General contractor in construction: issues of activity organization and licensing

To date, licensing issues for construction activity are regulated by the “Licensing conditions for carrying out economic activities pertaining to construction of facilities that, according to the class of consequences (responsibility), belong to the facilities with medium and significant consequences”, approved by the Resolution of the Cabinet of Ministers of Ukraine No. 256 dated March 30, 2016 (as amended on August 10, 2017).

These licensing conditions, in addition to personnel, organizational and structural requirements for business entities, contain a list of types of work for carrying out economic activities pertaining to construction of facilities that are subject to licensing. It should be noted right away: only work at facilities that, according to the class of consequences (responsibility) belong to facilities with medium and significant consequences, is subject to licensing. The medium and significant consequence classes are actually the consequence classes CC2 and CC3, respectively.

Going back to the list of types of work subject to licensing, we see that it is divided into three main blocks - these are general construction and installation works, construction of engineering infrastructure, construction of transport infrastructure.

However, people with certain experience in the construction industry remember that until August 30, 2016 other licensing conditions were in force, according to which the list of works was divided into a larger number of blocks - this is survey work for construction, design of architectural sites, construction and installation works, installation of utility networks , construction of transport facilities, engineering activities in the industry of construction. The last block, that is, engineering activities in the construction industry, included, among other things, a type of work such as “a general contractor in construction”.

As we compare the lists of works from the previous and current licensing conditions, we see that in the current licensing conditions there are no such blocks (and, accordingly, works) as survey work for construction, design of architectural sites and engineering activities in the construction industry. With the survey work and design, everything is quite clear: today, for the performance of these works, the company must have a design engineer with a qualification certificate from the relevant field. But with engineering activities, not everything is so simple. So, for example, to fulfill the item “general developer in design”, no permits are required at all, and the item “technical inspection and assessment of the state of steel structures of buildings” is carried out by analogy with design - the company must have a respective engineer with a qualification certificate on its staff..

The question remains: what is the situation with the general contractor in construction?

In general, a general contractor in construction is, in simple words, a party of a contract that undertakes obligations to the Client to perform certain construction work by themselves or with the involvement of third-party organizations (subcontractors).

And this is where the situation can develop in two directions:

1.  If the general contractor will carry out construction work by themselves, that is, actually perform the functions of a subcontractor, a license will be required by all means! A clear understanding of what kind of work will be done, using general contractor’s own effort, is important. After all, the types of work that are defined in the appendix to the license must correspond to the work that will be/is planned to be carried out.

2.  If, however, the general contractor does not perform work on their own, but will attract subcontractors, the situation is not entirely clear... As indicated above, such type of work as “a general contractor in construction” is not included in the list of works subject to licensing (by Resolution of the Cabinet of Ministers No. 256 of March 30, 2016). This is a position in favor of the absence of a license from the general contractor.

But at one time we filed a letter to the State Architectural and Construction Inspectorate of Ukraine (SACI) with a request to clarify this situation.In response, we received an explanation that can be stated as follows: although the item “a general contractor in construction” is not in the list of works subject to licensing, a company that is planning to perform the functions of a general contractor should have a license with a similar list of works that it plans to turn over to a subcontractor / subcontractors. In simple words, this can be described as follows: if the Client instructs the general contractor to put in place a heating system, and the general contractor plans to subcontract this work, then the general contractor must have a license with the type of work “installation of external engineering networks: heat supply”. This position is already in favor of the need for a license from the general contractor, although it is not confirmed by any official or legislative document.

Let's also try to understand the legislative nuances:

So, the Law of Ukraine “On licensing types of economic activity”, in addition to other works subject to licensing, defines the item “construction of facilities that, according to the class of consequences (responsibility), relate to the facilities with medium and significant consequences - taking into account the features defined by the Law of Ukraine“ On architectural activities. "

Article 17 of the Law of Ukraine "On Architectural Activities" determines that "Economic activity related to the creation of construction facility is subject to licensing in accordance with the law."

Art. 27 of the same Law indicates that Clients and contractors, when creating a construction facility, are obliged to turn over certain types of design and construction works to persons who have the appropriate license. That is, this norm can be interpreted so that the Client must make sure that the general contractor has a license!

In addition, according to Art. 882 of the Civil Code of Ukraine, the transfer of work by the contractor and acceptance of it by the Client is executed by an act signed by both parties. That is, upon completion of work (if the Client has no complaints about quality), an acceptance certificate for the work performed is signed. It is clear that the work performed is understood as construction work, and not, for example,as  the organization / maintenance of construction work. And if the general contractor did not actually carry out construction work, then legally, that is, according to the Acts of completed work, they performed them. This again speaks in favor of the need for a license by the general contractor.

And the last point. Article 1 of the Licensing conditions for the implementation of construction activities states that the licensing conditions establish an exhaustive list of organizational, personnel, technological and special requirements for the implementation of economic activities for the construction of facilities.

But what is economic activity in the understanding of the legislator? Article 3 of the Commercial Code of Ukraine tells us that "Economic activity in this Code refers to the activities of business entities in the field of social production aimed at the manufacture and sale of products, the performance of work or the provision of value-based services with a price certainty." Now we will answer the question: is the activity of the general contractor aimed at the performance of work? The answer is obvious. After all, without even performing work on their own, and transferring the construction work to a subcontractor, these actions of the general contractor are aimed at performing the work!

So, from an analysis of all of the above, we see that although the functions of the general contractor are not clearly indicated in the list of works that are subject to licensing, the need for a license for the general contractor is obvious. 

Therefore, in order to protect ourselves from possible negative consequences when delivering work to the Client or when audited by regulatory authorities, we recommend that our customers,who perform the functions of general contractor, have a construction license for the appropriate types of work.

If necessary, the lawyers of our company are ready to help you understand all the intricacies and nuances of doing business in the construction industry. After all, the product that we provide is not only a construction license, but also the absence of problems in the future!