Out-Law / Your Daily Need-To-Know

Construction materials shortages: assessing your risk

Out-Law Analysis | 08 Jun 2021 | 12:39 pm | 3 min. read

Parties to construction contracts should check their contract provisions carefully to understand the consequences of ongoing supply shortages and price increases.

A combination of disrupted imports due to the Covid-19 pandemic and Brexit, and increased activity as major global markets emerge from lockdown, is driving shortages in construction products and raw materials including timber, steel, pitched roofing, plastics and cement. The Construction Products Association (CPA) is expecting this level of demand to continue for at least the next six months, while emerging Covid-19 variants could push the timetable out further.

At the same time, the cost of materials has increased above inflation: the UK’s Office for National Statistics (ONS) is projecting an average increase in material prices of between 7-8%, with the price of certain materials, such as timber, expected to increase even further.

For those engaged in long-term fixed price contracts, the current circumstances are likely to be very different from the prevailing conditions at the time when the contract was entered into. Owners naturally want their projects finished on time and on budget, but will not want to see their already strained supply chain placed under further financial pressure given the major impact that insolvencies have already had on the industry over the past year.

At the same time, those negotiating new contracts or running tender processes will be keen to ensure that any potential price increases and potential delays in obtaining materials are priced into business cases, incorporated into new contracts and allowed for in works programmes.

Regardless of whether you are currently in commercial negotiations or work on the project is already underway, you should check your contract provisions carefully to understand who bears the risk associated with delays and increased costs.

Fluctuations and indexation clauses

Fluctuations, indexation or escalation clauses are found in many standard form contracts to account for changes in categories of prices – for example, as a result of inflation. However, given the historically low levels of inflation experienced in recent years, these clauses have often been ignored or deleted from contracts.

Check whether your existing contract contains such a clause and, if so, whether it covers the situations associated with the current market price rises. If you are about to enter into a contract, consider whether such a clause would be beneficial and, if so, what scenarios it should cover. Experience suggests that following a period of low or no inflation, these clauses are sometimes overlooked and institutional knowledge of their practical application has diminished.

Entitlement to additional time or costs

Where there is an existing or anticipated delay to the project, it is important to establish who bears the risk of that delay and whether any entitlement arises to either an extension of time or additional costs. This will differ based on the terms of the contract, including whether it contains a valid force majeure clause, and whether the governing law of the contract is that of a common law or civil law jurisdiction. In the UK, for example, a contractor may be entitled to bring a disruption or delay claim where access to the site is delayed or suspended by the employer.

Market disruption events of this nature require careful consideration, and without specific drafting may be difficult to make out. In addition, there must be a causal link between any time or costs claimed and the event relied on as the basis of the entitlement, and parties will generally be required to mitigate any costs claimed as far as possible.

Demonstrating actual loss and expense

Parties entitled to additional time or costs, or considering such a claim, must be able to demonstrate that they actually suffered a loss. If the claim is based on the increased cost of materials following a delay, the party must be able to demonstrate the original costs it would have incurred had the project proceeded as planned together with the costs now being incurred as a result of the delay.

Giving valid notice of claim

As ever, it will be important to give valid notice of any claim, in line with contractual requirements as to form, content and timing.

Many construction contracts make the giving of notice of claim a pre-condition to an entitlement of additional time or money, so if notice is not given within a specified time limit of the event or circumstance giving rise to the claim then the right to claim is lost.