With material shortages and price increases currently affecting the construction industry, Simon Dunkling of Arbicon warns of the importance for contractors, subcontractors and building employers to check their construction contract provisions and protect themselves against the impact of Covid-19
The Construction Leadership Council has recently warned that cement, some electrical components, timber, steel and paints are all in short supply, citing “unprecedented levels of demand” that are set to continue “for the foreseeable future”. The present material supply problems stem from several factors, the most notable being that construction industry projects have surged since lockdown began easing, leading to high demand for materials.
Projections indicate that high demand for materials will continue over the next six months, which mirrors similar projections worldwide, as major economies such as China, the US and the EU surge following lockdowns.
Furthermore, with demand increasing across the globe and the UK importing many of its raw materials, not only is demand outstripping supply but prices of materials are also rising. The Office for National Statistics is projecting a rise of 7%-8% in material prices, with increases for certain materials, such as timber, expected to more than double during the year.
As both demand and prices rise, many in the construction industry will be negatively affected. The BBC has reported that some SME builders are already struggling to purchase essential materials, like timber, cement and roof tiles, as readily off the shelves.
Existing construction contracts
For parties who have already entered fixed-price contracts, the aforenoted conditions may be significantly different to those envisaged at the time that contract was entered. This change could add significant stress on the contractor as these shortages cause on-site delays and disruption to projects, which in turn leads to financial risk such as exposure to liquidated damages and delay costs.
Additional consequential costs, such as paying for extended site preliminaries can also be incurred. These are risks that may not have initially been factored into the contract price or programme.
Parties in existing contracts should check their contracts for such clauses and ascertain whether there is entitlement to price increases, and those parties entering new contracts should consider the inclusion of such clauses.
New construction contracts
For parties negotiating new agreements, care must be taken to be conscious of the current supply and pricing issues. It is important to ensure that the prospective contract adequately captures the risk allocation between the parties, clearly recording which party bears the risk for any material-related delays or cost increases.
One way the contractor can seek to mitigate their risk of price increases is using fluctuation provisions that are found in many standard forms of contract, although are seldom used outside of long-term projects. Such provisions allow for prices within the contract to be adjusted to account for changes in the prices of materials, plant and labour, with adjustments typically made on set anniversaries and in line with inflation or published indices.
In addition, those negotiating contracts should also review the prospective contractual terms pertaining to delay and loss arising from material shortages or Covid-19. If not adequately captured, the benefit of introducing clauses that expressly set out the risk allocation for such delays and losses should be considered; for example, confirming if the contractor is entitled to additional time, additional money, or neither.
Entitlement to extension of time
For those contractors already in contract who are expecting to be or have been delayed due to the impact of Covid-19, material supply or other event, it is important to check the contract terms to ascertain the entitlement to additional time for such delays. Where permissible, the delay, or risk of delay, should be notified as soon as possible and an extension of time applied for. A successful extension will protect against delay damages and, subject to the terms of the contract, the contractor may also be entitled to claim for the financial loss and expense suffered.
If the contractor is entitled to additional time or money then it is incumbent on the contractor to be able to demonstrate that they actually suffered the delay or financial loss being claimed. It is vital that records of both the intended cost and time, and the actual delay and costs are documented.
Notifying a claim
The process of notifying a claim for time or money will depend upon the provisions of the applicable contract form. It should be borne in mind that giving the correct notification of a claim is often a condition precedent to being entitled to time or money; and in some instances, the entitlement can be lost completely if the notice is not served correctly and within a specified timescale. Thus, correct service is imperative.
The failure to properly protect against the impact of Covid-19 and material shortages could lead to the contractor taking the risk of the delays and the resultant costs. This could significantly impact upon the contractor’s cash flow and financial standing, their ability to complete projects or even stay in business. As such, understanding the contractual risk allocation and entitlement to time and money is vital.
Simon Dunkling
Director
+44 (0)1733 233 737
Twitter: arbicon
LinkedIn: arbicon
