News | September 22, 2022

Managing Construction Price Inflation – part 2

Below is Part 2 in this series. Part I can be found here and an earlier post regarding commercial steps that developers can consider to ameliorate the worst effects of inflationary pressures can be found here.

 Considerations if procuring materials in advance.

  • Check the terms of your contract and contract documents carefully to ensure that they are consistent and reflect precisely what has been agreed about early delivery and payment. Most payers will want ownership of goods for which they pre-pay to be formally “vested” in them by way of a “vesting deed” to guard against supplier insolvency and ensure that the goods cannot be used for any other project.
  • If materials are going to be stored off-site, consider who will pay the storage charges and when the legal ownership in those goods passes to the payer. Check suppliers’ terms of sale to make sure that if transfer of ownership of those goods is required early you are not prevented from doing so by “retention of title” provisions.
  • Place greater emphasis on security and protection for materials and fuel both on and off site. An increase in thefts is already being reported as prices rise.
  • If an off-site materials bond is a precondition of early payment, consider if what is required can be obtained and which party will bear the cost. The bond market has hardened considerably since COVID-19, therefore carefully consider the terms being offered.

What can be done about inflation in existing contracts?

If the contract expressly includes any basis for price adjustment, for example a term or provision that states prices will only be fixed for a specific time period that has now elapsed, the price may be adjustable.

If the contract does not include any fluctuations clauses or another way of being able to adjust prices, there may only be scope for additions to the agreed Contract Sum where there is either:

  1. A variation or change, or
  2. An entitlement to an extension of time and related loss and expense.

This will be by reason of specified delay events (Relevant Matters in JCT contracts and Compensation Events in NEC). All will need to be within the meaning of the contract provisions so careful consideration of the background circumstances will be required. If there are grounds for such an application, it is important that contractors comply with all the contractual requirements to make a claim.

Even where no contractual right of recovery exists, the parties are best advised to be pragmatic and find a consensual way to deal with the issue.

What can I do if a shortage of materials is causing a delay?

JCT contracts provide for specific grounds on which a contractor can seek to claim an extension of time (EOT), known as “Relevant Events”.

Force majeure may appear to be the most obvious ground to apply to delays caused by the war in Ukraine. However, it will depend on the precise wording in the contract concerned. 

Force majeure is typically associated with an occurrence or event that is (1) beyond a party’s control which (2) hinders performance under a contract or makes it impossible to perform.

Generally, proving force majeure is a high threshold which can be difficult to reach. This is particularly so under unamended JCT contracts because force majeure is undefined. It is therefore necessary to look to common law when considering whether or not force majeure may apply to the facts in any case. However, historically successful force majeure claims have been made in relation to disruption caused by regional or large-scale conflicts. The war in Ukraine is not a war that the UK is directly involved in, so it remains to be seen if the effects on trade with the UK are held by the courts to come within the common law meaning of force majeure.

Depending on the terms of the contract, a change in law that directly affects the execution of the works may be a Relevant Event for which an extension of time can be granted, for example if performance of the contract has been impacted by sanctions imposed on Russia and certain Russians by the UK.

Although under unamended JCT contracts force majeure and changes in law are not “Relevant Matters” entitling a contractor to claim for additional loss and expense for any EOT allowed, an EOT if granted will at least provide relief against liquidated damages. Further, if having regard to the contract terms there is a variation to the specification or change to the Employer’s Requirements instructed by the Employer to mitigate the effects of materials and labour shortages and delays, such instructions may be treated as a variation or change and be valued as such.

In NEC contracts, the provisions for obtaining an EOT are assessed together with requests for additional money as “Compensation Events”. Grounds include an event delaying practical completion which neither party could prevent and an experienced contractor would have judged as so unlikely to occur as to have been unreasonable to plan for (clause 60.1(19)), a change in law (Option X2), or where the scope requirements are impossible to perform (Clause 60.1(1)).

Clause 60.1(19) and Option X2 are likely to operate in similar circumstances to those under the JCT form of contract discussed above. Clause 60.1(1)’s threshold of “impossibility” is very high and makes clear that performance simply being more difficult or costly due to supply shortages will not be enough.

Part 3 in this series will be published in the coming weeks.

Produced on behalf of and in conjunction with Build UK.