As the UK opens up after over a year of lockdowns and restrictions, the construction industry has seen a boom in activity levels (a seven-year high). However, this surging demand is one of the factors contributing to the widespread shortages of materials, long waiting times and 24-year high levels of inflation. The compounded impact of increased demand, Suez Canal delays, Brexit and COVID-19 have all had an impact on the industry.
The Construction Leadership Council have been monitoring the issues and have set up the Products Availability Taskforce; the taskforce has identified that numerous products, such as timber, cement, steel, plastics and aggregates, are all facing constraints.
This market volatility will have many contractors keen to establish whether their contract allows them to claim extensions of time for delays to deliveries, and / or additional payments to cover the increased cost of materials.
Can a Contractor get more time?
Whether or not a particular contract allows a contractor more time to complete a project due to shortages of materials will obviously depend on the precise wording of the contract. However, even if the contract does not specifically refer to ‘materials shortages’, it does not necessarily mean that there is no remedy available.
Many of the standard form contracts contain applicable provisions. For example, under the JCT Design & Build 2016, if there is a ‘Relevant Event’, and the completion of the works would likely be delayed by that event, then the contractor is entitled to a fair and reasonable extension of time. Relevant Events under the unamended contract includes eventualities such as an Authority exercising a statutory power that affects the execution of works, strikes or lock out affecting any trade employed on the works and force majeure events.
The general meaning of force majeure is an event that prevents a party from fulfilling their obligations under a contract. However, there is no one established meaning of force majeure in English law; so, its meaning will depend on the wording of the provision in the contract. The standard form JCT does not provide any definition of what a force majeure event is, but materials shortages that are properly attributable to the global consequences of COVID-19, may be sufficient to allow a contractor an extension to the completion date.
That being said, proving that material delays have been caused by COVID-19 may be difficult in many circumstances, because a force majeure event must be the sole cause of the failure to perform the contractual obligations. Following the 2019 case of Classic Maritime Inc v Limbungan Makumr SDN BHD, where there are two effective causes, one force majeure and one not, the force majeure clause cannot be relied on.
While the above may assist a contractor who is unable to source materials, it will not be any assistance if the materials are available but just at a significantly higher price. The fact that performance of a contract has become more expensive will not amount to a force majeure event.
Can a Contractor get more money?
The ‘Relevant Events’ may alleviate a contractor from paying liquidated damages by granting additional time; however, additional time will be of no assistance if materials are available but at an inflated price. In this scenario a contractor may wish to seek additional payment.
There are circumstances called ‘Relevant Matters’ in the JCT suite of contracts that entitle a contractor to reimbursement for their loss and expense. However, these Relevant Matters are a lot narrower than the Relevant Events that permit extensions of time; and only relate to situations such as employer instructions, delays in the receipt of relevant permissions and acts of prevention by the Employer. Increased costs due to delays to deliveries and rising material prices are not usually Relevant Events that might entitle a contractor to extra money.
The standard form JCT suite does contain a range of standard provisions relating to fluctuations. Fluctuation provisions provide a mechanism for parties to deal with the impact of inflation and are more common in larger projects that last for a number of years, where inflation will have a bigger impact. Many smaller projects (that use the standard form JCT) will have had these provisions struck out. On these projects, contractors are usually expected to take into account inflation when calculating their price at the outset.
For parties finalising new contracts, it is likely that there will be increasingly difficult negotiations as all parties seek to apportion the risk of further shortages and inflation.
Employers will likely demand fixed price tenders to limit the exposure to future uncertainties. This will inevitably lead to contractors seeking to reduce risk by taking such steps as requesting increased payments up front to pay for materials, incorporating more provisional sums, limiting the period for acceptance of tender returns, or simply increasing the whole of the tender price to account for the risk.
But, if materials price inflation continues unabated, we might see a return to the more common use by Employers of fluctuations provisions, particularly if the alternative for Employers is vastly inflated tender returns as contractors seek to mitigate the risk of materials price increases during longer-term projects.
Things to remember
As with all contracts, it is important to check the wording of the contract carefully. Even a standard form contract can include amendments that impose additional requirements or remove options for contractors.
When seeking additional time or money, parties must be aware of the notice requirements under the contract. There may be early warning requirements and notices may need to be given in a particular way, and may need to contain prescribed information.
As with any delaying events, parties should make sure that accurate written records are kept (including emails, minutes, letters and progress photographs) detailing the impact. The prospects of success of any eventual claim will depend largely on the strength of the evidence available.
If you require advice or assistance with a contract that has been impacted by material shortages or increased material costs, or you would like more information about incorporating fluctuations provisions in your contract, contact Ellisons’ specialist Construction and Regulatory Solicitors today on 01206 764477 or email us at [email protected].