Dealing with volatile materials costs in construction contracts

Very real financial pressures are currently being placed on leading suppliers to the construction and engineering sectors due to rising raw materials costs, as this story on Billington shows.  My article on clauses that can be negotiated in contracts, so as to provide contractors with fair, proportionate and specific reliefs in relation to such pressures was recently published in Scottish Construction Now.  It advocates applying pricing reliefs for specific identified materials, based on application of (recent) inflation data that is sector specific and capping the maximum additional amount payable by the employer through introducing maximum time periods during which the price adjustment will apply.

There is no doubt that inflationary pressures are in play, but it is not in relation to all costs and everything.  When negotiating live contracts, employers should focus on the materials that are the key areas of concern and incentivise contractors to mitigate cost increases applied post tender by entering into relevant sub-contracts and supply agreements promptly after the letter of award or contract is signed.  Where there is likely to be a lengthy gap between tender receipt and letter of award, the use of letters of intent/advance works contracts can be considered to facilitate early "lock in" in relation materials prices that are particularly sensitive to fluctuations.  Such arrangements can include novation provisions, allowing the employer to transfer the benefit of the underlying sub-contract or supply agreement to a replacement main contractor where the need arises.

Challenging situations always require a degree of creative solutions!