Materials shortage: contracts ‘not fit to deal with volatility’
Contractors could be exposed to commercial risk because their contracts do not account for the current material price and delivery volatility, experts have warned.
Construction Leadership Council (CLC) co-chair Andy Mitchell has highlighted the challenges that material shortages are causing: “This volatility is likely to be something we must live with for a while to come and could have a significant impact on the timeframes and delivery costs of many projects.”
He cited the JCT and the NEC 4 Secondary X1 — two different forms of standard construction contracts that include provisions for managing volatility. While the former is designed for national-level (England and Wales, with relevant use in Scotland) contracts, the latter is used in the drafting of global construction contracts. Both contracts have different approaches to managing the risk attached to obligations of time, cost, and quality.
The CLC reiterated the use of these provisions as legal challenges arise: “They are ideally suited to providing a means for managing the volatile period we are now entering and therefore CLC strongly urge those responsible for developing, agreeing and managing contracts, existing and new, to consider adopting these provisions in their contract.”
Construction partner at Boodle Hatfield, Navpreet Atwal, warned the industry was not used to adding volatility clauses into contracts due to years of relatively stable prices and availability: “Given the amount of time that has passed, there is going to have to be this re-education that needs to be undertaken,” Atwal said. She added that resorting to fluctuation provisions was neither an easy fix nor a formula that could be applied in every contract.
The CLC also called for “a collaborative approach” and sharing of risk between clients, contractors, and suppliers. Suggestions included longer lead-in periods and up-front ordering. Bevan Brittan construction partner Louise Robling said risk sharing could only go so far, with contractors still likely to bear the greatest share of risk. She added that other cooperative measures would be subject to conditions: “Up-front ordering and payments to suppliers are likely to need to be subject to security (for example, vesting certificates, advance payment bonds) for the protection of the employer against insolvency.”
JCT and the NEC do not apply to the industry in Northern Ireland. Mark Spence, managing director of the Construction Employers Federation (CEF), which represents the construction industry in the country, recently said: “Contractors in Great Britain have contractual remedies in their contracts that Northern Irish procuring bodies have seen fit to delete or chose not to include. CEF has demanded their reinstatement and a more robust contractual model to take us forward, future-proofed for any future ‘unforeseen’ series of circumstances.”
The CLC warned in January that a number of legal disputes relating to COVID-19 would arise.
These comments were included in Construction News on 14th July 2021.