The uncertainties of beginning a building project now30 May 2022 | Shilpa Mathuradas
The construction industry is seeing a perfect storm at the moment with labour shortages following Brexit and material costs which have soared as a result of the increase in inflation and the war in Ukraine.
According to the Building Cost Information Service (BCIS) Materials Costs Index the cost of raw materials in the UK is expected to more than treble in the 2022. The pandemic had already see it going from -0.9% in 2020 to 4.8% in 2021. Contactors are paying 20% more on average for their materials than a year ago.
It means that construction projects which appeared viable 12 months ago are no longer viable and certain projects are taking significantly longer than expected to complete.
Smaller contractors are feeling particularly at risk given that many will have agreed a particular price to carry out the work which is likely to have been priced some months earlier. Contractors are having to consider what might happened if they are hit with additional costs during a projects timeline and what they might do if they are unable to recover this.
The usual JCT type contract which is commonly used in the industry does not entitle contractors to recover any additional costs incurred on a project after agreeing a price before completion. As a results many contractors have had to accept this as the position as until before the pandemic there was no or little risk of prices fluctuating during the length of the project.
However things are changing and parties are finding themselves having to include clauses that allow the contract sum to be adjusted if the market price of materials and goods change so as clients are have little certainty.
The industry is now seeing fluctuation clauses in JCT contracts which seek to allow adjustments to the contract sum to reflect changes in the costs of labour, transport and materials. Certainly going forward parties should be considering in the contract:
-how risks should be allocated between the parties specifically in relation to costs and delay;
– how the parties will deal with the unavailability of specified materials such as considering alternatives
However, what happens if you are in the middle of a building project? Obviously in these circumstances, parties should before instructing solicitors try and work together to resolve the issues, it is certainly cheaper and quicker for both parties to come to a resolution – the contractor will get paid and the project completed. The Construction Leadership Council has called on all parties to have an flexible approach during the current pricing and availability issues.
Secondly, you need to check the terms of the contract and see what it says about payment. As indicated above the common types of contract provide for the lump sum to be built into agreed specification for an agreed price and within an agreed timescale.. Changes can only be made if the contract allows for this which is another possible clause partied may consider introducing at negotiating stage. Obviously the terms of the contract may be varied by agreement but until this happens parties are bound by its terms.
Obviously when dealing with domestic projects clients may find that everything that was not included in the specification or the client request variations or changed to the project specification. At that time, clients may find that contractors use the opportunity to incorporate into the contract sum the increased prices and there may well be nothing that can be done about it.
Obviously of an agreement cannot be reached then parties will be stuck with the contract or other side find themselves in litigation where there are unlikely to be any winners and for small contractors may lead to insolvency.
The current uncertainties are far from perfect if you are embarking on a development or building project however there are safeguards both parties can make to ensure the project results in a successful conclusion.
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