Construction companies struggling with under-priced contracts as costs increase

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Commercial Article

19 May, 2022

As the height of the pandemic continues to recede, contractors still face several ongoing issues, including sky-high materials prices and staff shortages. Construction cost inflation in 2022 is currently unprecedented, and after having decades of price stability in the supply of labour and materials, construction costs have increased rapidly combined with shortages of all resources. Construction cost increases and resource shortages bring two problems:

  1. Trading losses as contracts become under-priced; and
  2. Costly delays to the works.

Construction contracts are commonly fixed price with little or no provisions included for price increases. We are however, seeing an increase in the use of the [previously] little used JCT fluctuations option clause and 'cost-plus' mechanisms, thereby enabling contractors to make proposals with more certainty.

What can you do when faced with a fixed price contract that is no longer acceptable on price?

Whilst each individual case will have different circumstances and merits of which an analysis is required to reveal the most effective strategy, there are certain actions of the employer or circumstances which could give rise to opportunities. If the employer is culpable for delays this might lead to a claim for loss and/or expenses made by the construction company or there may be an opportunity to recover losses in the valuation of variations. The easiest solution is to renegotiate contract prices and achieve an amicable outcome, but the contractor should be careful not to apply any financial pressure amounting to economic duress as this will likely make any price increase void if challenged by the employer.

Renegotiating a contract is not likely to be straightforward if an alternative contractor can be found easily after walkout/repudiation or a refusal is made by contractors to continue the work. If the works to be provided are specialised, where there is no choice but to continue with the contractor, the actions of a contractor in looking to increase the price are more likely to amount to economic duress. It could be that certain normal materials are in short supply with a long lead time and the threat of a walkout made by the contractors could lead to employers having no choice but to agree to the price increase which again could be held as economic duress.

What amounts to economic duress?

One of the most familiar situations is Carillion Construction Ltd v Felix (UK) Ltd (2000). In this case Felix was a cladding subcontractor engaged in the design, manufacture, and supply of cladding for an offices construction project. During the project disputes arose on the prices for the works and variations and Felix proceeded to refuse to make deliveries until an agreement was reached. Carillion was worried about significant liability for liquidated damages that could result from the delay and although Carillion valued the work as £2.75m, after Felix's demands the parties agreed the sum of £3.2m in full and final terms. On completion, Carillion reverted to their original figures following this Felix brought an action to enforce the settlement agreement. The Court held that it was unenforceable as the pressure applied by Felix was illegitimate and without justification.

Each case turns on the facts and merits involved and financial pressure leading into a negotiated price increase agreement must be illegitimate to be void, meaning where the paying party has no choice nor a practicable alternative but to submit to the financial pressure.

What can you do if you are affected by the increased costs?

Although construction companies are faced with these construction cost increases, it is advised that contractors do not walkout or put their business at risk without professional consultation. This can lead to repudiatory breach of contract which will lead to construction companies facing further impacts on their business, which is unnecessary.

Our Construction team at Forbes Solicitors are experts in drafting contracts in the construction sector and can assist with implementing effective pricing mechanisms and their renegotiation.

For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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