Distinction between service contracts and contracts to produce a work as well as risk sharing

This distinction is important because different rights and consequences can be derived from them in law and in fact. Contract and invoicing practice should therefore be as accurate as possible.

Service contract

Under a service contract, one party provides a service for the other party.

The service provider provides his services independently and is usually not bound by the customer’s instructions, but in contrast to a contract to produce a work, the service provider does not owe a concrete work result. The service provider is only obliged to work for the customer who bears the entrepreneurial risk. Even if the desired success is ultimately not achieved, the customer is obliged to pay for the provision of the services. The classic service contract, for example, is a contract for medical treatment. The physician does not owe the patient’s recovery, but is only obliged to provide correct treatment. In the business world, service contracts come in many different forms, for example, as maintenance contracts for IT systems, as consultancy or as agency contracts.

Contract to produce a work

The producer of a work owes his customer a ‘success’ or a ‘work’. The producer of the work is therefore liable to the customer. The producer of the work is also liable for his work and he is obliged to remedy defects. The customer is obliged to accept the ‘work’. The producer of the work is not entitled to claim remuneration until the work has been accepted. This means that the producer of the work bears the entrepreneurial risk.

The customer is not entitled to issue instructions regarding individual work steps. He can only issue general, work-related instructions to the producer of the work (orders, specifications, etc.).

The classic contract to produce a work, for example, is a contract for repair work with a mechanic. Contracts to produce a work exist in many different forms in the business world, for example, as installation services in the IT sector, in project work or in the manufacture of products. 

Practical tip

The risk when choosing the form of contract is that the Federal Employment Agency (Bundesagentur für Arbeit) checks precisely which form of work is stipulated in the written contract and which one is then actually carried out. It is, for instance, not permissible to designate a contract as a ‘contract to produce a work or service contract’ (read more…), although employees are in fact hired out within the framework of temporary employment (ANÜ). Otherwise a fine of up to EUR 30,000 may be imposed (read more…).

In order to avoid any risk, it is better to conclude a temporary employment contract rather than a contract to produce a work or a service contract. Especially the latter form is often very similar to the temporary employment contract. The temporary employment contract should expressly state that it is a temporary employment contract.