Partner and Head of Commercial
Following the uncertainty of the pandemic as well as other factors such as Brexit, congested transport routes, rises in shipping costs, labour shortages and even climate change, UK builders have been exposed to a world-wide surge in demand for essential materials. Construction companies have revived existing projects and new projects have been given the go ahead, however many have come to a standstill due to the issues mentioned within this article. Key materials have been affected and there currently does not appear to be any chance of relief, at least in the short-term.
Traditionally between employers and contractors, the risk of obtaining materials would pass to the contractor, who are generally willing to accept this position. However, due to the current uncertainties within the market, contractors are increasingly unlikely to contract on this basis.
This article looks into some of the different ways to approach the current uncertainties for contractors.
Things that can be done to help the uncertainties are:
- As mentioned above, traditionally the risk passes to the contractor to obtain materials for projects. Employers usually request a lump sum cost upfront for the whole project and it is then for the contractor to take the risk of any subsequent changes in the price of materials. Contractors could still look to accept this position but look to request a higher initial lump sum, in an attempt to offset any future price increases.
- Some contractors will also likely agree to the risk passing to them regarding materials if they are able to place orders with suppliers sufficiently early in the project. This then allows them to obtain a secure fixed price from their supply chain but should also allow them to mitigate any potential delays in delivery. Contractors are likely to request an advance payment from the employer in order to place such early orders, however employers will then in turn consider the usual risks around making such a payment like for example, what protection they would have that the advance payment will be used for the agreed orders?
- Contractors could request that fluctuation provisions are included in their contracts, which helps to protect them against future price rises. These clauses will allow adjustments to be made to the contract sum in certain situations, which could include increases for materials and/or labour. It is very unlikely that employers will likely agree to this cost uncertainty within contracts, however, amendments could be made to the contracts to partially allow for fluctuations by allowing a cap of some sort.
- Provisional sums could also help mitigate the risk of future price increases against the cost of certain materials within the contract sum. These would still need to be agreed in the usual way between the parties but could be incorporated.
- In normal circumstances, a delay for delivery of materials, dependant on the circumstances, would usually be considered as a force majeure event, however due to the ongoing issues being wellknown this now falls outside a force majeure event, meaning a contractor cannot gain an extension of time. New bespoke grounds for an extension of time or additional loss/expenses can be included within contracts in relation to these delays. These again can be agreed between the parties dependent on the circumstances.
It is currently unclear how long these material shortages will last and this is likely to be an ongoing issue for UK projects for a period of time. Employers and contracts will need to actively engage with each other to discuss this issues proactively and agree an appropriate level of risk allocation which is commercially acceptable to both sides.
For more information contact John Pickervance in our Commercial department
via email or phone on 0333 207 1134.
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