Security of payment: Denmark

What legislation or regulations govern security of payment in construction contracts?

In Denmark, construction law is mainly based on the following bodies of law:

• Contract law: Law that governs agreements and arrangements between parties
• Law of torts: Law that addresses and provides remedies for civil wrongs not arising out of contractual obligations
• Case law: Decisions from the Danish national courts and The Danish Arbitration Board for Building and Construction
• Standard form contracts:
  • AB 18: General conditions for the provision of works and supplies within building and engineering.
  • ABT 18: General conditions for turnkey contracts.
  • ABR 18: General conditions for consulting services.
  • AB Consumer: General conditions for the provisions of works within building to consumers. (A standard form contract that takes into consideration that the employer is a non-professional party.)

As the above indicates, there is no statutory regulation of construction contracts. Instead, standard terms and conditions – commonly referred to as “agreed documents” – have been developed through collaboration among representatives of the key stakeholders involved in the construction industry. The standard form contract terms apply solely by virtue of the parties' agreement.

The standard form contracts, particularly AB 18 and ABT 18, are widely used in both public and private construction projects. AB 18 is typically used where the employer provides the design, whereas ABT 18 is used for design-build projects where the contractor also performs the design. Both forms allocate risks and responsibilities in a similar way, with only minor differences in numbering and the design obligations.

Once adopted, they form the contractual basis unless expressly derogated from. In Danish construction practice, the standard form contracts AB 18 or ABT 18 are almost invariably adopted as the contractual basis when agreements are entered into between professional parties.

The AB 18 includes provisions on progress payments, final settlement, and payment security, notably in Chapter B on guarantees and insurance (clause 9-11) and Chapter D on payment (clause 34-38).

Under AB 18/ABT 18, the contractor has a clear right to regular progress payments and timely final payment. The standard form contracts entitle the contractor to request payment up to twice per month for work performed. Payment claims fall due upon the employer’s receipt of the invoice and must be paid within 15 working days. If the employer fails to pay on time, the contractor accrues interest (as per the Danish Interest Act) and may ultimately suspend work after giving notice. Thus, while no specific “Security of Payment Act” exists, the combination of contractual rights in AB 18 and general Danish law (interest on late payments, etc) governs payment security in construction contracts.

Crucially, AB 18 also requires both parties to provide financial security (guarantees) to protect each other’s payments. Under Ab 18 clause 9 the contractor must furnish a performance bond (usually a bank guarantee) equal to 15% of the contract price excluding VAT (reducing to 10% after completion and 2% after one year) to secure its obligations and any defects liability. Conversely – and in a departure from earlier practice – the employer is obliged to provide a payment guarantee for the contractor’s benefit. Under AB 18 clause10, within 8 working days of contract signing the employer must provide a “reassuring” guarantee (bank guarantee or surety insurance) covering the contractor’s payment claims, typically an amount equal to 3 months’ payments (minimum 10% of the contract sum). This employer’s security covers all amounts due to the contractor, including variations/extras.

In summary, while Denmark has no statutory payment-security regime, the AB 18/ABT 18, if adopted, comprehensively govern payment rights and protections in construction projects.

 

What framework is put in place to protect monies intended for progress payments?

Danish law does not require statutory segregation of progress payments or use of project bank accounts. However, AB 18 ensures payment protection through:

• Entitlement to progress payments based on completed work and supplied materials (clause 36).
• The contractor’s right to demand a performance bond from the employer (clause 10).
• Structured procedures for retentions and final accounts (clause 36).

AB 18/ABT 18 put in place a contractual framework to ensure that funds for progress payments are secure, but there is no statutory requirement for special trust accounts or similar. Key features of the Danish framework include the employer’s guarantee, clear payment schedules, and limited use of retentions, as detailed below.

Are project bank accounts required?

Danish law does not mandate the use of project bank accounts for construction projects, and AB 18 does not require a segregated “project account” for progress payments. Progress payments are made from the employer’s own funds in the ordinary course. Instead of quarantining money in a separate account, the employer’s payment bond serves to secure the contractor’s progress claims. In other words, the contractor’s main financial safeguard is the ability to call on the employer’s guarantee if the employer fails to pay.

Are retention monies quarantined?

Under Danish standard practice, retention monies are not required to be held in trust or in a separate escrow account. The AB 18 conditions do permit the employer to withhold a limited amount of the contract sum as security for proper completion and defect rectification, but those funds remain commingled with the employer’s funds (no special trust). In fact, AB 18 explicitly provides that at the time of handover, “the employer may withhold a reasonable amount as security for remedying defects noted upon delivery”, and that withheld amount must be paid out to the contractor as soon as the defects are remedied. This is a contractual retention right rather than a statutory trust. The monies retained by the employer for defects are not placed in any third-party account – they are simply not released to the contractor until repair obligations are fulfilled. Beyond this defects holdback at completion, AB 18 does not envisage any further ongoing retentions on progress payments, and any such arrangement would have to be expressly agreed by the parties (it is not common unless specially negotiated).

In sum, retention funds are not “quarantined” in trust for the contractor under Danish rules; they remain with the employer (subject to the obligation to release once conditions are met).

Are retention monies regimes prohibited?

Denmark does not prohibit retention money regimes in construction contracts. AB 18 introduced an express clause affirming the employer’s right to retain a reasonable sum at handover to secure defect corrections, essentially codifying what was already established practice. This means retention is a permitted mechanism, so long as it is reasonable and tied to securing performance (eg fixing defects). The presence of the contractor’s performance bond in AB 18 often reduces the need for large cash retentions during the project. There is no blanket ban on using retentions – parties remain free to agree on retention of part of the payment, and AB 18’s only limitation is that any deviation (eg an additional retention regime) must be explicitly agreed in the contract.

In summary, retention of monies is allowed and used in Denmark (within reason), and the law has not outlawed such regimes.

 

Can a contractor or subcontractor impose a lien or other form of security over the works or other assets of the developer?

In Denmark, contractors and subcontractors do not have an automatic lien on the works or the land they are improving. There is no statutory “mechanic’s lien” or legal charge that a contractor can unilaterally impose on a building or property for unpaid construction work. Instead, the AB 18 and general law provide other remedies for non-payment (such as suspension of work or calling the payment guarantee), but not a right to encumber the works or the assets of the employer.

Moreover, the standard form contracts forbid retention of title or similar security interests in materials once they are brought to the site. AB 18 §12 stipulates that “materials and other supplies intended for incorporation in the works must be delivered by the contractor without any reservation of title; once such items are delivered to the site, they become the property of the employer.” This means a contractor cannot retain ownership of materials as a security device – ownership passes to the employer upon delivery, and the contractor cannot insist on taking them back due to non-payment.

The only security rights a contractor has are those agreed contractually. Under AB 18, the contractor’s protection is the employer’s payment bond and the right to stop work or terminate if not paid. If an employer fails to pay a due amount, the contractor can give notice and suspend further work after 3 working days (5 days if the employer is a public authority).

 

What impact has the legislation or regulation had on the construction sector and insolvencies?

The introduction of the AB 18/ABT 18 framework (effective 2018) has had a significant influence on payment practices in the Danish construction sector, generally improving security of payment and risk allocation. By requiring mutual guarantees and setting clear payment timelines, AB 18 was intended to reduce the vulnerability of contractors and subcontractors to non-payment – a concern that became especially pointed after the financial crises of the 2000s and, more recently, the COVID-19 pandemic and supply chain disruptions of the early 2020s.

One major impact is the mitigation of insolvency risk for contractors when employers encounter financial trouble. Under AB 18, a contractor faced with an employer’s insolvency has recourse to the employer’s payment guarantee, which can cover typically around 10% (or three months’ worth) of the contract payments. This means that if an employer becomes bankrupt mid-project, the contractor can claim under the guarantee for work already done, instead of being just another unsecured creditor in bankruptcy. This safety net has likely prevented or reduced the cascade of insolvencies down the contractor chain that can occur when a major employer fails to pay. Additionally, because public authorities and housing associations are exempt from providing a guarantee (on the premise of their reliability), the guarantee requirement primarily targets private employers – typically the scenario where the risk of non-payment (and subsequent contractor bankruptcy) was highest. The feedback in the industry is that this measure has strengthened contractors’ confidence in getting paid, thereby stabilising the sector. It addresses a gap in the older AB 92 rules and was “new” in AB 18 to firmly secure contractors’ payments.

For the employer side, AB 18’s impact has been to formalise and cap the retention of monies for defects, and to rely on bonds for security. Employers still hold the right to withhold reasonable amounts for incomplete or defective work at handover, but they cannot indefinitely delay payment of substantial sums without cause. They are also assured of contractor performance via the performance bond (15/10/2% guarantee), which protects them if a contractor becomes insolvent or defaults on obligations. In practice, this balanced approach (each side provides a guarantee) has increased trust between parties and likely reduced disputes purely over financial security.

The prompt payment provisions (15 working days payment period) have improved cash flow in projects and reduced the incidence of strategic payment delays. Contractors can more swiftly enforce their rights (for example, by suspending work after short notice for non-payment), which creates a strong incentive for employers to honour payment deadlines. This has contributed to fewer prolonged payment disputes and potentially fewer contractor cash-flow crisis. It is worth noting that these improvements came not through legislation but through widespread adoption of AB 18 terms – since AB 18 is not mandatory by law, its positive impact is felt to the extent parties use it. Fortunately, most large projects in Denmark do use AB 18/ABT 18, and even where bespoke contracts are used, they often mirror AB 18’s payment provisions due to their perceived fairness.

 

What, if any, reforms are being considered?

As of 2025, there are no major new legislative reforms in the pipeline in Denmark specifically targeting security of payment in construction. The focus remains on the effective use of the AB 18/ABT 18 framework rather than on introducing statutory schemes like those seen in some other countries. Denmark’s approach has been industry-driven self-regulation through standard form contracts, and that approach continues. The comprehensive update in 2018 (from AB 92 to AB 18) was itself a significant reform, and the general view is that stakeholders are allowing time to see its full effects in practice before considering additional changes.

However, there is awareness of international trends and ongoing discussions in the industry. For instance, some jurisdictions have experimented with project bank accounts, statutory trusts for retention funds, or even banning retention money altogether – but such ideas have not (so far) gained traction in Denmark’s policy debate. Danish contractors and trade organisations are certainly interested in securing payments, especially in light of recent insolvencies, but rather than new laws, the solution here is seen in enforcing the existing AB 18 mechanisms (like insisting on payment guarantees and using fast-track dispute resolution for non-payment issues). There has been no proposal to make project-specific escrow accounts mandatory, nor to legislate a blanket prohibition on retentions. The current framework already limits abusive withholding by requiring reasonableness and prompt release of any retained amounts, and this is deemed sufficient by the industry at present.