Construction contracts need to be adapted to reflect market volatility - Andrew Boccoli

For the past 20 years, convention in the construction trade has been that contractors take on much of the financial risk when they tender successfully for projects. But, as the world attempts to manage rising costs, that can no longer be considered a given.

The extreme market volatility means many construction contractors may need to consider deploying greater legal safeguards to protect their own businesses.

A sensible starting-point is ensuring contractors and developers are properly aware of the fine detail in existing contracts. Next, consider enhancing contractual terms on future projects so potential risks can be managed and mitigated.

Advising those involved in development projects across Scotland, I see increasing evidence of that happening, with a steep increase in the inclusion of fluctuation provisions in Scottish Building Contracts Committee (SBCC) contracts.

Andrew Boccoli is a Director, Lindsays

It is an understandable step for companies to consider. Increasing material costs – impacted by factors including rapidly rising energy costs, supply shortages and war in Ukraine – on top of ongoing labour challenges and inflation, have added to pricing pressures on the building trade at all levels. Meanwhile, none of us really knows what the impact of rising energy costs will be this winter.

Given all this, it’s little surprise that contractors are genuinely struggling to price jobs. That’s a position which benefits no-one.

In recent times, building contracts have mostly been fixed price – subject, of course, to certain limited events to allow a contractor to claim additional time and/or money.

With the increasing financial pressures of recent months, a question mark hangs over whether that can continue to any extent, as businesses of all kinds try to limit exposure to additional costs.

While it will be harder to change the risk profile of existing contracts – as employer engagement and contract amendment would be required – contractors might want to consider including provision within future contracts, allowing them greater flexibility to recover time and money if there are increases to the cost of labour and/or materials.

The addition of fluctuation provisions within SBCC agreements is one such way of doing that.

This is a mechanism for dealing with the effects of inflation and changes in costs, allowing the contractor to potentially claim additional sums. Until recently, these provisions were rarely utilised, but more contractors are pushing for their inclusion as they try to protect their position.

Fluctuation provisions can benefit both employer and contractor. Their inclusion will give contractors comfort that they will be reimbursed for spiralling costs but also give employers comfort that tender prices are reasonable, not artificially inflated to factor in the risk of potential future cost increases.

All this makes robust legal advice, tailored to each development, more important than ever, especially as the highly competitive building industry typically operates on tight margins.

This is a tricky situation for anyone involved in a building development of almost any kind. We should be under no illusion about the importance of construction to Scotland’s economy, with the sector employing in excess of 100,000 people.

That’s why I encourage all parties to be open, honest and realistic when planning developments, however challenging those conversations may be.

Most employers do not want contractors to take on excessive risk because, in doing so, contractors open themselves up to potential insolvency which has obvious knock-on effects for developments. I would urge both employers and contractors to be open from the outset and ensure contracts include the appropriate provisions.

Andrew Boccoli is a Director, Lindsays