Navigating increased construction material and labour costs

Out-Law Guide | 15 Sep 2022 | 4:35 pm | 4 min. read

Until relatively recently, managing the risk of price increases and material and labour supply shortages was not something that the UK construction industry had to consider.

Prices in the UK have been fairly stable for years and contract provisions dealing with inflationary risk tended to be ignored or even deleted. Fixed price, lump sum contracts were the norm, and contractors were happy to take on those risks because they were low or manageable. But recent global events – in particular the war in Ukraine – have brought these issues sharply into focus.

International sanctions, coupled with the ensuing energy and cost of living crises, mean that prices are rising month on month. The most recent Building Materials & Components Index reported a 26.4% increase for ‘all work’ for June 2022 year on year. Costs of concrete reinforcing bars, fabricated structural steel and pre-cast concrete products increased by 58.2%, 46.3% and 28.3% respectively. Unfortunately, 2023 is likely to also see significant inflationary pressure on the labour market, as the cost of living crisis begins to put pressure on households.

There are no easy solutions to these problems, but rather than reverting to a focus on contractual claims, the best approach for construction firms may be a more pragmatic one. Co-operation and open dialogue between employers and contractors are being encouraged, particularly at the outset of any new project. After all, whichever side of the table you sit on, nobody benefits from an insolvency scenario. 

It is, however, still important to understand the contractual position, not least because it underlines the fact that seeking to recoup losses based on claims linked to the Ukraine war is likely to be extremely difficult. It is also useful to consider what other options might be available to deal with the difficulties created by inflationary scenarios.

Claims linked to the war in Ukraine

Although the war in Ukraine has no doubt contributed to material supply and price increase issues, the difficulty of bringing a claim on this basis should not be under-estimated. Most standard forms contain some form of ‘force majeure’ provision, which give the parties relief when some external event – which is beyond their control – prevents or adversely affects their contractual performance.  While war would typically amount to force majeure, that is not enough to bring a successful claim under such a provision, particularly where the war itself is in a different location from the contract in question.

Co-operation and open dialogue between employers and contractors are being encouraged, particularly at the outset of any new project. After all, whichever side of the table you sit on, nobody benefits from an insolvency scenario

The contractor would be required to prove that the war in Ukraine caused the impact claimed, such as a delay in obtaining materials or their increased cost. Other than in very specific circumstances, it will be very difficult to prove a direct link between those events because issues with material and labour supply and price increases were being reported and experienced well before the Russian invasion of Ukraine in February 2022. 

While each matter would need to be considered on its facts, it could be difficult to untangle Ukraine-related delays and additional costs from other possible causes at the contractor’s risk. Even if that were possible, a contractor would also, depending on the wording of the clause, be required to prove the impact of the event on the contract – and that is likely be a high bar. Under the NEC form, for example, a contractor must show that the event “stops” it from completing the works. Contractors should also consider that, even if a claim could be pursued through these provisions, it may only bring an entitlement to time and not to money.

On top of this, the courts generally take the view that works being unprofitable to performs – even if vastly so – is not the same as works being impossible to perform. Just because price rises may have rendered works “commercially impractical or impossible” probably will not constitute force majeure.

Separate considerations arise from fresh sanctions imposed on various Russian individuals, companies and banks since the invasion. While some might argue that the sanctions could give rise to a claim route through ‘change in law’ provisions, it should be noted that sanctions against Russia were first introduced in 2014. Change in law provisions are typically linked to changes which arise after a particular a base date, such as the date of tender or conclusion of the contract. To the extent the sanctions were already in existence prior to a contract’s base date, they will not qualify as a change in law.

Even if these hurdles could be overcome, the contract may create others. Under a JCT contract, for example, a change in law will only provide relief where it results in an alteration of the employer’s requirements. It is difficult to see how that would apply outside of a situation where the employer’s requirements expressly require the use of sanctioned materials or suppliers.

Alternative options

It is also worth considering, in cases where a frank discussion with the employer is not possible, whether there are any employer breach events which would entitle a contractor to bring a claim, either under the contract, or just as damages for breach of contract. If the contractor could establish, for example, that the employer is in culpable delay, then there is no reason that a damages claim could not include the increased – or inflationary – costs linked to that delay. That is, however, not a panacea and recovery will be limited to the costs which the contractor can show are directly impacted by the breach in question.

Another opportunity could arise if the employer has issued instructions which result in price increases or delays due to material or labour shortages. In those circumstances, the contract may provide for relief. Of course, when issues arise, employers are often reluctant to issue formal instructions, preferring instead to leave it to the contractor to resolve matters.

If contractors are in the process of tendering for a new job, or the employer is open to negotiating amendments to an existing contract, then it is worth considering what the alternatives might be. Check the standard form fluctuation and inflation provisions and clarify whether these apply to labour or just materials. If they only apply to materials, examine whether only certain materials are covered, or whether the provisions apply to all materials. JCT contracts, for example, provides for three options – A, B or C – for which parties must expressly apply. 

Considering and dealing with these issues up front, rather than seeking to rely on standard claims provisions, is likely to be money well spent.