Dealing with Material Inflation

Zoe Stollard, Chair of the Hinkley Professional Services Group and a Partner at law firm Clarke Willmott, looks at the challenges posed by the rising price of materials and advises on what firms can do to minimise risks and uncertainty.

Having overcome the hurdles of COVID-19 / safe-working, the construction industry is now faced with a supply crisis. Not only are products scarce or delayed due to Brexit, COVID-19 and the Suez blockage – they are expensive.  Lead times are having a major effect on construction contracts across the country, as are soaring prices. In many cases, there is little the contractor can ‘physically’ do but wait and plan.

However, there are certain ‘contractual’ mechanism that might be of assistance.

On an NEC3 contract for example, rising prices might not be an issue for Tier 1 contractors who are on Option E contracts. On these ‘cost reimbursable’ contracts, the contractor can claim whatever the current cost of materials is, regardless of whether this has dramatically increased since signing of contract. At the opposite end of the scale, tier one contractors on Option A ‘fixed price’ contracts are significantly adversely affected by the rising prices having locked into lower pre-pandemic prices.

What can these Tier 1 contractors do about material inflation?

At Hinkley Point C, the NEC3 contracts are long term frameworks with various task orders being issued for different areas of supply. Each task order can be under a different pricing option within the NEC3 framework. There is potential to divide supply / work stream up and negotiate cost reimbursable (Option E) task orders where current commercial uncertainty makes fixed price task orders (Option A) too risky for the contractor.

If a fixed price is agreed, Option X1 of the NEC3 contract allows the contract prices to be re-calculated and uplifted every month in line with inflation. This provides a certain level of comfort to the contractors and ensures pricing remains in line with actual cost. However, this only works if the indices used are ones that accurately reflect specific products. The key is to list specific indices in the Contract Data (not just RPI which is the average of many commodities). Another option would be to include provisional cost sums in the contract for certain materials so that the tier 1 contractor would be reimbursed actual cost for these specific materials.

On a project such a Hinkley, it is imperative that contractors focus on forward planning to help actively tackle pricing deficiencies and move away from a “just in time” approach to delivery which clearly is no longer tenable. It is recommended that as soon as you become aware that inflated pricing for delay is likely, this is raised as an early warning triggering a risk meeting between the parties. Raising an issue under NEC3 is a neutral even and is positively encouraged. There is no blame allocation at this stage – it purely allows the parties to review risks affecting the project and proactively discuss potential solutions.

Solutions might be: using equivalent materials, re-programming to bring forward or delay procurement as necessary to accommodate the market, or forward funding to assist cashflow in extreme circumstances where the products needs to be secured at current prices.

Communication and collaboration are absolutely key to dealing with issue for the overall benefit of the project. It is of paramount importance that contractors and sub-contractors don’t suffer alone, without raising a hand to see if something can be done to resolve the issue or at least lessen the impact.