09-06-2021
With material shortages and price increases currently affecting the construction industry, Arbicon warn 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 a 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; with The Office
for National Statistics 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 reports 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.
If your construction project has been impacted by Covid-19 and you need to assess your contractual rights, apply for an extension of time, loss and expense claim, or respond to a request, please contact Arbicon on advice@arbicon.co.uk or call 01733 233 737 for detailed advice and assistance.
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