With inflation levels low, construction contracts are now less likely to offer fluctuation provisions. But the question as to where the risk of price changes should lie has not gone away
Fluctuation provisions under building contracts have, since the 1970s, rarely become the subject of formal disputes but to conclude that fluctuations cause little difficulty would be wrong. Fluctuation provisions and dealing with fluctuations of price are not the same thing.
When estimating the cost of work there are many problems to overcome if a fair but competitive price is to be ascertained. Partly because of this there are advocates for cost reimbursement and other forms of procurement, such as management contracting and target cost contracting. These approaches alleviate the difficulty for contractors but introduce greater uncertainty as to price outcome for the client. Also, inefficiency on the part of the contractor is paid for by the client. Perhaps it is for those reasons that traditional tendering processes are still prevalent in certain sectors.
Pricing works on a current cost basis and dealing separately with price changes reduces the contractor’s risk by transferring it to the employer. Under traditional procurement, any changes to prices upon which the tender is based have to be ascertained and some form of fluctuation provisions is required to regulate the process. That is why the main JCT standard form contracts (Standard Building Contract (SBC) and Design and Build Contract (DB)) include fluctuation clauses.
Clients often look for certainty on price and will pay a higher tender figure for placing the risk of fluctuations on the contractor in the belief that competition ensures the amount included is reasonable. However, in times of tough competition the client can pay less than would otherwise be incurred and the contractor suffers a loss which would be exacerbated in periods of volatility. This unfairness is recognised and many clients, especially in the public sector, accept some form of fluctuating price contract.
When estimating the cost of work there are many problems to overcome if a fair but competitive price is to be ascertained
Over the years, especially as the inflation levels seen during parts of the 20th century have become a distant memory, clients’ natural instincts prevailed and many moved away from fluctuation provisions within building contracts. Where they did use them, they were restricted - for instance, taxes and duties only or confined to a limited number of critical materials. Whether their view would be maintained in a period of deflation is another matter; although the time for deflation may have passed, one can never be sure.
To reflect the much lower levels in the use of fluctuation provisions, JCT has decided that when it publishes its 2016 editions of SBC and DB contracts, they will not contain detailed provisions for what are Options B (Labour and materials cost and tax fluctuations) and Option C (Formula adjustment) and only maintain Option A (Contribution, levy and tax fluctuations) within the printed text. Nevertheless, the choice of fluctuations will be maintained and contract particulars will still provide for those three options. The difference being that the detailed provisions for Options B and C will then be available on the JCT website. In addition, the contract particulars will include options of no fluctuations and for stating some other type of fluctuations adjustment. The default is Option A. The recently published Minor Works Building Contract 2016 maintains the equivalent of Option A and includes the additional contract particulars.
JCT’s revisions aim to declutter the contract while increasing choice to reflect changes in practice. The revision to the presentation of its fluctuation provisions can act as a prompt to a reassessment of their importance and to how fluctuations in labour and materials prices are dealt with in contracts. The question as to where the risk of price changes should lie is important. In answering that question the parties should address who is better able to quantify, manage and bear such risks. Excessive competition with regard to what is included in a tender price is not only unreasonable but can lead to claims and major problems with contract management. The RICS is currently preparing a fluctuations guidance note; hopefully its publication will assist the process.
It is also worth remembering important operational lessons from the past such as:
- No fluctuations are payable under JCT SBC , DB and MW where the contractor is in default over completion so long as the extension of time provisions remain and are not amended and also the contract administrator has acted accordingly.
- Although the quantity surveyor and contractor may agree what shall be deemed the amount of fluctuations payable, the contractor, where it seeks to recover, must still comply with the notice provisions (John Laing Construction Ltd vs County and District Properties Ltd ).
- Although fluctuations will always be present, the increasing difficulty is one of dealing with large unpredictable variations in materials and types of labour rather than general levels of inflation, which remain subdued.
Peter Hibberd is the past chair of the Joint Contracts Tribunal