CLC call for fluctuating price contracts

The Construction Leadership Council (CLC) have warned* that the recent volatility in the availability and pricing of labour and materials is likely to be something the industry may have to live with for a while to come and could have a significant impact on the timeframes and delivery costs of many projects.

They point out that most forms of construction contract have standard provisions for managing volatility, without the need to make contract amendments. These provisions, such as fluctuations provisions in JCT and NEC 4 Secondary X1, provide a means of collaboratively sharing the risks associated with this volatility.

These clauses are ideally suited to providing a means for managing the volatile period we are now entering and therefore CLC strongly urge those responsible for developing, agreeing and managing contracts, existing and new, to consider adopting these provisions in their contracts.

In recent years the industry has been operating in a stable environment and these clauses have only been used on long, mainly civil engineering, projects.

The most common method of allowing for inflation in these contracts is the use of indices. In the UK, the most commonly used indices are the Price Adjustment Formulae Indices (PAFI) prepared by BCIS. They can be used with both NEC and JCT contracts as well as other standard and bespoke contracts.

The BCIS paper Inflation Adjustment Clauses provides guidance on the application of indexed linked inflation clauses and points out that allowing for the risk of inflation in a contract  ensures the best price and that ‘the risk for inflation should be taken by the party best able to manage it. Inflationary risks derived from the local market can probably be managed by a contractor and their supply chain, but the underlying inflation caused by wider pressures from the outside construction and global markets probably cannot.’

There are separate PAFI indices for:

• Building
• Civil Engineering
• Specialist engineering
• Highways Maintenance

*Open letter to the Construction Industry from Andy Mitchell Co-Chair Construction Leadership Council.