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Sharing the risk of inflation in construction procurement

Published: 10/06/2022

Clients need to consider sharing the risk of inflation and shortages in resources to ensure a successful procurement process.

Contractors are being more selective in contracts they tender for as the inflation (particularly in relation to fixed price and for long construction programmes) and supply risks continue. This is highlighted by the BCIS Tender Price Panel1 which reported that it was increasingly difficult to get contractors to tender. Whereas in the past the appetite to tender reflected contractors order books and demand, currently it reflects the inflation and supply risks involved in tendering. Contractors are having to balance their desire for work and their appetite for risk.

BCIS have been tracking contractor’s appetite to tender for the past year as a part of the BCIS Tender Price Panel Survey. As can be seen from the table below, during the past four quarters, more panelists have reported challenges with attracting contractors to tender as they become more selective and put significant consideration into project complexity, client, procurement, and contract route before agreeing to tender. It has been widely reported to become harder to get contractors to carry out projects with a higher risk profile without considerations in respect of risk management and ownership.

Considering, where possible mitigating, and where appropriate sharing these risks, is key to a successful procurement process and quantity surveyors will need to investigate where the risks lie for each project and advise clients accordingly.

Sharing the risk can be achieved in several ways:

  • Using a fluctuating contract2 – BCIS has been seeing a growth in subscriptions to the BCIS Price Adjustment Formulae Indices (PAFI), illustrating the increased use of fluctuations by the industry.
  • Allowing for reimbursement if inflation differs from expectations at the time of tender. BCIS has had several clients wishing to check our historic forecast in order to use this as a baseline for any additional reimbursement for ‘abnormal’ price inflation. Depending upon the client, type of work, etc. this additional cost or risk could be shared between the client and contractor3
  • Paying for pre-ordering of materials
  • Considering the sourcing of materials in the specification
  • Reducing tendering period, contractors and sub-contractors will not hold tenders for any length of time
  • Extending contract periods to allow for delays in supply.

Mitigating risk, particularly sharing the risk of inflation, may help clients achieve the most economical tender and secure a contractor with the experience and proven track-record in the current economic climate.

1 BCIS Tender Price Panel

2 The standard way of applying fluctuation clauses is using index linking PAFI.

3In the BCIS online users can view forecasts at any date

Price adjustment formulae indices online (PAFI) is part of BCIS CapX

This tool provides a comprehensive, detailed and easy to use method of measuring cost movement for building and civil engineering. Widely used in the construction and infrastructure sector to help fairly allocate risk between the client and sub-contractors

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