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01st June 2021

The Price is Right? Builders push up inflation risks

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Brexit, COVID-19, Suez Canal blockages have all contributed to double digit price rises for building materials resulting in shortages and putting pressure on construction contract pricing.  

So how do the standard form building contracts allow for the original contract price to be changed in such circumstances?

Part of the answer to this question has been well rehearsed in the past 18 months since the impact of COVID-19 which risked disruption to construction projects. In the same way that a contractor’s entitlement to be compensated for the impact of COVID-19 on a project depends upon the particular contract terms for that to happen, if a contractor agrees to construct a building for £X then regardless of the fact that material prices later become more expensive over the course of the project than the contractor has allowed for its tender, unless the contract states otherwise then £X is all the contractor is entitled to.

As we have reminded ourselves during the pandemic the standard form building contracts such as the JCT and the NEC make provision for the original contract price to be altered, such as where the employer varies the works, or causes delay or disruption to the contractor, or in certain cases where external events impact on the works. In such a case, compensation may be due in the form of more time to complete the contract, or more payment to cover the contractor’s costs.  When it comes to inflationary effects making the job more expensive, the standard forms include specific provisions to manage how any changes in the contract price can come about.

In the JCT Design and Build Contract for example, the JCT Fluctuations provisions can be selected so that the originally agreed contract sum can be adjusted.  The Fluctuation clauses include that the contract sum is deemed to have been calculated based on cost factors which were applicable at what the JCT calls the Base Date; the date for tender returns.  If those factors; relating to levies and taxes, labour or materials prices change including due to inflationary factors, the contractor is permitted an adjustment in the contract price otherwise due.  In fact due to the long period of low inflation in the UK the most recent editions of the JCT (2016) now only include Part A of what was previously a three part set (A, B + C) of detailed fluctuation provisions (although B and C remain available on line via the JCT).  

In regard to the NEC, the term fluctuations is not used in this contract but under secondary option X1 – price adjustment for inflation - allowance is made in that the contractor is stated to have based its prices on estimates of cost current at the base date, which are then varied by a price adjustment factor. 

While more of an issue perhaps in the case of longer term projects, the natural keenness of employers to always agree a fixed price for construction works means that fluctuation provisions in standard form contracts will often be deleted, or disapplied, as a matter of course.  As though with the consequence of holding a contractor to what may no longer be a viable price where COVID-19 or Brexit factors have arisen, consideration should be given to the possible impact on work quality and the risk of insolvency if inflation squeezes out any margin for the contractor under its original price.  We can certainly anticipate more disputes in this category if building materials inflation continues to rise. 

For further information please contact Colin Jones on 01223 532731 or click here to email him.