Laws and regulations governing construction in Mexico vary depending on the place where the construction takes place. In Mexico, construction is usually governed on a local level; therefore, each state has its own regulations governing this matter; however, there could be some specific issues where federal legislation will apply.
For projects required by government entities, additional laws and regulations could apply.
Principal Laws Governing Construction in Mexico
In Mexico, the construction market usually applies contracts designed on a case-by-case basis for projects between private companies, while for projects with government entities, standard contracts are provided by the calling entity. However, some institutions and associations, such as the Mexican Chamber for the Construction Industry, have released their own standard contracts, generally used as a construction guide by its partners or associates for the relations between employer and contractor. These are not mandatory.
Additionally, certain international standard contract models, such as the ones released by FIDIC (International Federation of Consulting Engineers), AIA (American Institute of Architects–USA), and ConsensusDocs (USA), are in some cases adapted and discretionally used for specific projects in Mexico.
For projects called by government entities, the calling entities release templates of construction contracts, which are part of the bidding guidelines and will be mandatory for contractors.
Some of the main guidelines for the public contracting process are the Policies for the Procurement of Goods and Works Financed by the Inter-American Development Bank and the Guidelines for Procurement under the International Bank for Reconstruction and Development (BIRF) Loans and Accredited Investment Fiduciary (AIF) Credits, which are usually harmonised with the Mexican legal framework.
The construction industry faced major struggles during 2020, mostly during the first months of the pandemic (March and April) in which such activities were not considered as essential and had to be suspended.
To alleviate the situation, the federal government announced on 14 May 2020 that construction could be considered an essential activity as of 1 June 2020. Since then, the pandemic has had only a partial impact on the construction market.
To minimise the impact of the pandemic at a local level, some authorities announced incentives to aid the local construction industry, for example:
Some of the major infrastructure projects on behalf of the federal government were allowed to continue development and construction regardless of the restrictions.
As of November 2021, according to official data released by the National Institute of Geography and Statistics, the production value generated by the industry grew by 9.4% in comparison to 2020.
Employers in a construction project in Mexico are either national or international private companies that already have a presence in Mexico or companies that are seeking to establish themselves in Mexico and make new investments for strategic purposes.
In Mexico, many projects are also promoted by public entities on a federal or local level or by state-owned companies, such as the Mexican State Electric Company (CFE) or the State Oil Company (PEMEX), all of which act as employers.
Construction companies are usually engaged with their main workforce. However, it is common to subcontract additional manufacturing or specific tasks, especially when sophisticated skills are required. Subcontracting services are allowed if the subcontracting services are not identical to the hiring party’s core business.
Mexican federal labour law does not provide special regulations related to the construction industry, therefore, employers specialised in the construction industry are entitled and obliged to the general rights and obligations set forth by law.
An employer is entitled to:
An employer is obliged to:
Contractors in Mexico are generally Mexican construction companies that are either hired and subcontracted by major international construction companies or directly hired by international or national clients. These contractors shall use their own workforce to render the agreed activities between the parties or hire subcontractors for specific parts of the project that require specialised services or works.
Additional contractors, who could be either hired directly or subcontracted, may include firms specialised in:
The general rights and obligations of the employer are listed in 2.1 The Employer.
Under construction contracts, the main relationship is between the company (as hiring party) and its contractors. The relationship with subcontractors is generally handled directly by the contractor for activities that it may not do itself since such activities are outside its core business.
If finance is requested by the company, the relationship with financiers is usually handled by the company itself.
Under the new subcontracting regime provided in the Federal Labour Law (enacted in April 2021), the outsourcing of personnel is prohibited, unless who provides or makes their own personnel available for the benefit of a third party (recipient of the services), is for the provision of (a) “specialised services” by third parties and/or (b) “complementary specialised services”, which are those provided between companies of the same corporate group that are not part of the recipient’s core business.
Subcontractors are typically companies hired by the contractor for the provision of specialised services and tasks that are not part of the core business of the contractor and which the contractor would not be able to render using its own workforce.
Under construction contracts in Mexico, there is usually no direct relationship between the company (as client of the contractor) and the subcontractors. Rather, each subcontractor will be directly responsible to the contractor, which will be allowed to supply specialised services, materials and equipment, as well as perform all the activities necessary for the execution and completion of the project, either directly or indirectly through the subcontractors.
Contractors are usually responsible to the client for all acts and omissions of subcontractors and any individuals hired, directly or indirectly, by such subcontractors.
Financiers are not usually involved in the relationship between contractors and subcontractors; rather, their relationship is generally solely with the employer.
The main financing sources for construction projects vary depending on whether the project is being developed in the public or private sector.
Financing sources in the public sector stem from government entities such as the National Infrastructure Fund (Fondo Nacional de Infraestructura or FONADIN). On the other hand, a private construction project may be financed by a wide variety of entities, ranging from financial institutions such as commercial and/or development banks, international organisations such as the Inter-American Development Bank, the World Bank, the International Finance Corporation, to foreign and domestic private equity funds. Additionally, the Mexican Stock Exchange (Bolsa Mexicana de Valores) has been an important source of funds for construction projects through Infrastructure and Real State Trusts (Fideicomisos de Infraestructura y Bienes Raíces or FIBRAs), which are trust vehicles used to finance the acquisition and/or construction of real estate in Mexico, for leasing purposes or to acquire rights to receive income from the lease of such properties.
On a more current and second-tier level, Retirement Funds Administrators (Administradoras de Fondos para el Retiro or AFOREs) have also provided funds to support construction projects in Mexico.
There are no general rights and obligations for a financier regarding a construction contract; rather these are determined on a case-by-case basis. However, in certain financing structures, it is not uncommon for the parties to agree certain rights and obligations to allocate risks regarding the contract.
In addition, as a general rule, a financier will only have a relationship with the person(s) or entity to whom the funds will be granted.
For projects between private companies the scope of works is determined on a case-by-case basis depending on the specific project. The parties concerned will therefore determine the methods to be used during the construction, including the specific programmes to be observed, specification of the project, the budget and blueprints, among others.
For projects required by government entities, the scope will be defined by the calling entity and will usually be included in the documents related to the bidding guidelines. It is unlikely that parties will be able to negotiate the content of these documents; therefore, the awarded entity or individual will have to abide by such documentation.
For construction projects developed under a public-private partnership (PPP) scheme, the scope of work and services will be included in the relevant contract entered into between the private company and the public entity. The scope of responsibilities of the contractor with regard to every aspect of the project, including the design, execution of the construction and operation of the project itself, are usually agreed in this contract.
Between Private Companies
For construction contracts related to a project between private companies, any variations will be negotiated between the parties according to the procedures included in the contract. Price increases derived from a variation in the scope of work provided by the contractor will not be paid by the employer unless such variation has been previously agreed in writing, usually by means of a change order. The determination of the price variation generally follows an analysis aimed to determine the impact that such variation will have on the costs.
Should parties be unable to agree on the price variation, the adjustment to the contract price will be based on the contractor’s documented cost of labour, materials, equipment and the overheads necessary to perform the variation.
Between Government Entities and Contractors
In contracts entered into with government entities, including PPPs, variations related to the scope of services and price will follow the procedure included in the law and must be previously negotiated between the calling government entity and the contractor, in which case, an amendment agreement must be signed stating the modifications and justifications.
For contracts between private companies, the parties concerned will determine who bears all the responsibilities and liabilities related to the design process.
Specialised Design or Civil Engineering Firms
Generally, the employer will hire specialised design or civil engineering firms that will prepare all the studies, blueprints and documents related to the design of the project. These documents are commonly signed by the designer/engineer who prepared them, thereby assuming all the responsibility related to the design process. However, in some cases, the employer may hire independent third parties that will review the designs related to the construction and ensure they comply with the employer's requirements and the needs of the project.
The designers will usually be responsible for making all the calculations related to the works, determining the materials that will be used during the construction process, as well as incorporating the technical elements to the designs and studies that the contractor will have to observe during the construction phase. The contractor, on the other hand, will be responsible for the execution of the project according to such designs and technical studies.
The Contractor as Designer/Builder
However, a construction contract could certainly stipulate that the contractor will be responsible for the design of the project and therefore, as part of its obligations, it will provide engineering and design services to achieve completion of the project. In some cases, the employer may directly provide the design that the contractor must follow for the project or hire a special designer for such purposes, in which case, that person would need to work hand in hand with the contractor.
In Mexico City, under the construction regulations, individuals known as: (i) the responsible construction manager (Director Responsable de Obra) and (ii) the co-responsible (corresponsables) act as auxiliaries of the construction administration authorities to verify and approve, among other issues related to the construction, the design aspects of the project and their compliance with any applicable local legislation/regulation. The responsible and co-responsible individuals referred to here will have an administrative and even, in some cases, criminal responsibility before the local administrative authorities for the performance of their duties should they contravene the provisions included in the local regulations.
Contracts With Government Entities
For contracts entered into with government entities, the calling entity may determine if the contractor needs to provide a specific design for the required work or, alternatively, the government entity could provide the designs to which the contractor would need to adhere as part of the tender. In the first scenario, the contractor would be solely responsible for the design.
A government entity could also opt to call for a specific tender for the design of a project since under the applicable law, the design would be considered as a service related to public works and therefore the scope of the work would usually include, among others: (i) design and architecture; (ii) executive projects; and (iii) blueprints.
Contracts With PPP Schemes
Finally, for construction contracts under PPP schemes, it is customary that the contractor will be responsible for the whole project, including the design, execution of the construction and its operation. Therefore, responsibilities related to the design will fall within the contractor's scope of work and not that of third parties.
Generally, all responsibilities related to the construction process are borne by the contractor and, if agreed and authorised by the parties in the construction contract, also by the subcontractors. However, it is worth mentioning that:
Additionally, construction contracts provide a clear list of activities that fall within the responsibilities of the contractor and its subcontractors, including among others:
The employer's responsibilities will usually be limited to payment obligations. Additional responsibilities may include:
Regarding the subcontractors, responsibilities for their activities will be agreed and included in the contracts entered into between the contractor and the subcontractors; however, it is common that many of the responsibilities included in the main construction contract will pass through directly to the subcontractors.
For contracts entered into with government entities, including PPPs, the contractor will be considered as the fully responsible party to carry out the whole construction process. The responsibilities of the government entity would be limited to payment obligations, supervision and authorisation of any modification to the agreed project.
The status of the construction site is usually contractually agreed by the parties. Typically, under contracts signed between private companies and/or government entities, the contractor assumes responsibility for the status and maintenance of the construction site.
Depending on the contract, the contractor also usually assumes the obligation for obtaining all the permits required to execute the construction and is therefore obliged to observe and comply with the conditions included in such permits.
Additionally, construction contracts usually include other specific responsibilities to be assumed by the contractor in connection with the site, including, among others:
Environmental matters in Mexico are regulated by the three levels of government (federal, state and municipal). This is due to the concurrence of faculties foreseen in the Mexican Constitution. Hence, when beginning a construction project in Mexico, the interested party must be prepared to comply with the applicable environmental laws of local government based on the location of the project and of the federal authorities according to the activity to be carried out and its location.
From an environmental perspective, regarding liability for soil or water pollution, Mexican regulations establish that when the site is polluted, the party responsible for implementing the necessary actions for its remediation is the one that caused the pollution (the “polluter party”). However, the law also states that the owners or possessors of the site where the soil is contaminated will be jointly liable for carrying out the necessary remediation actions, without prejudice to the right to recourse against those responsible for the soil pollution (eg, the contractors). This means that the Mexican environmental authority would have the power to claim the remediation of the site from either the polluter, the owner or possessor, even if the pollution of the site was not caused by either of the last two. It is important to mention that since this obligation is set forth by provision of law, it cannot be modified or limited by means of a private contract.
The permits required for the construction process in Mexico vary depending on: (i) the type of construction and project; and (ii) the location in which the project is to be developed. However, generally, the following permits are required:
Both the environmental impact authorisation, and the authorisation for change the land use of forest land must be obtained, pursuant to the applicable provision, a priori by the owner of the site where the project will take place or through a third party (as long as it has the owner’s permission to conduct the project on the site).
Additional permits could be required from federal, local and/or municipal authorities depending on the project to be developed, which must be reviewed on a case-by-case basis.
Generally, permits, licences and authorisations must be processed and obtained by the contractor carrying out the construction. However, if agreed by the parties in the corresponding construction contract, some permits could be obtained by the employer.
Maintenance of the works during the construction process is usually the responsibility of the contractor. Once the construction is concluded and, depending on the schemes under which the employer hired the contractor, the parties may agree that the maintenance of the works falls within the scope of activities to be carried out by the contractor under a different and specific contract.
Maintenance works vary depending on the project that was or will be developed but they usually entail all activities required for the project to perform at the levels determined by each party, including but not limited to, major maintenance of machinery, provision of spare parts, provision of a labour force, and minor services such as painting, refurnishing, etc.
Additionally, construction permits issued in favour of contractors provide specific obligations regarding the maintenance of the works during the construction process, in which case, the holder of the permit would be the responsible party before the corresponding authorities.
Contracts with Government Entities
For contracts entered into with government entities, the construction contract will include responsibilities related to the maintenance of the construction and the works to be carried out by the contractor.
Contracts with PPPs
For PPP contracts, specific provisions will be included in connection with the maintenance and operation of the infrastructure, which will fall within the scope of services rendered by the contractor once the construction has been completed. Maintenance activities will include, among others, major and minor repairs required to operate the services.
The functions included in the construction contract are related to the construction process itself and are included in specific sections. These activities include:
Additional functions related to the project, such as transfer or finance, are usually included in other types of contracts entered into between the employer and third parties (ie, credit contracts, finance contracts). Furthermore, as mentioned before, the operation and maintenance of construction works/projects is also usually agreed between the parties by means of an operations/maintenance contract; however, for contracts under a PPP scheme, maintenance of the works, operation of the developed infrastructure, as well as rendering of the required services, will be part of the contract entered into between the contractor and the government entity.
Tests are usually carried out by the contractor based on a mutual agreement with the employer or the government entity calling for the project. For these purposes, the contractor will generally submit a testing execution schedule that will define the items to be tested. Additionally, if agreed in the construction contract, the contractor will provide all the devices, assistance, documents, and other information, equipment, instruments, labour, materials and duly qualified and experienced personnel that may be necessary to efficiently carry out the tests.
Upon completion of a test, the contractor will send the results to the employer for its approval.
If, as a result of a test, any facilities, materials or execution are deemed defective or in contravention of the contract and its appendices, the employer may reject it by written notice to the contractor, which will either conduct the test again or take any necessary action to fix the defects.
Upon completion of the construction, the contractor provides a written notice to the employer and prepares a certificate of substantial completion which, subject to the approval of the employer, will provide the date of the substantial completion and a timeframe within which the contractor will finish items pending that are still to be completed (but which do not limit or interfere with the employer's use and occupancy).
The notice referred to above does not imply acceptance of completion or takeover of the works from the employer.
Notice of Completion
After receiving a notice of completion, the employer will inspect and verify that the works have been executed pursuant to the terms of the contract. If the employer finds during the inspection that the works do not comply with the provisions of the contract, the employer will notify the contractor as to why the works are being rejected and the contractor will be required to make all the repairs and do the work stipulated to comply with its obligations to complete the works, without prejudice to the right of the employer to apply the necessary liquidated damages and/or to enforce the bonds.
Final acceptance of the works and the project from the contractor will take place once the employer signs a certificate of final completion.
Termination of the Works
Once a construction has been concluded, the holder of the construction licence must notify termination of works to the local authorities. For some specific projects (such as schools, industrial facilities and hospitals, among others) the safety and operational approval issued by the responsible construction manager (Director Responsable de Obra) and the co-responsible (corresponsable) must be enclosed with the termination notice. In most local jurisdictions, an inspection visit would be previously carried out by the corresponding authorities to determine if the construction complies with the corresponding authorisations, prior to receiving an authorisation of safe use to occupy the building/project.
For contracts entered into with government entities, partial acceptance of the works may take place if, although they are not completed, in the opinion of the entity, there are finished works, identifiable and susceptible to being used and conserved.
Generally, the contractor is liable for defects in the construction.
Construction contracts stipulate the period during which the contractor is obliged to fix defects detected after the employer takes over the works, specify guarantees for the work or parts thereof, give mechanisms by which the employer can file claims, as well as giving securities from the contractor. Typically, a one or two-year period counted from receipt of the work is agreed between the parties.
Depending on the particularities of the case, if a defect in the work is detected, the employer is usually entitled to claim for specific performance (reparation, correction), together with damages and lost profits therefrom, either if detected before or after takeover by the employer, and even to have the reparation made by a third party at the cost of the contractor. In any case, the contractor should be formally notified of the defects and requested remedies as soon as the defects are detected, aside from any other contractual provision that might be applicable, and furthermore to avoid any legal action from being stalled by any applicable statute of limitation, as analysed on a case-by-case basis.
Generally, parties to a construction contract will also agree on the contractor providing a good quality and latent defect bond, or similar, for a specific amount as a guarantee. This bond is intended to guarantee that the works will be free of defects, and that the works will be executed by the contractor as provided in the contract. These types of bonds are usually in force from the date the works are accepted until about one or two years thereafter. If a defect appears, the employer could be entitled to enforce the bond with the bonding company.
Regarding design, construction agreements include representations and guarantees from the designer, as well as securities and claim mechanisms. In the event that a design is defective, aside from the liabilities set forth in the agreement, the designer could also be held liable for civil liability depending on the particularities of the case.
For contracts entered into with government entities, upon finding any defects in the works during the inspection carried out for this purpose, the government entity shall request that the contractor repair the defects in accordance with the conditions in the construction contract.
In this case, the term for verification of the work agreed upon in the contract may be extended for the period agreed upon by the parties for the repair of the defects; during this period, conventional penalties will not apply. The foregoing is without prejudice to the government entity's option to terminate the contract.
The repairs of the defects referred to in this article may not consist of the total execution of work items pending completion. In this case, the work will be considered as incomplete within the agreed timeframe.
Regarding administrative contracts, the general rule is a statute of limitation of five years after the fault was committed.
For construction contracts between private companies, the contract price is usually agreed between the parties. However, it is common to provide lump-sum schemes in which the total price agreed will oblige the contractor to provide all the labour, materials, equipment, supervision and any other item required for the purposes of executing the works. Milestone payments are usually included in an appendix attached to the contract whereby certain parts of the works must be completed following such appendix, as a requirement for the employer to make the corresponding payments. Generally, as a requirement to receive payments from the employer, the contractor must provide all the information required to fully certify that a milestone has been reached as per the contractual terms.
For construction contracts entered into with government entities, milestone payments are the general rule. Such payments would be agreed in the execution programme and only upon estimates. The government entities must establish in the construction contract the place where payment will be made and the cut-off dates.
The contractor must submit payment requirements to the construction resident, accompanied by the documentation proving that payment is due.
If payment cannot be authorised within a payment period due to differences of opinion, these will be resolved, and payment incorporated in the next estimate.
If an employer is in default in the performance of its payment obligations to the contractor, including late or non-payment, the employer must pay default interest at an agreed rate. However, prior to imposition of the applicable interest rate or a penalty for late payment, the parties may agree to a specific cure period for the defaulting party to remedy its breach.
Parties may also agree to advance payments, for which purposes, a specific percentage from the total contract price is transferred from the employer to the contractor at the execution of the contract.
Dispute Over Payment
Parties may agree to include clauses related to disputes over payments, in which case, the parties will usually try to solve the dispute and if they are not able to do so, they will designate senior officers who will attempt to solve the matter in dispute. If the dispute cannot be solved, then the parties will leave their rights intact and will exercise them pursuant to the terms of the contract.
Contracts With Government Entities
For construction contracts entered into with government entities, delays resulting from non-payment of estimates will not imply delay in the agreed performance programme and therefore will not be considered as cause for the application of penalties or as a contractual breach and cause for administrative termination. In other words, if the public entity does not pay estimates, the contractor has the right to suspend activities.
Delays in the payment of estimates incurred by government entities will defer the date of completion of the work by the same amount of time.
In the event of default in payment of estimates and cost adjustments, the government entity, at the request of the contractor, will pay financial expenses at a rate equal to that established by the Federal Revenue Law in cases of extension for the payment of tax credits.
A contractor will submit invoices related to the executed works to the employer for analysis and approval prior to payment. Invoices may be for a specific milestone already executed or for all works carried out in connection with the contract.
All invoices must comply with Mexican tax requirements for them to be approved by the employer. The usual means to issue invoices in Mexico is through a digital tax document, which in Mexico is known as a "CFDI". For such digital tax documents to be effective in Mexico, they must be validated by the Mexican tax authorities, meaning by the entity known as "SAT" (Tax Administration System). Once the invoices have been validated, the recipient of such invoices must receive two files, a digital one known as XML and a PDF document backing up the invoice.
For companies to be able to issue and receive invoices as per the requirements referred above, such companies must be registered before the Mexican tax authorities.
Where the invoices submitted for payment do not meet the tax requirements, or the amounts or concepts do not correspond to what is described and agreed in the contract, the employer, without any liability, will return such invoices to the contractor so that the latter can proceed to correct them. Reception of the invoice does not imply its acceptance by the employer, or the acceptance of the works related to such invoice.
For construction contracts entered into with government entities, once the amounts of the estimates have been analysed and calculated, the government entities must consider the applicable duties and taxes for their payment, as well as withhold the amount thereof, in accordance with the tax provisions. Failure to pay due to the incorrect submission of the invoice is not grounds for requesting payment of financial expenses.
In contracts between private companies, the contractor states in the representation section of the contract that it is aware of all the documents related to the project, the milestones related to the construction, and the planning schedules.
Planning in construction contracts between private companies is carried out by the employer and subsequently agreed with the contractor throughout negotiations. Planning will relay in different circumstances that must be taken into consideration, such as:
Planning will be agreed in specific schedules/programmes, enclosed with the contract as appendices, and will be binding for the parties. Extension of timeframes and milestones, and modifications to the planning, in general, will be subject to the prior approval of the contractor and employer and it will usually be the subject matter of a contractual change order or modification to be signed by both parties as evidence of any amendment to the programme.
Once the parties agree to certain milestones, the contract will also include penalties and/or liquidated damages for any delays.
For contracts entered into with government entities, planning for the construction is based on the agreed execution programme, which establishes the process of the works and the payment timetable. This programme is provided by the government entity calling for the construction and will be included as part of the documents disclosed for the bid.
The obligatory "logbook" is the document that evidences compliance with works, timeframes and milestones.
In Construction Contracts
For construction contracts between private companies, the delay process will be agreed between the parties. Usually, parties agree that any delays related to the construction programme and its milestones shall be notified by the contractor to the employer for the purpose of assessing the causes giving rise to such delays and their impact on the project, and to determine if the programme and milestone schedules should be modified.
For delays in milestones, contracts will include specific liquidated damages to be paid by the contractor for each day/month of delay in completing the work. Such liquidated damages will generally be capped to a certain percentage of the whole contract price. Liquidated damages for delays will not apply if the delays are caused exclusively by: (i) an act of God or force majeure; and (ii) if there is a change in the law or the employer breaches its contractual obligations.
In Contracts With Government Entities
For construction contracts entered into with government entities, the contract may be terminated whenever the contractor fails to comply with the construction programme and its schedules, and should the entity determine that the delay may hinder the satisfactory completion of the work. However, delays will not be considered as a breach if they are caused by non-payments, or if the government entity ordered the suspension of the works, among other circumstances.
For contracts between private companies, the remedies for delays may vary from case to case; however, parties usually agree on the following:
Construction contracts generally include that if in the employer's sole judgement, the contractor’s rate of progress indicates that it will be unlikely to complete the work on time, the employer will be entitled, in addition to any other rights and remedies under the contract, to take such steps as the employer deems necessary to effect such completion of the work, including without limitation, taking over the construction process to conclude it by itself or through third parties, all of which shall be charged back to the contractor.
For contracts entered into with government entities, the remedy for delays consists of termination of the contract. However, the law provides a conciliation proceeding available to the parties, which must be filed before the Ministry of Public Service for disagreements, arising from the fulfilment of contracts prior to their termination (including delays) whereby parties may agree to mechanisms to fix defaults.
Contracts Between Private Companies
For contracts between private companies, such modifications may be agreed between the parties on a case-by-case basis; however, contracts usually include that any modification to the agreed construction programmes, execution timeframes and milestones will be made by the contractor by means of a change order to be submitted to the employer. The contractor must include the specific request, possible implications on the project, and any other relevant information for the employer’s consideration. Any change order will first need to be accepted by the employer.
Contracts With Government Entities
For contracts entered into with government entities, the construction resident will have the possibility of submitting any petition related to time extensions to the calling government entity for its prior approval. The entity will analyse the petition and if it decides the time extension is possible, it will issue an authorisation.
Mexican legal practice accepts force majeure as an unusual event beyond the control of a party to an agreement that prevents the fulfilment of an obligation and generates no liability on the part of the party prevented from complying. A force majeure event must be unpredictable, unavoidable and its effects must effectively stall the affected party from complying with its obligations.
From the contractual perspective, the parties to a contract are entitled to set forth in advance the events that could be considered as force majeure and regulate their effect; furthermore, they can agree that performance shall take place regardless of the occurrence of a force majeure event.
Force majeure events usually include:
Circumstances that are excluded as acts or God or force majeure include:
Specific procedures are included in contracts regarding how to notify and deal with force majeure events and acts of God that prevent any party from complying with its contractual obligations. These procedures include:
Some civil codifications of the Mexican Republic accept the concept of “Teoría de la imprevisión”, according to which, the parties to an agreement subject to a term, condition, or continuing performance, as is the case with construction contracts, have an action to recover the balance of the contract, if during the effective term an unforeseeable, extraordinary national event occurs, causing the agreement to be more burdensome to one of the parties. For instance, in Mexico City, the affected party is entitled to request its counterparty to modify the agreement and if no agreement is reached, the modification could be submitted to a court; in which case, if the merits of the request are grounded in law, the counterparty could opt either to amend the agreement as set forth by the judge, or to terminate it under certain circumstances. This concept does not entitle the parties to suspend fulfilment of the agreement and, if this does occur, the termination amendment does not affect the fulfilment obligation due before the unforeseeable event occurred.
It is natural for the parties to a construction contract to look for a limitation of liability and, typically, specific covenants that are included in the form of capped amounts, penalty clauses/liquidated damages, which are all possible under Mexican law. Nevertheless, under the principle that a party to an agreement should bear the consequences of intentional conduct, liabilities as a result of fraud and negligence, or other deliberate acts, cannot be excluded or validly limited in advance.
Regarding liability for soil pollution, the owners or possessors of properties whose soil has been contaminated, will be jointly liable for carrying out the necessary remediation actions, without prejudice to the right to recourse against those responsible (eg, the contractor) for the soil pollution.
From a tax perspective, pursuant to Articles 5 and 6 of the Federal Tax Code, taxes are triggered in accordance with the legal or factual situations set forth in the tax laws during the period in which they occur. Since these are provisions of public interest, they are strictly applied, and therefore parties cannot agree to exceptions or variations to these provisions.
Finally, other types of liabilities that cannot be contractually excluded pursuant to mandatory laws, include: (i) criminal; and (ii) those related to corrupt practices.
Mexican civil law recognises the notion of wilful misconduct as an intentional action of illicit nature that could very likely cause damage to people or their property, or carried out regardless of its consequences, could give rise to civil liability to the benefit of the affected party or victim.
From the contractual perspective, intentional, misleading conduct aimed or used to induce or maintain erroneous thinking in the other party, might be a cause for annulment of a contract. The notion of negligence is also recognised in Mexico's legal system as a cause for civil liability, and gross negligence as an exclusion to liability in those cases in which the damage caused is a consequence of the party or victim’s inexcusable guilt. There is no standard of what qualifies as wilful misconduct, negligence and gross negligence, and therefore the particularities of the case and its effects are analysed on a case-by-case basis.
The parties are entitled to contractually limit their liability, and even to regulate it in advance or have a mix of both. In the first case, the parties can freely set the maximum amount that the affected party might obtain if liability arose, in which case, the burden of evidence that damage was caused remains. In the second case, the agreement adopts a form of penalty clause containing anticipated liquidated damages. Limitations and exceptions apply and consequently a detailed analysis of the project is mandatory.
Indemnities and indemnification clauses are usually included in construction contracts, which would typically include the obligation of the contractor to indemnify the other party from:
Typically, the following guarantees are requested to limit the risks for the parties:
Methods for providing these guarantees are by means of bonds (fianzas) issued in favour of the employer or the government entity calling for the works.
Bonds are regulated by the National Insurance and Surety Commission (Comisión Nacional de Seguros y Fianzas) and must be issued by an authorised institution that must comply with the terms included in the Bond and Insurance Institutions Law.
Surety companies are deemed solvent by law and their bonds allow the beneficiary to access a proceeding for collection before the company, and a special legal action for enforcement if litigation is needed.
Acquiring insurance policies and coverages is intended to encompass all potential liabilities in connection with the project. This goes hand in hand with the scope of construction contracts, requiring specific insurance policies and coverages on a case-by-case basis.
Common insurance policies in construction contracts include:
Consideration should be taken regarding workers' insurance, as this will depend on the requirements petitioned by the corresponding workers' union taking part in the project.
If a contractor enters into a contract with a government entity, the contractor will need to provide specific insurance policies and coverages for its employees.
Under Mexican insolvency law, the agreements of a party subject to an insolvency proceeding shall be fulfilled, except if the bankruptcy referee objects in the interest of the estate. However, an exception applies to lump-sum construction agreements, which could be rescinded, except if the insolvent party, with the authorisation of the bankruptcy referee, agrees with its counterparty that the agreement should be fulfilled.
In some cases, specific provisions for early termination, anticipated maturity and similar provisions in the event of insolvency of one of the parties are included in agreements. The convenience or not of having this type of covenant in a construction agreement needs to be analysed in detail since under Mexican insolvency law, any provision causing aggravating modifications to an agreement by cause of a request or claim of insolvency, or its declaration, shall be set aside.
In construction contracts between private companies, it is not usual for parties to agree to share responsibility for risks related to the construction and execution of works since the contractor assumes full and complete responsibility for the work performance until transfer of ownership of the project takes place.
It is usual for the parties to agree on the fact that the contractor must obtain specific insurance policies to cover, among other things, all risks implied in the works related to the contract. These insurance policies must be in force until completion of the works and receipt by the employer.
For contracts with government entities, sharing responsibility is a common practice. If any of the parties are found liable for breaching a public disposition, the contract can establish shared responsibility for the amount of the fines and the correction costs.
The common structure to engage employees is a fixed-term contract or a specific task project contract, which must include the specific working shift(s) to be rendered, the agreed salary and benefits.
To justify the temporality of the contract, the employer must indicate on which project or construction the employee will be engaged.
Construction contracts include clauses related to the possibility, limitations and rules applicable to subcontracting whereby it is agreed that:
Although the contractor to a construction contract has freedom to subcontract, in some cases there could be limitations to such possibility and therefore, for the purposes of hiring such subcontractors:
Construction companies may only subcontract specialised services that relate to activities that differ from their core business. Otherwise, the legal consequence could be that the hiring party (the contractor) may be deemed an employer and be considered jointly liable for any lack of compliance that the services provider (as an employer) may face regarding employment and social security matters.
From a tax perspective, failure to comply with this rule means that the applicable VAT will not be creditable and the income tax will not be transferred.
Generally, construction contracts do not include specific provisions related to intellectual property rights; however, it is relevant to review the scope of the works to be included within the contract so as to determine if such provisions are necessary (ie, if the construction contract also includes as part of the scope of the designs, provision of certain services that could imply the implementation of intellectual property from the contractor/provider).
If intellectual property clauses are agreed in a construction contract, each party retains ownership of the proprietary rights owned and/or developed by the other, regardless of how the intellectual property is used during the execution of the works.
In some cases, intellectual property provisions will include the granting of an irrevocable, perpetual and royalty-free licence by the contractor to the employer to use, disclose, modify and copy intellectual property for any purpose related to the project and its operation.
Generally speaking, the breach of obligations to agreements entitles the affected party to claim: (i) specific performance; (ii) termination by cause, in both cases, together with; (iii) payment of damages. This rule is applicable to construction contracts and all parties thereto, subject to the particularities of the case and its specific covenants, and is analysed on a case-by-case basis. Additionally, interim measures ahead of litigation could be available to the affected party, eg, an order to stay a work to preserve factual situations existing at the time, in which case, the lawsuit must be filed shortly after the measure is granted.
Additional remedies available to the different parties could include:
Upon a contractual breach, the defaulting party will receive a default notice specifying the breach and providing a term to cure such breach or commence any correction action before imposing or making any remedy available. If the default is not cured during the timeframe agreed by the parties, the party in compliance could either terminate the contract or seek any available remedy, as per the contractual terms or as provided in law.
The parties to a contract are entitled to all remedies available by law or under the contract; however, parties do usually agree either to cap some of the remedies available to them or limit their contractual liabilities, which are generally capped to the total value of the project.
In some cases, remedies related to liquidated damages due to delays in the performance or achievement of certain milestones are capped to a maximum cumulative amount that may not exceed a certain percentage of the contractual price. Nevertheless, in addition to such liquidated damages, parties could be entitled to enforce additional remedies under the contract or applicable legislation.
Sole remedy clauses may be included in a construction contract in Mexico. However, these are unusual and are not commonly included in these types of contracts.
The general provision included in a construction contract would state that the contractor would have to pay the employer for specific liquidated damages as a remedy in case of delays in complying with timeframes or milestones, which penalty would not be construed as the employer's waiver to demand or enforce any other available remedy resulting from the contractor's breach of its contractual obligations.
Should an employer refuse to make the sole remedy clauses effective, the same would typically be enforced under the dispute resolution clause/procedure included in the contract.
In Mexico, damages are defined as the loss or decrease of assets suffered because of the failure to comply with an obligation; while lost profits are defined as the deprivation of lawful gains that would have resulted from compliance with an obligation. Both damages and lost profits are regarded as a direct and immediate consequence of the failure to comply with an obligation, whether they have already occurred or will necessarily occur, and furthermore, must be evidenced independently of the originating cause. Any other damage not meeting said conditions should not be awarded.
Special mention has to be made of the term “non-pecuniary damages” (daño moral) contemplated in some civil codifications. This is applicable to contractual and non-contractual liability, defined as the harm that a person suffers in terms of their emotions, feelings, beliefs, dignity, honour, reputation, private life, physical aspect, and which entitles the affected person to an indemnification, regardless of whether material damage was caused, in an amount to be determined by the judge in consideration of the affectation caused, the degree of responsibility of the causing agent, the economic situation of the responsible party and the victim, as well as specific particularities of the case.
For construction contracts between private companies, retention and suspension rights are not excluded – rather, they are usually agreed.
Regarding suspensions, the employer is entitled to suspend, at its own discretion, the execution of works, whether in whole or in part, for the time it deems necessary, through a written notice sent to the contractor. If the suspension exceeds an agreed timeframe, the contractor could be entitled to terminate the contract. Under these assumptions, the contractor may also be entitled to file a change order requesting the extension of certain milestones and reimbursement of the expenses generated by such suspension.
Regarding retentions and withholdings, the parties may agree to provisions related to the withholding of certain amounts until the contractor complies with specific obligations. Additionally, the parties may agree that the employer may withhold final payment until provisional or final acceptance of the works.
For contracts entered into with government entities, retention and suspension rights cannot be excluded.
Mexican local courts have jurisdiction to adjudicate disputes arising from construction contracts executed between private companies, and typically, the parties agree to a specific jurisdiction in advance. Regarding construction contracts with government entities, the jurisdiction is granted by law to the federal courts. The election of a specific jurisdiction should be analysed on a case-by-case basis.
Alternative dispute resolution (ADR), such as conciliation, mediation and arbitration, are mechanisms recognised by Mexican law. Mexico is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the provisions of which are in essence incorporated into the Mexican Code of Commerce.
ADR could be agreed by the parties to a construction contract, even in contracts with government entities, in which case, some restrictions related to administrative matters apply. In practice, depending on the particularities of the case, the parties could opt for a specific type of ADR or several successive types of ADR, and to submit unsettled disputes to arbitration.
COVID-19: Impact in the Mexican Construction Industry
In Mexico, as in other countries, the COVID-19 pandemic has had a significant impact across diverse industries, including the construction industry. According to the Mexican Chamber of the Construction Industry (Cámara Mexicana de la Industria de la Construcción), in 2020 activity in the construction industry decreased by 8.1% in comparison with 2019. Fortunately, during 2021 it grew by 9.5% compared with 2020 and is expected to grow by an additional 10% during 2022.
The impact on construction that resulted from the COVID-19 pandemic has varied across Mexico; consequently, different jurisdictions have adopted different measures to incentivise it. For example, on 4 August 2021, Mexico City’s government enacted a series of resolutions by means of which certain construction projects, such as low-income housing, schools, hospitals and health institutions, would benefit from administrative measures aimed at reducing the time of processing and issuing permits so that construction works could begin sooner.
It seems that COVID-19 did initially reduce the demand for office space and, therefore, has pushed developers, investors and local authorities to rethink the use of office and retail spaces in the country. On 4 August 2021 and 22 March 2022, Mexico City’s government enacted resolutions by means of which office and retail spaces that existed before the COVID-19 emergency (ie, 31 March 2020) in specific areas (eg, popular Mexico City neighborhoods, such as Polanco, Santa Fe, the Reforma corridor and Centro), could be reconverted and used as residential developments after completing and complying with certain terms and conditions. These resolutions are intended to promote construction works and reactivate the residential market in Mexico City. The reconversion process will be in force until 31 December 2024.
According to Mexico City’s Ministry of Urban Development and Housing (Secretaría de Desarrollo Urbano y Vivienda de la Ciudad de México), by the end of March 2022, Mexico City’s government had already authorised nine construction projects, equivalent to 50,000 square metres of construction area and approximately 750 residential units. Additionally, mixed-use buildings are also trending within Mexico City’s construction industry, a trend that has increased after the COVID-19 pandemic. In order to incentivise construction activities, therefore, during 2021 Mexico City’s government approved 17 mixed-use projects to be built in Mexico City’s renowned Reforma Avenue. These are expected to improve the infrastructure of the area and provide services to the neighboring population.
Labour Law Amendments Impacting the Construction Industry
Collective labour reforms
In May 2019, the Mexican Federal Labour Law (“Labour Law”) was amended on various matters, including key modifications to labour relationships (“Labour Reform”), which had an impact on the Mexican construction industry. Other modifications are scheduled to become effective between now and May 2023. The Labor Reform law includes the following.
In April 2021, a Subcontracting Reform was adopted to modify, add to or suppress certain provisions of several labour, social security and tax-related laws. The purpose is to prohibit the subcontracting of personnel in Mexico, defined as the act whereby “an individual or an entity provides its own employees or puts them at the disposition of another party”.
The exceptions to such prohibition are (i) the rendering of specialised services which are not part of the corporate purpose or the main economic activity of the beneficiary of such services (such as construction services); and (ii) the provision of shared services between companies of the same corporate group.
The ability to provide such specialised or shared services is subject to the service providers meeting specific requirements, including registration with the Mexican Labour Ministry and reporting their duties to social security agencies.
In August 2021, the Mexican Labour Ministry published a set of guidelines which include the said authority’s interpretation of the applicability of the Subcontracting Reform to specific cases.
The guidelines suggest that it shall be construed that the provisions of the Subcontracting Reform (including the obligation to comply with the specific requirements in connection with specialised services) apply in those cases where employees of one person provide specialised services in the facilities of another. The Subcontracting Reform came into effect on 1 September 2021, the date as of which all companies operating in Mexico were to be in compliance with the new regulations.
In view of the foregoing, all construction companies and other contractors providing specialised services in construction projects and developments are now bound to be registered with the Mexican Labour Ministry as a specialised service provider to be able to provide services under the construction agreements.
In cases where the construction companies and/or other construction-related contractors fail to comply with the Subcontracting Reform provisions, the contractors and the owner of the construction could be subject to economic penalties issued by the labour authorities. Additionally, construction companies (as providers of specialised services) which fail to deliver the information required by social security or tax laws and regulations may be subject to economic penalties. In particular, a sanction for not complying with the Subcontracting Reform is that all payments made with regard to unauthorised subcontracting of personnel would not be tax deductible and any value added tax associated with payments related to subcontracting of personnel would not be accredited.
In view of the foregoing, it is highly recommended that construction companies confirm that they are compliant with the new provisions of the Subcontracting Reform. Also, that those entities retaining the services of a construction company or construction contractors (including owners or developers of real estate projects) confirm that the contractors are in compliance with the new regulations of the Subcontracting Reform.
Hurdles to Building and Developing in Mexico
Certain hurdles need to be overcome by developers and construction companies in Mexico.
Required permits and obtainment process
Construction is a highly regulated activity in Mexico. Municipal regulations usually require companies to obtain several permits prior to initiating construction activities at the municipal, state or federal level.
In most municipalities throughout Mexico, prior to obtaining a construction licence the contractor is required to hold a land-use licence, an alignment and official number licence (ie, a licence providing the official address of the property and construction restrictions), an environmental impact authorisation, an urban impact authorisation and a water supply feasibility certificate. Obtaining these permits should be straightforward; however, in most cases the authorities do not issue the permits within the specified legal timeframes. In our experience, the process can take up to 18 months, and some permits may be prerequisites for obtaining others.
Water and energy could be considered the most important utilities required for construction activities as well as for the long-term operation of real estate projects. Unfortunately, water and energy are scarce in some regions of Mexico. Therefore, obtaining water and energy supply feasibility certificates can be complicated.
In regard to energy supply, during the past year several news outlets have reported that the lack of an energy transmission and supply infrastructure has affected the construction and opening of real estate projects (including industrial parks) in Mexico. The most recent changes implemented by the current administration regarding, among others, self-supply power contracts and transmission costs for power generators to use the public network have not only affected the renewable energy market but have also made developers across all industries become more cautious in ensuring the power required to build and operate a facility (regardless of its asset class) is ready and available in any location.
Securing such rights, preferably during the development phase of the real estate project, is a hurdle that needs to be taken into consideration early in any project’s development.
With regard to water supply, the laws and regulations state that constructors and developers may only use recycled or treated water during the construction period. However, once the project is concluded, potable water is required for operations at the site. Consequently, project developers are seeking the opportunity to obtain water concession titles that would permit developers to extract water from superficial or underground bodies of water and also be able to provide the project users with the amount of water they require.
Nonetheless, as mentioned above, water availability is scarce in some regions of Mexico. Therefore, in cases where a water concession is not granted the water supply needs to be obtained from local water supply entities.
Recently, we have seen development and construction companies looking for local partners, whether landowners or development entities requiring investment, that are used to dealing with these types of obstacles and have specific know-how on how to overcome them.