Materials Shortage and Fluctuations Provisions in SBCC Contracts

The recent report that Construction activity in the UK has hit a seven-year high was welcome news to an industry hard hit by the Covid-19 pandemic. However, the increase in demand, combined with Brexit related delays has led to a materials shortage and a surge in prices for essential materials, with timber, steel and cement amongst the key materials affected.

As a consequence of this, we have seen renewed interest in the lesser-used Fluctuation Provisions contained in SBCC/JCT contracts.

What are Fluctuation Provisions?
Fluctuations provisions are clauses in construction contracts that allow adjustment of the contract sum in the case of changes to the price of labour, materials and tax during a construction project.

In recent years, fluctuation provisions have generally been deleted from the standard forms due to stable pricing, low inflation and Clients/Contractors placing an emphasis on certainty of price in their projects. However, with the recent shortages and price increases, these provisions have become more relevant as they can allow a Contractor to mitigate the risks of price increases in an uncertain market.

Fluctuation Provisions in SBCC/JCT
The Standard Building Contract and Design & Build Contracts from SBCC/JCT have three fluctuation options that may be selected:

Option A (Contribution, levy and tax fluctuations)

Fluctuations Provision Option A is the default provision in SBCC/JCT contracts and will apply unless explicitly deleted in the building contract. Option A allows for adjustment of the contract sum in relation to changes in tax, levies and contributions that a Contractor has to pay in respect of their employees. So if there is an increase in the tax payable, the contract sum can be increased to reflect such a change.

Option A also allows for the contract sum to be amended if there is a change in the duty or tax “payable on the import, purchase, sale, appropriation, processing, use or disposal of the materials, goods, electricity, fuels, materials taken from the site as waste or any other solid, liquid or gas necessary for the execution of the Works”.

This default option would therefore not cover the increase in prices on materials such as timber and steel.

Option B (Labour and materials cost and tax fluctuations)
Option B allows for the adjustment of the contract sum in respect of changes in the price of labour, material cost and, tax fluctuations.

Option B provides that, should the cost of labour increase (via an increase in wages as dictated by a wage-fixing body or through an increase in public holidays) then the contract sum will be adjusted to take account of this. It should be noted that Employer’s liability insurance and third party insurance are covered under this provision.

This option also incorporates the contribution, levy and tax fluctuations that are mentioned in Option A.

Perhaps the most pertinent fluctuation allowed by Option B is the adjustment of the contract sum in respect of changes to “the market prices which were current at the Base Date of the materials, goods, electricity, fuels or any other solid, liquid or gas necessary for the execution of the Works, and upon the duty or tax payable at that date on the disposal of waste from the sit”.

If, after the Base Date of a contract, the market price of any of these increases, then the difference in price shall be paid to a Contractor. This means that should the price of steel, timber etc. increase, then the Contractor will not bear that cost, something that is relevant in light of the current materials shortage.

It should however be noted that the inverse also applies, should the cost of these materials fall,

then the contract sum will be lowered accordingly.

Option C (Formula Adjustment)
Option C allows for the adjustment of the contract sum in accordance with the Formula Rules issued by the JCT. The formula used changes depending on the type of work being carried out. It should be noted that there are 60 different categories of work noted in the Formula Rules.

Option C also has specific rules regarding articles manufactured outside of the United Kingdom which are imported for direct incorporation into the works with no prior processing. Contractors must include a list of articles required and their current market prices in their Contractor’s Proposals. Any difference in price during the project shall then be reflected in the contract sum. The price of these articles also includes any duty or tax payable.

In the post-Brexit era, this could see the Client being liable to pay increased importation duties that they had not budgeted for.