Market Volatility Calls for Specific Contract Clauses in the Construction Industry

The Construction Leadership Council (CLC) has urged those working in Commercial Construction, to incorporate specific  contract clauses in the construction industry, for both existing and future contracts. Companies with a JCT Contract should include fluctuation provisions. While companies working under NEC contracts should include NEC4 X1 clauses. This advice comes as ongoing market volatility wreaks havoc on the price, and availability of materials and labour.
What is CIS?

Market Volatility in the Construction Industry

Anyone working the Commercial Construction industry right now will know that the market is incredibly volatile. Thanks to Covid-19, Brexit and an increase in demand, there’s a shortage of raw materials. Freight costs are rising, and haulier capacity is reduced. All of this is having a significant impact on the timeframes and delivery costs of commercial construction projects. As Andy Mitchell, co-chair of the Construction Leadership Council, wrote in an open letter: “This volatility is likely to be something we must live with for a while to come.”

This puts commercial construction companies in a very difficult position. Especially if their contracts don’t allow for a degree of flexibility. What if a company cannot finish the project within the agreed timeframe due to a shortage of materials? Or what if the materials are unavailable. This can then mean design changes are needed? Or what if the cost is based on the price at the time of tender. Then thanks to inflation this figure has actually doubled? Unless a contract accommodates such issues, it’s the construction company that must bear these risks.

Commercial Construction Contract Provisions

Because of this, the CLC recommends that special provisions be included into Commercial Construction contracts. Thereby allowing the risks associated with market volatility to be shared. Both JCT contracts, and NEC contracts have standard provisions that can be included. All of which are ideally suited for the task.

JCT Contracts

With regard to JCT contracts, there are various fluctuation provisions that can be incorporated. Under a JCT lump sum contract, the main options are:

  1. A, which covers contribution, levy and tax fluctuations
  2. B, which covers labour and materials cost, and tax fluctuations
  3. C, which allows for a formula adjustment, as set out by the Joint Contracts Tribunal.

It is also possible for the contractor and the employer, to agree on alternative provisions.

NEC Contracts

With regard to NEC contracts, the relevant clause is a NEC4 X1. This allows for the price to be adjusted in line with inflation.

Make Changes Today

While a company may never have incorporated such provisions into their contracts before. The CLC is strongly urging “those responsible for developing, agreeing and managing contracts, existing and new, to consider adopting these provisions in their contracts.”

The CLC further advises that: “The contractual challenges created by lack of product availability, and inability to access approved products are likely to mean design changes are necessary. Therefore, again, the CLC would encourage a collaborative approach to be taken to managing these risks. This would be by considering actions such as allowing longer mobilisation and lead-in periods for contracts. Including up-front ordering and payment to suppliers, in order to secure manufacture and delivery slots for critical material resources.”

Speak to our Construction Contract Solicitors

If you feel that further advice is needed, or you wish to negotiate the use of these clauses into any projects you are currently considering, contact us at Altion Law. We specialise in construction law and can help you further.

Call us on 01908 414990 or complete our online enquiry form and we will get back to you.