Never overlook the impact of price volatility when entering a contract

Peter Hibberd BW 2017

In a climate of strongly fluctuating prices and pressure on supply, provision for such risks must be factored into the contract

Back in September 2021, the Bank of England said inflation might reach 4% by the end of the year. Some called this alarmist and warned of overreacting – but a year later, inflation had in fact risen to around 10%. How wrong can one be? The construction materials indices are even more variable. In any case, overreacting to inflation and volatile prices is one thing; making sensible provision is another.

Fluctuations in labour and materials prices can, and do, quickly erode a contractor’s margin. Conversely, over-providing for them in a tender means the employer pays more than necessary. In the years leading up to 2021, price inflation was benign. That resulted in those entering building contracts giving little consideration to its impact or the need to incorporate fluctuation provisions. Consequently, much knowledge of fluctuations, together with the expertise to advise and calculate them, has been diminished.

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