Mexico: Construction Comparative Guide

1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

The regulations that govern construction projects in Mexico will depend on the nature of the project, as follows:

• Public projects (funded by public resources) are governed by the Public Works and Related Services Law and its accompanying rules; and
• Private projects are governed by the Civil and Commercial Code, and of course the relevant contracts.

Each state also has its own civil regulations, so it is important to pay attention to the specific code applicable at the place where the project will be built.

Certain projects which are to be executed by specific entities or companies owned by the state have their own laws that govern relevant projects.

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

Depending on the purpose of the project, several norms of reference must be followed. In particular, for major power and oil projects, various different rules govern materials and processes.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

In the case of public contracts, several different entities are responsible for managing their performance. Generally, these entities will appoint a specific officer to monitor the progress of the works, ensure the contractor's compliance with the rules and notify the contractor of any breach, among other things. These entities have the power to terminate the contract through the corresponding procedure and notify the corresponding ministry or department to commence the sanction process.

1.4 What is the general approach in regulating the construction sector?

In the case of public projects, regulation is effected in accordance with public order and the general interest. Every effort is made to avoid corruption and criminal activities, and any such activities will be punished.

In the private sector, regulations primarily relate to the parties' obligations and the consequences of breach thereof.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

Public law provides for three types of public procurement:

• Public tender: The public tender is the general rule and consists of an open invitation to the population in general. In the first phase of this process, the contracting entity uploads the specifications of the project to be developed, the requirements to fulfil and the deadlines for the submission of proposals. In the second phase, clarification meetings are held, at which participants can ask questions about the project and the contracting entity will respond accordingly. Finally, the contracting entity will issue an award based on the technicalities and value of the proposals.
• Restricted invitation: This method is utilised for specific complex projects, where there is a limited number of specialised contractors on the market. After undertaking a study of the market, the contracting entity will invite a few operators to express their interest in participating in the process. Once the invited parties have express their interest, the tender process will continue as a public tender, but with the interested parties only.
• Direct award: This involves a direct award with no tender process and can be used exceptionally only.

Whether these processes vary depending on the involvement of international parties will depend on the individual circumstances of each case.

2.2 What are the advantages and disadvantages of these different methods?

The main advantage of a public tender is the transparency of the process. In addition, ‘social witnesses' are involved who monitor the actions of the authorities.

The main disadvantage is that, for instance, the best option is not necessarily the cheapest. However, as public projects are funded with taxpayers' money, the economic criterion generally proves decisive to the award – even where this option is not the best from a technological or technical perspective. However, some projects admit private funds.

2.3 What other factors may influence the choice of procurement method?

Definitively, the offer in the market – that is, if there are numerous companies that could provide the services required by the state, the procurement method will be a public tender. If there are just a few competitors in the relevant sector, the contracting entity will opt for the restricted invitation method.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

In both private and public projects, the client commonly appoints a project manager to monitor the status of the project, follow up with subcontractors and keep it informed of advances, delays, breaches and general progress.

The participation of international parties does not usually affect this structure, as it is common to most major projects

3.2 What are the advantages and disadvantages of these different structures?

There are two main advantages to the structure outlined in question 3.1:

• It ensures that the project will proceed in an orderly fashion, as a specialist is managing the project; and
• It is easier for the client – which will not necessarily be a construction specialist – to liaise directly with a project manager as a single point of contact.

The disadvantage is that the proposals made by the project manager must be approved by the client. This may result in delays due to late responses from the client.

3.3 What other factors may influence the choice of project structure?

Other factors include the size of the project and the available budget.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

The financing arrangements may vary depending on whether the project is public or private. While public projects are financed by the state, private projects are usually financed by finance institutions such as banks or funds.

However, some public projects are funded with hybrid financing sources – that is, partly by public resources and partly by private.

The experience in Latin America is that, for instance, the financing parties may require the construction parties to use a model contract (eg, those of the International Federation of Consulting Engineers) before providing funding. However, this practice is not common in Mexico.

4.2 What are the advantages and disadvantages of these different structures?

As a rule, the financing parties will want some degree of control over the project. This can be both an advantage and a disadvantage.

4.3 What other factors may influence the choice of financing structure?

The scale of the project, the parties involved and the schedule for the development.

4.4 What types of security and other protections are available to lenders to safeguard their position?

Warranty instruments such as bonds and/or insurance are available to cover different scenarios.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

This will depend on the nationality of the financing parties and the location of the goods or assets that will serve as a warranty.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

Several instruments aim to combat bribery and corruption. For instance, the Federal Act to Prevent and Identify Operations with Illicit Background Funds aims to facilitate the detection of both the source and destination of funds, with a view to protecting the financial system and the national economy as a whole.

The General Law of Administrative Responsibilities sets out the responsibilities and obligations of public authorities, and the applicable sanctions in case of breach.

These acts require that comprehensive due diligence be conducted in order to identify whether there are sensitive activities that must be notified to the corresponding authorities prior to implementation of a project; and, where applicable, to commence the corresponding legal actions and determine the sanctions for both public and private entities where procedural irregularities, bribery and corruption are detected.

Sanctions can include:

• administrative fines;
• prohibitions against participating in public contracts (for private companies) and/or working in public jobs (for public officers); and
• imprisonment.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

In Mexico, the use of model contracts – such as those of the International Federation of Consulting Engineers (FIDIC) or the New Engineering Contract (NEC) – is not common. Most commonly, the parties establish their own model contract.

6.2 What are the advantages and disadvantages of using the different standard forms?

In our experience, there are many advantages of using model contracts such as FIDIC or NEC. They include:

• follow-up on the different phases of the contract; and
• the availability of dispute resolution methods such as dispute boards in order to prevent disputes from arising, or at least to allow the project to continue in the event of a dispute.

While the adoption of these model contracts normally involves a financial cost, this pales into insignificance to the costs that poor administration of the project could incur.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

• The scale of the project;
• The nationality of the parties involved;
• The schedule for the development; and
• The available information on the benefits of using model contracts.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

Although the use of model contracts is not common in Mexico, in some other regions of Latin America, the parties commonly modify specific conditions of the contract, as long as such modifications do not change the nature of the contract.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

Yes, the general rule in Mexico is that the law of the contract is the parties' will. In this regard, if the parties opt for the law of a foreign jurisdiction, their choice will be valid.

In general, however, local administrative laws remain mandatory. For example, the parties cannot avoid the fulfilment of local and/or national requirements, such as environmental, social, tax, labour and union obligations.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

Certain requirements will apply to all construction projects, including those relating to the payment of tax and employers' obligations. For example, social security fees must be paid and registration with the Employers' Registry is mandatory.

A new act aims to avoid the implementation of outsourcing arrangements for the benefit of employees. This law prohibits employers from subcontracting services that are expressly stated in the employer's deeds of incorporation.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

The contractor commonly bears the risks associated with the scope of its mandate, as well as with the transport of some materials, tools and machinery. Once the project has been received, the risk usually passes to the client.

Under common lump-sum contracts, the contractor bears the risk until the project is delivered to the owner. Upon delivery, the risk is transferred to the owner.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Generally, the parties will agree that each will be fully responsible for its own acts and omissions; and should any contingency take place, the party that causes or gives cause for it will hold harmless to the other party.

Some of the most common restrictions on the parties' liabilities are labour contingencies and/or disputes with unions.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

This will depend on the nature of the delay.

If the delay is caused by force majeure or act of god, the parties will usually agree on:

• suspension of the works and extension of the milestones; and
• which costs will be paid by the client and which by the contractor.

The scenario is similar where the delay is caused by failure to pay or delayed payment by the client. In the latter case, it is common to agree on an extension or on a daily penalty.

Where the delays are caused by the contractor or the contractor has a motive for the delays, the owner will retain a certain amount of the next payment. If the contractor does not cure such delays, the retentions can be kept by the client as liquidated damages.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

The concept of force majeure has been developed in Mexican jurisprudence and will be considered on a case-by-case basis.

As a general rule, the Civil Code provides that no one is responsible for an event of force majeure. In this regard, in the case of a force majeure event, the parties can jointly agree on the terms to proceed.

Construction contracts commonly provide that if an event of force majeure occurs, the parties will jointly agree on the suspension of the jobs and the payments that the owner will continue to pay. If the suspension cannot be released, the parties can agree on termination for convenience.

7.7 What scope do the parties typically have to make material variations to the works?

This will depend on the original scope of the contract. However, variations on time and amounts are common.

For instance, the addition or reduction of substantial elements to the scope of contracts will require consequent modifications to the warranties.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

The parties will commonly agree that final completion will be decided by the client at its discretion. However, in the case of lump-sum contracts, a specific rule states that, unless otherwise specified, final completion will be determined by a third-party expert.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

The general rule is that a contract will be terminated once the conditions set out in the contract have been completely performed and/or once the specified timeframe has elapsed.

However, there are specific rules on early termination, termination for convenience and termination for breach, which commonly take place as follows:

• Early termination arises if a suspension of works cannot be overcome;
• Termination for convenience generally applies where it is no longer possible for one of the parties to continue and complete the contract; and
• Termination for breach implies that one or more breaches have not been cured, and will result in contractual penalties.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

The concept of liquidated damage is not expressly established in Mexico. Mexican law does contain provisions on the contractual penalties that can be agreed by the parties; but these can never be higher than the principal obligation. In addition, the contractual penalties cannot be claimed jointly with damages and losses.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

Hot topics which are frequently the subject of negotiations in this regard include:

• risks;
• the amount of the down payment;
• suspensions;
• contractual penalties; and
• percentages of bonds are commonly hot topics where the negotiations focus in.

8.2 Are there nominated subcontractors in your jurisdiction?

In the case of public projects, the general rule is to choose a contractor through either a public tender, a restricted invitation or a direct award. Thus, in public projects, there are no nominated subcontractors.

In the case of private projects, the parties are free to contract with whomever they believe appropriate. It is thus possible for the client to nominate subcontractors. However, if a specific company will act jointly with another through a merger, the Federal Commission of Competence (COFECE) must be notified accordingly and must approve the merger before it is implemented. Not every merger must be notified to and approved by COFECE, but it is recommended that a legal opinion be obtained on a case-by-case basis.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

The parties are free to agree on the terms for payment.

9.2 Are ‘pay when paid' clauses valid? In what circumstances?

Pay when paid clauses are permitted, as the general rule on contracts in Mexico follows the autonomy of the parties.

9.3 How are retentions typically dealt with?

Retentions that constitute warranty funds are commonly agreed, which can be used to pay expenses, fines, the costs of remedying latent or hidden defects and so on.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

Special rules apply to the construction sector to ensure the health and safety of employees on site (NOM-031-STPS-2011). These set out the minimum obligations of employers in relation to their employees – for example, a requirement to provide them with the basic tools needed to perform their jobs.

Employers must also register their employees with the Mexican Institute of Social Security.

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

In Mexico, employers have an obligation to notify the Work Ministry of any accident, death or outbreak of disease that occurs on site through the Job Accident Notification System.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

If an employer breaches the health and safety obligations, the Work Ministry can issue administrative fines. If the employer does not provide employees with the necessary personal protective equipment (and in general, if it does not comply with its obligations as an employer), employees have the right to notify such breaches to the union, so that it can address the issue with the employer.

On the other hand, if an employee does not follow the health and safety rules, he or she can be fired without any liability of the employer.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

In general, employees should be provided with the necessary tools and personal protective equipment. During the COVID-19 pandemic, additional requirements have applied – for example, a ban on sharing personal tools and phased schedules for starting work and taking lunch breaks.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

The Work Ministry is responsible for ensuring that employers fulfil their health and safety obligations.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

To ensure that workplaces are safe and reduce the risk of accidents occurring on site.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

The authorisations will vary depending on the type of project. For example:

• in the real estate sector, special authorisations are required depending on the number of floors that a development will have;
• for railway and transport projects, legal access to the site and the venue are required; and
• for projects involving water treatment, authorisations from the Water National Commission (CONAGUA) are required.

In general, an environmental impact statement is required for all projects.

11.2 What is the process for obtaining environmental authorisations?

The contractor must submit a series of documents – including a letter explaining the project, blueprints, corporate documentation, official ID and payment receipts – to the relevant authorities, depending on the type of authorisation sought.

Most such applications are submitted to the Secretariat of Environment and Natural Resources (SERMARNAT). The costs may vary depending on the permit or authorisation sought; and the timeframe in which they are granted may also vary depending on the authority's workload.

11.3 What environmental requirements must the contractor observe while the site is operational?

The contractor must comply fully with the terms and conditions stated in the environmental authorisation.

It should also obtain a completion of works notice from the corresponding municipal or state authority; once this has been obtained, the contractor will be granted an operating licence.

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

In general, non-compliance with the environmental requirements will result in administrative fines and potentially even the indefinite suspension of the project.

11.5 What environmental requirements apply to new buildings?

The environmental legislation applies to all types of construction projects; while special norms and regulation apply to historic buildings and constructions.

11.6 Which bodies are responsible for enforcement of environmental obligations?

The relevant permits, licences and concessions are granted by:

• SERMARNAT;
• CONAGUA;
• the federal government; and
• municipalities.

The Environmental Federal Procuracy is responsible for resolving claims relating to the environment. However, the responsible authority will vary from one project to another.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

The general approach to regulating the construction sector varies from one type of project to another. Most of the regulations are set out in the Federal Environmental Liability Law. However, several important issued are regulated by official Mexican norms, which are published by environmental authorities such as SERMARNAT.

11.8 What is the impact of Net Zero in your jurisdiction?

During the COVID-19 pandemic, the Ministry of Energy published a fast-tracked bill that would effectively halt private renewable energy investment in the country, prioritising the government's own ageing, fossil fuel-fired power plants. In this regard, Mexico has stated that it will be unable to comply with its 2020 pledge and is thus looking towards the implementation of new policies to meet its national climate targets for 2030.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

Contractors must obtain certain types of statutory insurance – for example, under the Law of Social Security, insurance must be obtained for death, works risk, personal injury and sickness of employees. However, depending on the type of project, the parties can agree on different kinds of insurance.

In construction projects, it is common to see the following types of insurance:

• professional liability (for design);
• civil liability;
• general liability (all risks);
• equipment;
• machinery; and
• environmental.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Yes, if the parties have expressly agreed this as a possibility.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

It is both possible and common to request professional liability insurance applicable to design.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

In addition to insurance, it is common to agree on bond policies in order to guarantee that:

• down-payments are made correctly;
• contracts are executed correctly and completely; and
• the client is covered for:
• • any contractual penalty;
  • latent and/or hidden defects; and
  • any labour contingency.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

The Federal Work Law sets out the general rules of labour law and must be followed strictly, as it regulates the employer-employee relationship. The Social Security Law sets out obligations of the employer in relation to matters such as:

• registration of the project;
• registration of employees with the Social Security Institute; and
• the fees to be paid.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

The law is very general from a tax perspective. All companies must pay value added tax and profits tax. Taxes may also be levied on the import of material, machinery and so on.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

Tax incentives were recently introduced for companies that perform their services in states in the north border area, where taxes are considerably lower than in the rest of the country.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

Companies should ensure that they pay all taxes due in a timely fashion. In addition, a recent reform to the law aims to prevent outsourcing and obliges contractors that perform specific services to register themselves in the Register of Service Providers and Specialised Works.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

The use of BIM modelling technology is not mandatory for public projects. However, BIM, Primavera and similar software solutions are becoming more prevalent on the market.

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

There are no smart contracts in Mexico.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

As mentioned in question 15.1, BIM, Primavera and similar software solutions are becoming more prevalent on the market.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

Disputes relating to complex projects in Mexico are usually resolved through arbitration under the rules of:

• the International Chamber of Commerce;
• the London Court of Arbitration;
• the Centro de Arbitraje de México; or
• the Arbitration Centre of the Construction Industry.

The local courts are also occasionally used.

According to a recent judicial precedent, disputes arising from projects that involve public authorities must be resolved in the administrative field. In the past, they were resolved in the civil and commercial field – although exceptions were made for companies such as Pemex and the Electricity Power Commission.

16.2 What issues do such disputes typically involve?

Construction disputes generally relate to the following:

• cost adjustments;
• recognition of additional works and time;
• application of contractual penalties;
• latent or hidden defects, and who is responsible for them; and
• execution of bonds.

16.3 How are disputes typically resolved?

Disputes are most commonly resolved through a final judgment or award. However, the use of mediation, conciliation and negotiation has also increased significantly of late.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

It is common to include arbitration clauses, and negotiation or mediation clauses, in construction contracts. The Commercial Code permits the use of alternative dispute resolution (ADR), and the judiciary tends to be pro-arbitration and pro-ADR in general.

The private sector has lobbied extensively for the introduction of a law on mediation and proposals are now frozen, awaiting discussion at Congress.

16.5 Is the use of dispute boards common in your jurisdiction?

The use of dispute boards is not yet common practice, although it is slowly increasing not only in Mexico, but throughout Latin America.

16.6 Have there been any recent cases of note?

One recent major project that has generated a lot of controversy is the now-cancelled New Airport of Mexico City. Two arbitrations were commenced in relation to this project and were eventually resolved through mediation.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

Construction was severely impacted by the COVID-19 pandemic, as it was not recognised as an ‘essential activity' by the authorities (with the exception of certain governmental projects). As a result, most projects had to be suspended through the application of suspension clauses.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The construction sector is now slowly getting back to normal. Although no new legislation is expected, it is anticipated that certain health practices that emerged during the pandemic will continue, such as the use of face masks; a sensible approach among employers to employee illness; and enhanced hygiene practices.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

As Mexico is a very formalistic jurisdiction, contracts should be strictly managed. Parties should have full knowledge of the terms of their contracts, their obligations thereunder and the applicable timeframes; and should document each and every event during the works. This should help prevent them ending up at a disadvantage and ensure that, should litigation arise, they will be in the strongest possible position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.