For many months now contractors have faced serious problems with increased prices and limited availability/extended lead in times for materials. A point had been reached around the turn of the year when prices were still high but levelling off and lead-in times, although long, were at least more certain. One consequence of the war in Ukraine is that matters have become far less certain again and price increases/material availability have become even more acute. Where does this leave contractors who were already facing considerable issues in completing projects?
Rights on existing projects, and the challenges
For existing projects, a contractor's rights will very much depend on the terms of the contact entered into and when it was entered into. Under an SBCC/JCT form a contractor's rights are limited. There may be options to substitute materials for equivalent materials with the employer's consent. Failing this a contractor may be entitled to seek an extension of time, depending on the exact issue being encountered. For example, there are provisions allowing additional time for force majeure. Although force majeure is not defined under SBCC/JCT there is authority which indicates that war would fall within that definition. Similarly, there may be an entitlement to time based on delay caused by the exercise of a statutory power, for example, where a delay has arisen as a result of sanctions imposed on Russia.
The ability to recover increased costs and loss and expense is much more limited. Neither force majeure nor the exercise of a statutory power are Relevant Matters'. In certain circumstances, it may be possible to argue that earlier Relevant Matters have pushed the project into the current period giving rise to extra costs (similar to winter working clams). In other circumstances it may be possible to rely on a change of law necessitating a change to the works – for example where the use of specified products from certain countries or companies is outlawed. There may also be a right to additional payment if the employer has instructed changes or where the fluctuations provisions have been selected.
The problem for contractors in advancing any such claims is trying to identify the actual cause of the delay or price increase, given the multitude of factors at play. Is a delay or price increase due to the war in Ukraine, sanctions imposed on Russia, COVID-19, Brexit, fuel price increases or another factor? This all needs analysed, to identify whether any relief is available.
Under NEC contracts the contractor has potentially greater remedies, although a detailed analysis of causation is again required. Under NEC possible options for recovery of time and increased costs include compensation events covering instructed changes to the Scope (60.1(1)), events which are the employer's risk (60.1(14)), events which prevent the contractor completing the works (60.1(19)) and changes in law (Option X2). There may also be a remedy where the works become impossible to complete (clause 17.2) and this might be argued to mean commercially impossible. The Early Warning' procedure is also an important mechanism where delays or price increases occur. If Option X1 has been selected, a price adjustment for inflation may be available.
Outwith the contractual terms there are other practical steps that can be taken to alleviate pressure on material supply and pricing issues. For example, most contractors are now looking to order materials much earlier and either entering into offsite materials agreements or storing the materials until required. In some cases, possession dates are being delayed by agreement to ensure a productive start can be made on site and that site set-up costs are not prolonged and wasted. Some employers are looking to offer extensions of time and a waiver of LADs/delay damages, while others are contributing to increased costs voluntarily.
Collaboration and careful thought is key
Working collaboratively in the current circumstances will be the best route to a successful project. We have seen a substantial increase in construction insolvencies in recent months. Irrespective of the contractual position on a project it will not assist any of the parties if delays and cost increases give rise to supply chain failures, lengthy and expensive litigation and uncertain outcomes for all parties. Strong direction is also required from government regarding public sector contracts and how the current issues should be dealt with. The current guidance offers little comfort for the construction industry.
In relation to new contracts, careful thought is required by contractors on programming and pricing issues. Many of the clauses discussed above will not assist contractors on new contracts where the issues are already known about, or are foreseeable. For programming, thought should be given to extended programme periods, reduced LADs, and clauses giving time for material delays/unavailability. For price increases, we have already seen a number of options being used including:
- Fluctuations or inflation provisions as per the standard forms, or more often with bespoke amendments.
- Use of provisional sums or cost-plus arrangements in respect of the most volatile materials/products. This can include a bespoke process and an element of control for the employer to select the subcontractors on an open book basis following an open tender process, and pre-agreeing a contractor percentage for profit and overhead.
- Advance payments or early purchase of materials/products and offsite material agreements/separate storage facilities.
- Agreement of Relevant Events/Matters and Compensation Events' to specifically cover materials issues.
These are matters that must be considered upfront. Taking into account the price increases currently being reported and the impact on every contractor's cost base, the current situation is the most challenging period for contractors that most of us will have witnessed to date.
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