Construction has taken a hugely positive message out of the pandemic; that collaboration can work. The Construction Leadership Council played a huge part in cross, client, contracting, supply chain and supplier guidance to adopt a steadying role, to instill calm when needed to help the sector weather (so far) the storm. Largely, the pandemic related disputes that some feared, have not materialised at any scale.
This achievement is all the more significant given that it was layered on significant and continuing construction product supply issues, some related to the departure of the UK from the EU and some set at the global supply level. The ONS has confirmed that the peak-to-trough fall in construction output for the 2020 coronavirus (COVID-19) pandemic was substantially larger relative to that observed for the 2008 to 2009 recession
Construction activity may have rebounded to pre-pandemic levels at Q4 2021 but this looks like being short lived given concern at inflation - both macro and sector specific.
Both the pandemic and materials supply has impacted pricing in a way that can be tracked through 2020 and 2021. As we move to the end of Q1 2022 it is global issues and global inflation that grab attention. The huge instability that has attached to core materials cost of which steel pricing is the obvious bellwether. It is difficult to get accurate information on steel price except at the point of placing an order, but energy cost rises and the war in Ukraine have pushed prices to the £1000/tonne level for some products with multiple price increase and price holds only measured in days. These factors are common across copper, timber and aluminum.
The price softening that might have been predicted early in Q1 through the impact of rises to date quietening demand seems now illusory as the impact of energy cost and the war in Ukraine perpetuate uncertainty and obvious supply and price concerns.
We are seeing the return of fluctuation provisions in construction contracts. A long period of price stability and the ability of the market to price inflationary risks into fixed price contracts is on hold. Fluctuation provisions allow for controlled price adjustment to the extend that the contract does not state otherwise where there is a change in the relevant price component from (in JCT parlance) a fixed date, the Base Date; typically the tender return date. Fluctuations operate up or down; the aim after all is to be allow for controlled and moderated price change not a free for all.
In the JCT approach to fluctuations there are three types of fluctuation provision:
- Option A – changes to tax, levies and contributions which the contractor is required to pay. (we have seen examples of this to manage Brexit related issues for example).
- Option B – changes to the price of labour and material cost - adjustments to the market prices of materials and other inputs current at the Base Date
- Option C – a formula led adjustment to the contract sum - adopting JCT Formula depending on the nature of works
The application of "standard" fluctuation provisions may well not address the volatility of the current market and may create unintended consequences; remembering that prices, currently at a high may move downwards at the point that stability or lower demand triggers and adjustment. Just like the sudden movement of a tectonic plate this chances can be sudden even when long in the expectation.
Honest conversation and continuing conversation running through all levels of the supply chain is what we should aspire for. Discussion around the particular sensitivities of a project and the ability to focus price adjustments accordingly; the potential to work to a target cost model that incentivises holistic or balancing cost savings have a key role to play.
Without a creative an open working relationship we will see projects pulled to a greater extend that necessary by the affordability envelope. All aspects of the industry have much to gain from closer collaboration and much to lose from adopting a rigid position.
“Right now, nobody is going to fix a price. We’ve gone back to the 70s. It’s a huge challenge for everybody. We’ve somehow got to find a way where we can do these jobs.” Dave Smith COO Wates