Contracting for the UK's materials shortage

Possible solutions

We have seen various approaches taken to mitigate risks such as cost increases and delays, arising from these shortages. If these are to succeed, they need to be properly communicated throughout the supply chain at an early stage.

The steps taken will by their very nature be commercial and project-specific. They will typically be determined by factors such as the parties' attitudes, the nature of works, the supply chain, the procurement route and flexibility over time and materials.

The final choice of solution will depend on where in the negotiation process or stage of the project the parties are, but it is better to try to agree a way forward which is commercially acceptable to both parties early on, and avoid issues caused by shortages escalating into disputes.

Set out below are some of the options that we have seen proposed for dealing with shortages and, in some cases, adopted by the parties in question.

Contractor-retained risk

A number of employers are continuing to require the contractor to obtain materials as part of its fundamental obligation to complete the works. While obviously this is project-dependent, employers typically want to agree a lump-sum cost for the whole project upfront, and for the contractor to assume the risk of any subsequent changes in materials pricing.

While we are still seeing most contractors agree to this, some are now demanding that the employer agree to a higher initial lump sum so they can try to offset future price increases.

However, this approach potentially limits the range of subcontractors and suppliers that would be willing to contract on the same terms, so restricts contractors' options when they are tendering to the supply chain. This will in turn have an impact on price.

Early orders

Some contractors have been willing to accept the retention of full risk on materials if they are able to place orders with suppliers sufficiently early in the project. This means they are able to secure a fixed price from their supply chain, and also mitigate any potential delays in delivery.

In return, contractors may require an advance payment from the employer for such early orders. Before agreeing to this, though, employers will need to consider the usual risks of doing so, as well as ensuring they have title to any materials purchased in advance that are not delivered to site.

We are also seeing employers agreeing to instruct contractors to place early orders for materials under letters of intent or pre-construction services agreements (PCSAs). While this approach is not new, the costs of the orders we are seeing in such agreements are often higher than we would expect, as contractors are advising that more materials are ordered, for the reasons outlined above, before the main building contract is entered into to reduce the risk of projects being delayed due to materials being unavailable later in the programme.

While there is nothing inherently wrong with this approach, there are always risks for an employer instructing a contractor in this way, since the terms of such a letter or PCSA will not be as robust as a full building contract. We would therefore expect the agreement to include a mechanism by which the employer can secure the ordered items directly should the parties not enter into the main building contract for whatever reason.

Hedging against rising prices

While we have seen a rise in the number of contractor requests to include fluctuation clauses, we have seen little uptake in practice. These clauses allow for an adjustment to the contract sum in certain situations, which could include increases in the cost of materials or labour. This is because employers and their funders remain wary of such clauses, given the level of uncertainty they introduce.

Another option which may enable contractors to mitigate future price increases, and one with which employers and funders may be more comfortable as it is more familiar to them and is more targeted than a general fluctuations clause, is the inclusion of provisional sums against the costs of particular materials within the overall contract sum.

Dealing with delays

Most standard UK building contracts will not allow contractors to claim an extension of time or additional expense for delays in delivery of materials to site. However, we are seeing parties on a small number of projects agreeing additional provisions that allow for extra time or cost in relation to delays in delivery of materials.

Whether such an amendment is included is of course project-specific. If it is agreed, though, we would expect it to be limited to a small number of clearly identified materials, or to delays caused by a specific event.

Conclusion

We do not know how long the current materials shortage will last, but unfortunately all the signs are that it will be some time yet. That being the case, it is important for parties to engage actively with the issues it presents, so as to mitigate the risks and allow projects to progress satisfactorily.

As suggested above, giving this issue careful thought in advance – and agreeing an approach that allows a proper balance of risk between the parties – will help ensure that shortages are managed efficiently, which should reduce the possibility of any potential disputes.