The BBC and other news outlets have been coming out with some scary stories recently in relation to the ever increasing inflation percentage. “11% Hell is on the way” is the headline on the Metro. “Britain braced for tough times as food and mortgage costs soar” says The Herald. And this seems to be the same story around the world at this current moment.
Now as an individual, this is going to be a tough time, but if you’re in charge of a company right now, it may become extremely difficult. If you’re watching this video, you’re probably a QS or a QS in training and it’s our job to provide expert advice, bring value into our companies and help them save costs.
So in todays post, we’re going to define what the fluctuation provision clause is, give you the pro’s and con’s for using the clause and answering the question in the title, is it now time to include fluctuation provisions in your JCT contract?
In most construction contracts where fluctuation provisions have not been used, the risk of price rises are borne primarily by the Contractor. At the time of tender, the Employer and the Contractor agree a contract for a certain price, and the Contractor is the one who suffers if the materials or labour required go up in price.
With fluctuation provisions, the aim is to transfer some or all of the effect of price changes in the cost of labour or materials during the contract from Contractor to Employer by adjustment of the final contract price. However, if the price of materials inflate to a high level, the Employer risks spending increasing, and perhaps unforeseen, amounts.
Now is probably a good time to define Fluctuation Provisions. Simply put, Fluctuations provisions in construction contracts provide a mechanism for dealing with the effects of inflation. These are optional contractual provisions. The key word here is optional.
According to JCT Corporate, they fall under these 3 main contract options.
Option A – allows for adjustments to the contract sum in respect of changes to tax, levies and contributions which the contractor is required to pay. That would cover a change in tax payable on imported goods for example.
Option B – allows for adjustments to the contract sum in respect of changes to the price of labour and material cost. It covers adjustments to the market prices of materials, goods, fuel, gas (and more) which were current at the Base Date.
Option C – is a formula led adjustment to the contract sum. In this instance, the JCT Formula Rules issued by the Joint Contracts Tribunal will apply depending on the type of work being carried out (and there are a vast range of formulas).
The principal 2016 editions of JCT contracts that refer to all three Options are: Design & Build Contract (including sub-contracts), Standard Building Contract (including sub-contracts), Intermediate Named Sub-Contract, Construction Management Trade Contract, and the Management Works Contract.
Option A is the default position and provides only for changes to contribution, levy, and tax fluctuations, which occur after the Base Date. Options B and C are available from the JCT website which can be found in a link below https://www.jctltd.co.uk/useful-documents/fluctuations-options-b-and-c
The clear advantage here is that as a contractor, you could reduce the risk of these increasing costs. But its not as simple as it seems. First of all, as a client, why would you agree to this optional clause. The risk, or part of the risk would be transferred from the contractor to you. Secondly as a contractor, you can’t simply say, the price was x at tender and now its Y at construction, please give me money. Most fluctuation provisions are calculated by reference to published price indices, such as the government inflation index, Consumer Prices Index (CPI) or other industry published reports.
So why are we seeing an increase in the use of fluctuation provisions which have been forgotten or usually deleted long ago due to the stable prices and certainty of the market. Clients are now open to using them and here’s why. As a contractor in 2022, you have seen steel prices increase dramatically, your fuel changed from red diesel to white diesel, aggregate and other raw materials prices have increased, so when you put a tender together, your risk pot is significantly higher. This results in a higher tender cost. And this isn’t just one contractor but every contractor. So now, clients are comparing inflated tenders with inflated tender and to combat this, they may choose to take some or all of the future inflation risk with the Fluctuation Provisions mechanism. This then results in an initial lower tender cost.
