Fluctuation Provisions - What Do You Need to Know?
Fluctuation provisions are becoming more commonly used during the cost of living crisis. So what does this mean for both contractors and employers?
What Are Fluctuation Provisions?
Fluctuation provisions are clauses in construction contracts that allow the contract sum to be adjusted to take account of changes to the price of labour, materials and other miscellaneous costs throughout the duration of a construction project.
If a contractor tenders on the basis of current prices at the time of the tender, there are no fluctuation provisions in the building contract and inflation causes the cost of procuring the works to increase, the contractor bears that additional cost. On the other hand, where there are fluctuation provisions included in the building contract, the contractor could be entitled to be reimbursed some or all the additional costs (if any) caused by rising prices.
Why Is This Relevant Now?
Historically, although the use of fluctuation provisions has been an option in standard form contracts such as the JCT suite, they have been strongly resisted by employers and have been rarely used in practice. However, due to the current state of the construction market, and the economy in general, we are seeing an increased use of fluctuation provisions in building contracts.
The recent steep and often unpredictable changes in energy, labour and material costs have caused huge uncertainty for contractors in setting a lump sum price to complete the works. Contractors have therefore been increasingly insisting on the inclusion of fluctuation provisions and stating that, otherwise, they either cannot tender for the project or would need to include a higher tender price to address the risks involved.
Given the current circumstances, fluctuation provisions are becoming more commonly used. The inclusion of such provisions is now an issue that the parties need to consider, whereas previously it would often be accepted by both parties that no such provisions would be incorporated.
What Does This Mean?
We have seen, and are expecting to continue to see, the inclusion of fluctuation provisions being an issue for employers and contractors to address in contract negotiations, particularly in relation to longer term projects.
Employers would of course prefer the certainty provided by a lump sum price without fluctuation provisions but also increasingly understand that if a contractor is providing a competitive price, it does need some protection in respect of substantial price rises.
It is important to appreciate, though, that it is not always appropriate to insert fluctuation clauses, depending on for example the type of contract used, the nature and duration of the project, the risks involved in the project, the materials being used and lender requirements. Also, fluctuation provisions can be prepared (or standard clauses amended) to provide, for example, for only particular costs increases to be recoverable and/or for particular rates to be used to calculate the relevant increases.
As these provisions have not been widely used in the industry for many years it is essential that employers and contractors seek guidance in circumstances where they are considering whether fluctuation provisions are appropriate or where they need to ensure that only suitable provisions are included in their contracts.