which provide for their own safeguards.

What happens specifically in the event of a claim?

If the contractor is declared insolvent or permanently ceases work, the client must immediately report the claim to the insurer. The insurer typically commissions an expert to document the construction progress and determine the estimated additional completion costs. The insurer then covers the verified additional costs up to the agreed coverage limit. The client must find a replacement contractor on their own-we recommend establishing contact with alternative construction firms even before a claim arises, as hiring a new contractor during an ongoing claim takes time.

Is the insurance also worthwhile for a turnkey home from a developer?

Yes, the risk is particularly high with turnkey developer projects, as the client has already made significant down payments according to the MaBV payment schedule before the building is completed. While the MaBV limits these down payments and requires the registration of a priority notice of conveyance, it does not fully protect against the additional costs incurred if a third-party contractor must complete the project due to the developer’s insolvency. Construction completion insurance or an equivalent guarantee from the developer provides an additional layer of security here, which we strongly recommend for every developer project in the region.

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