How contractors’ registration requirements influence the structure of real estate investments

Common Structure

Often, when implementing a greenfield real estate investment project, the investor sets-up a subsidiary to acquire the respective land or the right to build on such land ("Owning Entity’). This Owning Entity will then also acquire the respective permits. 

Another company from the investor’s group will be engaged an  Engineering, Procurement and Construction ("EPC") contract  to design and build the project (‘Developing Entity’). The Developing Entity may further subcontract all or some of the construction works to third parties. However, even if subcontractors are engaged, the  Developing Entity remains the main contractor for the purposes of construction regulations. 

Requirements for Registration with the Central Professional Register of Contractors 

Any person or legal entity assigned to perform construction works in Bulgaria should be registered with the Central Professional Register of Contractors (CPRC) and obtain a certificate specifying the type of construction works the contractor is allowed to execute. In order to register with the CPRC the contractor must provide evidence that its equipment and employees are adequate for the implementation of specific type of construction works. In addition, contractors of large construction projects, such as highways, power plants with installed capacity over 25 MW, etc., should cover certain criteria in respect to the minimum average personnel, net revenues from sales, level of non-current assets in the balance sheet for the preceding year.

The Developing Entity in the structure set out above is subject to registration with the CPRC.. All subcontractors should also be registered with the CPRS.

In practice that means that the Developing Entity has to evidence that it has the capacity to perform all types of works necessary for the completion of the entire construction project in terms of available equipment and employees and to fulfill any additional criteria for large construction projects. In case the Developing Entity performs only overall coordination management of the construction project, while all construction works are to be subcontracted to third parties, registration with the CPRC would be a hurdle. If the Developing Entity does not have adequate equipment and employees or does not meet the additional criteria for large projects, it will not be eligible for registration with the CPRC. 

Construction Supervisor’s Reporting Obligations

The investor should appoint a third party construction supervisor for the duration of the construction. In addition to its responsibilities for monitoring the construction process compliance with the statutory requirements, the construction supervisor is obliged to record all details of the contractors, including the registrations with CPRC of the main contractor and its subcontractors. The supervisor must report any violation to the Directorate of National Construction Supervision .

The latter may impose administrative sanctions, ranging from BGN 2,000 (approximately EUR 1,020) to BGN 100,000 (approximately EUR 51,000), on a contractor performing construction works without registration with the CPRC. 

Alternative Structures

When structuring a real estate project, the investor should ensure that the Developing Entity meets the requirements for registration with the CPRC. If the requirements are not met, the Developing Entity should not assume construction obligations. However, it may be appointed as a project manager under a project management agreement or a service provider under an engineering agreement. In such cases the Developing Entity would not qualify as a contractor and the Owning Entity should contract the construction works to third parties directly.

Author

Atanas Mihaylov

Senior Associate
Bulgaria