Lindsays: Construction contractors need to protect themselves from spiralling costs
Construction contractors may need to deploy greater legal safeguards in order to protect their businesses from being pushed under by spiralling costs, a lawyer has warned.
Andrew Boccoli, a director in the Commercial Property department at Scottish legal firm Lindsays, believes extreme market volatility may lead to some reconsidering the convention of contractors taking much of the financial risk on projects to ensure they can weather unexpected price hikes.
And he is already seeing a “steep increase” in the inclusion of fluctuation provisions in standard Scottish Building Contracts Committee (SBCC) contracts.
“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,” Mr Boccoli said.
Lindsays lawyers are urging firms to ensure they are properly aware of the fine detail in existing contracts as well as consider enhancing contractual terms on future projects so that they can manage and mitigate risks.
Increasing material costs - impacted upon by factors including rapidly rising energy costs, supply shortages and the war in Ukraine - on top of ongoing labour challenges and inflation, have added to pricing pressures on the building trade at all levels.
Mr Boccoli, who heads construction law services at Edinburgh-headquartered Lindsays and acts widely for developers and contractors across Scotland, said: “Given current volatility, contractors are really struggling to price jobs.”
“For the past 20 years, building contracts have, for the most part, been fixed price - subject, of course, to certain limited events that would allow a contractor to claim additional time and/or money. With the huge fluctuations we have seen in recent months, there’s a question mark over whether that can continue to be a given. Businesses of all kinds are trying to limit their 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 may now want to consider including provision within future contracts which allow them greater flexibility to recover time and money if there are increases to the cost of labour and/or materials.
“The inclusion of fluctuation provisions, for example, 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 and are not artificially inflated to factor in the risk of potential future cost increases.”
With the building industry typically operating on tight margins, Mr Boccoli is urging firms to ensure they are realistic about costs when pricing projects. He also recommends they seek specialist legal advice to ensure that robust contracts - specific to each scheme - are in place.
“This is an extremely tricky situation. Construction is an important part of Scotland’s economy, employing more than 100,000 people” he added. “That’s why I am encouraging all parties to be open, honest and realistic when planning developments.
“The simple fact is that most employers do not want contractors to take on excessive risk because, in doing so, they 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 to ensure that contracts include the appropriate provisions.”