Construction materials

Managing Risks Throughout the Building Material Shortage – Real Estate & Construction

It will be news to few that the construction industry is experiencing a severe shortage of key materials. The Construction Leadership Council first warned of shortages (of wood, steel, pitched roofing, plastics, paints / coatings, some electronics and cement – among other materials) at the start of the year. this year, and has reiterated its concerns since. These concerns are so serious that rationing has been proposed as a potential solution – although, to date, this approach has not been adopted on a large scale in the UK.

The causes of the shortages are also well known: exceptionally high demand globally, supply issues related to Brexit and difficulties related to the Coronavirus all had an effect. Another factor is a global shortage of shipping containers.

The result is low availability of materials and high prices. The effects are felt throughout the industry – small entrepreneurs are particularly affected.

With the shortages expected to last for some time, many players in the construction industry will consider their exposure to additional costs or claims. An example of a warning is from the South Ayrshire Council: it was reported last week that the cost of building a planned new school has risen from £ 52.86million to £ 59.33million, in due to material shortages. The increase in borrowing is expected to cost the council an additional £ 400,000 per year.

What problems might arise?

When faced with a difficulty in obtaining materials, there are generally three options: first, the contractor buys the available materials at a surprisingly high price; second, the entrepreneur buys alternative materials; and third, jobs are rescheduled or delayed until materials are readily available.

Not surprisingly, which party bears any additional costs will depend on the precise wording of the contracts involved.

The cost of materials: who pays?

Where the cost of materials has been factored into the prices agreed upon at the time of contracting, there may be limited or no opportunity for the contractor to have these prices changed. Parties should carefully consider the specific terms of their contract and be on the lookout for possibilities to limit the impact of any unnecessary tariffs (for example when negotiating changes or additional work).

One of the ways that risk can be balanced between employer and contractor is to include a contractual provision for adjusting prices for inflation. An example of such a provision is found in NEC4 conditions, secondary option X1, which provides for an indexed price adjustment. The obvious downside to an employer is the inherent lack of price certainty; however, this may be acceptable when the alternative is to accept a bid price based on the “worst case” material costs.

One option to limit exposure to rising and uncertain prices may be to purchase materials in advance (if the materials are available in advance and can be stored). An employer considering financing such a purchase may wish to require the provision of an advance purchase bond (under which monies would be payable to the employer if the contractor fails to procure the relevant materials).

Are alternative materials an option?

Alternative material may be more readily available. Whether or not a contractor is allowed to make such a change will depend on the agreed specifications and – of course – the full contractual conditions.

Often, significant modifications to the specifications will only be authorized with the agreement of the employer. When the choice is between using the alternative material and drastically delaying the project, a switch may be the most attractive option for all parties. Early communication between the parties will be helpful.

Delay, suspension and rescheduling of work

When materials cannot be obtained, there may be no option (or, at least, no reasonably achievable option) but to delay – or even suspend – the work. In this scenario, who bears the risk?

Most construction contracts provide for special circumstances in which the contractor is entitled to claim additional time and costs in the event of delay. Parties to the negotiation may wish to consider stand-alone clauses to cover scenarios related to material shortages – for example, risk allocation in the event of delay in port. Such clauses must be carefully considered so that their scope is as broad as the parties see fit.

Likewise, most construction contracts contain provisions stipulating when – and at whose expense – work can be suspended. A contractor considering a suspension should pay particular attention to complying with the relevant contractual requirements, as “knocking down the tools” without just cause can open the door to early termination.

Parties should also consider what provision their contract provides in the event of a change in the law, which may be relevant if, for example, coronavirus regulations have delayed or prevented the delivery of materials. Entrepreneurs will often be entitled to extra time and money in the event of such a delay – provided the change in law is proven to be the cause. This can be difficult when there have been multiple contributing causes and / or when there is limited evidence of the immediate cause of the problem.

Whether it is a claim for time and costs resulting from delay, suspension or a change in law, the success of that claim will likely depend on more than simply meeting the contractual test. relevant. The party asserting the right must also be able to prove the additional costs it has incurred and must comply with all contractual requirements to make a claim (which may include a strict notification requirement).

In any case, when the progress of the work is threatened, it should be considered whether the remaining work can be rescheduled to reduce delays. Failure to do so can be criticized as an inability to mitigate losses, which is likely to impact the costs recoverable by the contractor.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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