With the construction industry facing price rises at rates not seen for nearly 40 years, inflation is an area for serious consideration for contractors and clients alike. Most of us who currently work in the industry have never really had to deal with inflation in our construction contracts. However, now it is vital that this is dealt with in a sensible, transparent manner to ensure all parties are not unnecessarily penalised for circumstances which no one can really control. Given that a large number of Caliba’s clients are used to dealing with JCT contracts, we’ll briefly discuss the JCT fluctuation provisions options and some of the practical issues associated with using them.
Most JCT contracts deal with the fluctuations options via Schedule 7 of the agreement to which we are presented with 3 main options. However, it’s important to note that the minor works form of contract does not give you the same level of options for fluctuations options.
JCT Option A: Limits to taxation and changes in legislation
Considering risk from the employer’s perspective, this is the least risky option as labour and materials increases aren’t generally the employer’s risk, except where the law has been changed which is fairly easy to verify independently. However, this isn’t likely to solve any real contractor problems, as the vast majority of price increases being incurred are outside this scope, so this option doesn’t really solve the problem we are facing in the current climate.
JCT Option B: Labour and materials
This option does put the risk on the employer, so contractor prices should be the most competitive; definitely the option that a contractor wants to push if they are really concerned about price increases and want to minimise their risk. However, it’s very difficult to manage for both clients and contractors, and very time-consuming to prove. To make this work, you need to make sure your contract sum is clearly separated into labour, plant and materials. You then need to be very clear on what the basis of the materials is, i.e. £2,000 per tonne for steel @ x tonnes. If you’re a quantity surveyor comparing the tenders, you need to make sure that the contractor can prove the starting prices, otherwise, you won’t be comparing like with like. For example, contractor B may price at £1,800 per tonne vs Contractor A who priced the tenders at £2,000 per tonne. Unless they prove their starting cost, Contractor B could still obtain the full difference as a variation if they prove their cost with a particularly expensive supplier. Ideally, you need to pre-agree the supplier upfront and have a way of checking these price increases independently of the contractor, if at all possible. These complications ultimately make this very difficult to navigate successfully.
JCT Option C: Index linked (the simpler option)
This stipulates a formula to calculate fluctuations in labour and materials and links to an index. This makes it much simpler to administer as you apply the formula each month. We believe this is the simplest approach because the calculation is fairly straightforward and caters for fluctuations in prices.
What needs careful consideration is defining what indices you are going to base this upon. Using generic indices such as CPI or RPI are unlikely to solve issues, as they don’t closely relate to how prices are increasing. The BCIS produce a number of construction-specific indices which cater for a number of useful situations, so this is probably one of the more accurate independently verifiable sources but there are limitations to this.
You also need to ensure each part of the contract sum is linked to a particular part of the index and state what the starting index number is. This can then be adjusted per monthly valuation in a fairly straightforward fashion.
If you need help selecting the correct fluctuations provisions for your project, or need advice on dealing with the risk of price increases on other contract forms, please give us a call and we’d be happy to assist.