CQS Solutions principal surveyor Tim Lloyd explains how his team helped solve a council’s contract price fluctuations dilemma.
The nightmare of soaring inflation, rising interest rates, disruption in the supply chain and shortages in materials may be easing but the impact the resulting price fluctuations had on construction contracts will be felt for many years to come.
In 2021, the construction market experienced its most difficult conditions since the 2007-2009 global crisis. The cost of materials rose across the board, well above forecasted figures. Just to add to the crisis many deliveries were disrupted by the impact of Brexit and COVID.
It has meant that many building contracts have been delayed by contractors unwilling to fix a price in such uncertain times or clients being forced to burst their budgets to get the work they wanted done on time.
As a result “fluctuation provisions”, or “fluctuation clauses” became more regularly used in major projects. These are compensatory clauses in construction contracts that allow the contract price to be adjusted to reflect changes in the cost of materials or labour during the contract period.
In most construction contracts where fluctuation provisions have not been used, the risk of price rises is borne mainly by the contractor.
With fluctuation provisions, the aim is to transfer some or all of the effect of price changes in the cost of labour or materials during the contract from contractor to employer by adjustment of the final contract price.
One Welsh council faced some of these issues in its tender process for a social housing development of 16 units after the Welsh Government decided to procure contracts using a fluctuation clause.
The challenge facing our CQS team was that the original tender had been developed using the JCT Design and Build Contract 2016 and, although there are published mechanisms in the JCT contract for operating fluctuations, they are long winded and onerous to operate.
Our solution was to come up with a simpler model which took account of the potential fluctuations based on the BCIS cost indices. We then employed a lawyer to draft the contract amendments covering any potential legal risks of the changes to the council.
We took the responsibility for making sure that everything was watertight smoothing the way for the contract to get the final sign-off.
The end result was that the council could procure the urgently needed housing with everyone sharing the risk of the unsteady and uncertain market. We think it was well worth the effort!