Construction industry bodies and builders' merchants are warning of considerable cost increases to raw materials amid an industry-wide shortage. The current market volatility raises some pertinent questions from a contractual perspective.
In terms of building contracts already entered into, many contractors will be keen to establish whether the agreed terms permit them (i) an extension of time for delayed deliveries; and/or (ii) additional payment to cover the increased cost of procuring those hard-to-come-by goods. The absence of an express reference to 'materials shortages' in the contract will not necessarily mean that the contractor is without remedy. For instance, a clause permitting a programme extension for ‘force majeure’ could be relevant if the contract in question was entered into prior to the outbreak of Covid-19 and the materials shortage can reasonably be attributed to the associated global fallout. On the issue of cost increases, if the contractor has included provisional sums in its pricing, then this too could provide a handy ‘get-out’ in terms of passing price hikes on to the employer.
Those currently finalising building contracts can expect significant (and potentially difficult) negotiations, as both parties seek a commercially viable risk sharing arrangement when it comes to materials shortages. Whilst we can expect many employers to stand firm in requiring fixed price tenders, this may come at a cost with contractors seeking to mitigate the risk of future price inflation by (i) insisting on ‘front-loaded’ payments to facilitate early procurement of goods and plant; (ii) incorporating provisional sum items; and/or (iii) increasing their tender price to account for the risks involved.
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