{"id":119279,"date":"2022-12-09T08:00:01","date_gmt":"2022-12-09T08:00:01","guid":{"rendered":"https:\/\/www.pbctoday.co.uk\/news\/?p=119279"},"modified":"2022-12-09T14:57:50","modified_gmt":"2022-12-09T14:57:50","slug":"fluctuation-provisions-contracts-inflation-in-construction","status":"publish","type":"post","link":"https:\/\/www.pbctoday.co.uk\/news\/planning-construction-news\/fluctuation-provisions-contracts-inflation-in-construction\/119279\/","title":{"rendered":"Fluctuation provisions in contracts: Tackling inflation in construction"},"content":{"rendered":"

Gemma Irving, principal associate and Richard Hartigan, partner at Eversheds Sutherland, explain why fluctuation provisions in contracts hold the key to tackling inflation in construction<\/h2>\n

When acting for an employer, it has become routine to delete fluctuation provisions. Usually, construction projects are priced by the employer setting out their requirements in a tender and accepting an offer from the contractor to carry out the works for an agreed price. The price is only adjusted thereafter in response to specific events and by established variation provisions. This process creates price certainty for the employer and has been very popular. We are experiencing rising inflation<\/a> in construction, materials and labour shortages, and increased price volatility. Contracting parties may wish for greater flexibility when pricing works to reflect the uncertainties they face in the market.<\/p>\n

It may seem counter-intuitive for an employer to accept the risk of inflation in construction<\/a> and other cost increases when they have enjoyed the benefit of having a fixed price<\/a> for several years. However, we are currently experiencing a very different market, and it could be that having a fluctuation provision is useful for both the employer and contractor: if there is market volatility, the contractor may \u201ccost dump\u201d this risk into its tender price. This means that the contractor has already inflated its price without grounding this on any real basis.<\/p>\n

This could also make it difficult for the employer to compare tenders amongst contractors when trying to establish the best value it is difficult for typical variation mechanisms to accommodate the type of variable and long-term change we are currently seeing in the market if the contractor does not make provision for cost increases during its project, this can erode its profit and make it susceptible to insolvency. Having an insolvent contractor would be a lot more costly in the long term, resulting in disruption to the project. It could also reduce the value of the contractor\u2019s warranties if the works are defective.<\/p>\n

It is necessary for the employer to consider the wider picture, including the contractor\u2019s overall financial position when deciding whether or not to accept a fluctuation provision. It could be that the perceived benefits outweigh the potential extra cost associated. A fluctuation provision is a contractual mechanism whereby the cost of a job is calculated as the job progresses, with the final contract sum adjusted accordingly. It allows the parties to price the works to mirror the effects of inflation or deflation in the market over time. This means the tender price could be increased or decreased when finalising the actual contract sum payable.<\/p>\n

For certain types of projects, it may not be necessary to complicate matters by having a fluctuation provision. For example, works that have a short duration, are relatively simple and do not rely on specialist plants or materials may be straightforward to cost and may have price consistency.<\/p>\n

Some contracts do not need a fluctuation mechanism because the pricing method used already accommodates such changes:<\/h3>\n