Uncertainty in construction

Answer

Brexit. Covid-19. Blockage of the Suez Canal. Shortage of HGV drivers and labour in general. Rise in shipping costs. Global warming. All of these issues combined have hit the construction industry like a ton of bricks, leading to a severe materials shortage, impacting thousands of developments and projects across the country.

What happened?

A global shortage of key materials such as timber, steel, cement and aluminium has caused prices to surge to a 40-year high, according to the Royal Institution of Chartered Surveyors (RICS). The greatest increases were seen in the steel industry, which suffered its seventh price increase in 2021 alone, as well as the timber industry, which saw its prices hike as high as 120%. The latest Federation of Master Builders (FMB) Survey stated that 97% of builders reported the rising price of materials as an issue.

With continued disruption likely thanks to the global pandemic, and no indication of waning demand, developers, contractors and sub-contractors are all becoming aware of how this disturbance to the construction industry could impact their contracts.

Changes to come?

Under most common forms of construction contracts (eg, JCT or NEC), the contractor is responsible for providing goods and materials needed and therefore absorbs the risk. It is understandable then that contractors and sub-contractors are becoming increasingly concerned about the increased risk of liability for delays caused by situations potentially out of their control.

There are some ways in which contractual negotiations may change in reaction to the current climate.

• The contractor may negotiate and agree for the employer to pay a higher lump sum outright in order to be more secure; whether the employer will accept this however is dependent on the circumstance.

• Advance payments by employers to contractors to aid contractors in meeting start-up costs.

• An increased use of 'pre-construction services agreements'. These are agreements that are used to appoint a contractor to carry out services before entering into a formal contract.

• Bespoke terms may be included in the contract creating new 'delay events' or additional terms allowing the contractor to receive delay-related costs. New terms may be added into the contract increasing 'extensions of time', which allow the contractor to complete their works within a set period after the original contractual completion date.

• Specific wording of the contract may allow a shortage of materials to give rise to a relevant matter and relevant event under the JCT suite of contracts, or a compensation event under NEC contracts. This may entitle the contractor to recover for both the effects of time and cost.

• If material shortages are caused by the impacts of covid-19 and/or Brexit, it may be possible to class these as a force majeure event in a JCT contract. Force majeure events are normally defined as acts, events or circumstances beyond the reasonable control of the party concerned. Standard examples include floods, terrorist attack or nuclear contamination. It is important to note that a force majeure clause in a JCT contract is a relevant event, not relevant matter, which means the contractor could be entitled to additional time but not additional money.

Overall then, it seems likely that the materials shortage within the construction industry will continue to impact the legal industry; contractual negotiations may have to become more flexible, all parties will have to plan further ahead and collaborate together to create reasonable allocation of risk within their contracts.

Dana Cook is a trainee solicitor in the construction team at Womble Bond Dickinson.