Three Options for Managing Inflation Risk Using JCT Construction Contracts
Contractors are generally reluctant to commit to fixed-price contracts, which customers can expect in the low inflation environment that has prevailed since the early 1990s.
In the absence of fluctuation clauses, the risk of inflation is borne by the contractor and any variation in costs due to inflation is unlikely to affect the amount of the contract. The advisability of including fluctuation clauses is a question that the parties must evaluate in the context of each project and according to several factors such as the type of activities, the materials to be used, the stability of the chain of supply and location.
The standard JCT contract template provides three options for handling price adjustments that contemplate not only an increase, but also a decrease in cost in situations where the contract base date is at the higher of the underlying cost.
Option A – Fluctuations in contributions, levies and taxes
This is a set of clauses which provides for adjustments to the amount of the contract in the event of a change in the contributions, levies or taxes due by the contractor in its capacity as employer, or a change in the legal reimbursements to be received by the contractor. entrepreneur in his capacity as employer. It also allows the amount of the contract to be adjusted in the event of a change in taxes or legal duties affecting goods, materials, fuel or electricity.
Using this provision will not help with material cost increases. However, they have provided a useful mechanism to manage the risk of tariff increases as the UK leaves the European Union and may need to be at the forefront of thinking if the Northern Ireland Protocol is suspended and leading to a trade war and additional tariffs.
Option B – Labor and Material Costs and Tax Fluctuations
When incorporated, this option allows the contract amount to be adjusted to fluctuations in the cost of labour, materials, goods, fuel and electricity – including changes in taxes and fees. legal rights that affect them.
Option B operates so that if the market prices of materials, goods, electricity, fuels or other solids, liquids or gases required to perform the work rise or fall from the market price of the materials on the date of basis of the contract, the net amount of the increase or decrease may be assessed and included in the assessment of claims made by the contractor. This is also the case if the fee due for the disposal of waste from the site increases or decreases.
The parties may agree on the sums to be paid. There is no change in the entrepreneur’s profit as a result of the additions.
Contractors cannot benefit from their own delays using the fluctuation provisions as the contractor is not entitled to adjustment for periods beyond the date of completion where he is responsible for the delay.
Option C – Adjustment of the formula
This option can be used when the parties agree to use the “formula rules” published by JCT to calculate adjustments to the contract amount.
The formula rules are complex and span over 60 pages.
On each request for payment, the contractor shall include a statement of the allocation of the value and the amount of the adjustment in accordance with option C of JCT fluctuations.
Again, it is possible to agree on amounts rather than relying on indexation, which can be an imperfect method of calculation as it is rarely up to date.
Under option C, the fluctuation adjustment formulas are based on indices that measure the average fluctuation over a defined period. There is an inherent risk of difference between the index measure of inflation and the actual cost of inflation which the entrepreneur must take into account.
Choose the right option
As contractors are naturally reluctant to commit to fixed prices, understanding and selecting the appropriate fluctuation provisions will be an increasingly important exercise for clients and their cost consultants in negotiations with contractors. Understanding and responding to the financial pressures caused by current political and economic conditions will become an important contractual consideration in the months ahead.
Co-written by Hamza Sekkar of Pinsent Masons.