The ongoing material shortages and continuous price hikes are wreaking havoc in the construction industry. There may be a number of reasons for this including the pandemic and Brexit but the cause is not as important as the effect. The supply issues are placing immense strain on the construction supply chain and many projects in turn. A lot of contracts entered into prior to these issues arising may not have provisions that suitably deal with them. Typically, the party doing the work, whether that be the contractor under a Main Contract or a subcontractor under a subcontract, will be responsible for providing the materials to undertake their works and they will also carry the risk in relation thereto. However, the current circumstances are perhaps unprecedented - does this mean the contractor or subcontractor has protection under their existing contracts? What about future contracts? We set out our thoughts below.
Check your existing contracts for the following provisions:
- Fluctuation/Inflation – if Fluctuation applies under the contract (which in our experience is rare) then you may be entitled to recover the additional cost of materials (See SBCC 2016 Schedule Part 4 and Optional Clause X1 under NEC4);
- Changes in the law – if the supply issues can be attributed to Brexit, then you may be entitled to an extension of time and/or additional payment. Under the SBCC Standard Subcontract 2016, this is a Relevant Event (see clause 2.19.15) but not a Relevant Matter. For NEC4 Subcontracts, check to see if Optional Clause X2 is ‘turned on’ - if so, this will be a compensation event that entitles you to time and money;
- Force majeure – if it can be argued that the ongoing issues were unforeseeable at the time of entering into contract, then it may be considered a force majeure event. This is a Relevant Event under SBCC 2018 (see clause 2.19.16) but not a Relevant Matter. NEC4 also has a force majeure type clause at 60.1(19) which states that such events are a compensation event.
Seek to adopt a transparent and collaborative approach with contractor/employer to mitigate the impact on the programme. For example, this may involve resequencing the programme to allow for longer lead times or a switch from lump sum to cost plus fee.
Plan ahead and seek to place material orders as early as possible – any additional storage costs should be weighed against the risk of material price increases and potential delays.
If the project is in delay due to issues that are not your liability under the contract you may be able to argue that the current issues would not have been experienced had the works been undertaken in accordance with the original programme e.g. if commencement of your works was suspended by a significant period of time.
If you have yet to enter into contract then you will be in a better bargaining position than you would be had the contract already been signed. Employers and Contractors are now looking to engage the supply chain earlier in the project to tie down price and programme commitments. Accordingly, it has perhaps never been more important to review your contracts, consider how the supply issues are dealt with and negotiate better terms! This may include the following:
Request the inclusion of fluctuation/inflation provisions that entitle you to additional payment if prices increase by more than a predetermined percentage e.g. 5%;
Also, ensure the contract provides you with entitlement to an extension of time if the material supply issues are so significant that they cause delay to your works. This will protect you from incurring damages due to matters which are outwith your control. You may also want to seek additional payment (e.g. through loss and expense) for such issues but it is suggested that additional time but not money is a reasonable compromise;
If the other party insists that you retain the risk then seek to build additional contingency into your price and programme. This would likely involve a detailed review of the programme to determine when material orders will be placed and an estimate of the potential price increases that will have been incurred by that time; and/or
Seek permission from the employer/contractor to order all materials upfront and either store these on-site or off-site and include anticipated storage costs in the contract price. If the latter, then you will also need to ensure that the contract allows for payment of materials off-site - this may involve the introduction of advance payment provisions or the inclusion of a contract of purchase to ensure title passes to the paying party.
We always believe that adopting a collaborative approach with other parties is the best approach but we also understand this isn’t always possible. If you are experiencing difficulty with any of the above issues, then please feel free to reach out.