The times they are a fluctuating

Brexit, Indyref2 ... there’s no escaping the fact that the established political and economic norm may be about to change: possibly dramatically.

And does it follow that our approach to contracts in the construction industry needs to make a similarly radical shift?

Impact on material and labour costs

What impact Brexit, Scottish independence or events further afield may have on the construction industry is simply a matter of speculation.

It is, however, hard to deny that there is at least a possibility that material and labour costs could go up.

So, if you are a contractor pricing jobs, how can you protect the future viability of your business bearing in mind these possible increases?

You could price your rates on the generous side. That may, however, make your bid uncompetitive. Moreover, your seeming generosity today may turn out to be inadequate should the economy take a nosedive in the future.

The alternative would be to start including fluctuation clauses in your contracts.

Fixed price versus fluctuation

It is the almost invariable default position of employers that the contract sum must not be subject to any form of fluctuation.

Fixed price contracts mean exactly that: the employer pays a specific sum for a scope of work, and if it turns out that it costs the contractor more, then that’s their problem, and their risk.

There are various reasons why contractors’ costs can end up more than they originally accounted for, some of which just have to be taken on the chin: for example where the contractor has made a mistake and needs to rectify it, or when something has taken longer than planned for a reason that’s their risk, such as inefficiency.

There are circumstances though where growing expenses are outside a contractor’s control. These tend to be rooted in the general economy, such as tax increases, or the rising cost of staff and materials.

And it’s these that can be covered by fluctuation clauses.

Employers generally don’t like fluctuation clauses because it means the sum they have set aside may not be enough to cover the final bill and, interestingly, contractors aren’t always keen on them because of the administrative burden it presents in terms of keeping an eye on market prices, for example.

Cards on the table: I’ve worked as a construction lawyer since the late ‘90s, and I don’t think I’ve ever seen a building contract where the fluctuation clause option has been applied in a meaningful way (except, perhaps, in framework agreements).

Paradigm shift?

Going forward, is such a default position sensible? If — and it's still just an "if" — prices do start to unpredictably rocket, that default position may need to be re-evaluated. If it isn’t, the sustainability of the industry as a whole could be in some doubt.

Don’t get me wrong. I’m not saying that contractors need to insist on fluctuation provisions being inserted into all contracts now. As far as I can see, Armageddon isn’t right around the corner.

Moving towards a default position where fluctuation provisions are included will, however, be a major paradigm shift for the industry. And paradigm shifts can take a lot of momentum before they happen.

So, I’m just planting the seed, putting it out there, that this is something we might need to be looking into further in the near future.