Why may fluctuation clauses be important at the moment?
- There has been instability in the market in recent years with rising prices that result in additional costs being added to tenders by which the contractors may end up losing out due to under estimations
- With fluctuation clauses, it can be argued the employer only pays what is actually incurred
- Since 1992 inflation had been relatively stable annually
- World Construction Industry Steel Purchasing Price rose by 40% between April 2020 and February 2021
What if a contract does not include for fluctuations? Is there a way of being able to adjust the contract sum?
Only if there is a variation or an entitlement to an EOT & L&E
Can a contract be terminated if inflation makes it commercially unviable?
Unlikely to be an option
If terminating party gets it wrong, they run the risk of a breach of conflict by which damages can be claimed such as additional costs of getting work completed by others
Why is the base date important for fluctuations?
Fluctuation provisions apply from the base date
Base date is usually the date of the tender or priced offer meaning risk of inflation between tender and construction is with the contractor
If the base date is the date of execution or commencement of works, then the risk of inflation over the period sits with the Employer
What are fluctuations?
Term used to describe the method of dealing within inflation (or deflation) in construction
Why would you use fluctuation clauses?
Where fixed price, the Contractor usually assumes all the risk on the cost of items which becomes problematic on long projects or during times of high inflation
Can cause tender prices to be higher
Allows a fairer way of calculating the actual cost
Under a fluctuating contract, employer is not bound by the contractor estimate of change, they only pay what is actually incurred
Where are fluctuating clauses found in contracts?
- Section 7 (JCT)
- Secondary Option X1 (NEC)
How may fluctuations be captured in different types of contract?How may fluctuations be captured in different types of contract?
-Lump sum: rates would be adjusted as appropriate. Formula adjustment using series of indices
- Target cost: target cost may be adjusted for inflation
-Remeasurement: rates adjusted as appropriate
- Reimbursement: based on actual costs so fluctuations would be captured.
-Framework agreements: arrangement with Contractor over period of time. Contracts are “call-off” or tendered over time so each contract sum will be current at the point of signing, so will reflect fluctuations to that point. May also be provisions within the contracts
-CM / MC: agreed at each point of contract. Usually a mechanism to allow for adjustment of manager fee and central costs e.g. site welfare / security
Where are fluctuations likely to cause disputes?
When construction period is delayed or works change
Can create concurrent delays making it difficult to manage risk
Area of evolving law
How are fluctuations managed with exchange rates?
- Usually the contractor bares the risk
- NEC attempts to mitigate by including an agreed exchange rate in Secondary Option X3 which can be used with main option A or B
What is an indices?
A measure made up from a variety of sourced. Regional variations where labour material and plant costs may vary
What should be considered when choosing indices to assess fluctuations?
- RPI - measured price increases in retail, usually higher than CPI
- CPI - developed by EU, internationally comparable, basis of UK Gov inflation
- TPI - changes in tenders for similar types of work
- RCI - Resource Cost Indices, changes in cost of material and labour
- Output Cost Indices - changes in final accounts
Need to be produced by third party & published for duration of project
What is a QS’s role in assessing fluctuations?
- Advising on cost of project & cost of alternative design & construction options
- Advising on likely effects of market conditions
- Advising on tendering and contractual procurement
- Advise on fluctuation options
- Have an awareness of the market clients are operating in
According to NRM, what are the 2 types of contracts relating to fluctuations?
- Fixed Price - no provisions for fluctuation recovery, separate provision within pricing for contractor to price risk
- Fluctuating price - extent to which provisions are allowed will impact the contractor’s tender price
What options are available to deal with fluctuations in a JCT?
Option A - fluctuations in contributions, levies and taxes
Option B - fluctuations in labour, materials and taxes
Option C - some items are fixed but others are variable. Price adjusted using BCIS data
Default is option A
Can all options apply to all types of JCT?
Intermediate - A only
Minor works - A only
How do NEC Lump sum contracts deal with fluctuations?
- Don’t use the term fluctuations
- Secondary Option X1 - adjustment for inflation.
- Costs priced at base date and varied by price adjustment factor
- Used with A, B, C & D
- Where X1 isn’t selected, A&B (contractor bares risk), C&D (shared)
- E&F have payment mechanisms allowing payment of inflation
