Shortage of materials and labour – the new normal?
The construction sector is currently suffering from a shortage of materials. There are numerous reasons for this and these to a certain extent, are dependant upon the actual material. The effect of these shortages are that:
1.Prices are not fixed, and are increasing, without notice;
2. Supplies cannot be guaranteed and so, the programme of works is being postponed and/or delayed;
3. There is an increase of report thefts of materials on site – fixed and un-fixed.
From a contractual perspective and using a JCT form of contract as an example, these risks are generally put onto the contractor as a construction risk. Those who commission works have generally expected that the construction sector will provide a lump sum, fixed price for a project which is expected to be completed within 2 years from the initial tender enquiry. This has been the model the industry has used over the past 30 years. Of course, there are specific sectors who adopt a different approach, but generally, most 'clients' expect to receive a fixed price quotation before the works properly start.
The problem we are seeing with the insistence of a fixed price in the current market is that the tenders received are significantly higher than predicted and the construction programme extending beyond expectations. This is mainly attributable to the contractor having to add a significant amount onto the price for the items of 'risk' listed above. The effect of this is that the project is being postponed or, in some cases the project is cancelled.
This therefore raises the question – should we amend the building contract to change the risk profile so that these projects can go ahead and, would these changes make a project which is unaffordable, affordable? Just to be clear, any changes to the contract arrangements will not eliminate all the additional costs arising from this situation. However, they may reduce the additional premium allocated to these risks. Consideration should be given as to where the risk should lie. Should it be with the party who can manage the risk or, is it a risk which neither party has control over and therefore, be treated as a 'neutral' event or indeed, should this be something the client has to pay for?
Here are a few suggestions:
1. Construction Management – the direct appointment by the client of the key trade contractors and suppliers allows the client to understand and have direct control over its supply chain. It provides the client with a level of transparency and flexibility which will inform and influence the decisions it makes. Of course, in return, the client takes a proportion of the risks associated with the construction process. However, it is becoming increasingly used by clients as an alternative procurement solution.
2. Fluctuation clauses – if the main concern relates to the possible future cost of materials, labour and taxes during the project, a fluctuations clause can be included in the contract. The JCT removed options B and C in its 2016 edition, but they are still available on its website. The increase costs formula (Option C) was relatively common up to the early 1980's and was part of a monthly valuation using the 'Base Date' (yes, that's one of the reasons it's still in the JCT). The same formula can be used with the main sub-contractor supply chain and so the amount of increase is passed down on the same basis.
3. Open book/Prime Costs – Both the JCT and NEC publish an 'open book' type contract. This allows the contractor to be paid its actual, proven costs together with a percentage for on-site overheads and profit. Clauses can be used alongside an open book arrangements which provide a capped or pain/gain target cost which can provide an element of cost certainty.
4. A 'change' allowing and extension of time – clauses can be added or adapted whereby in the event that substitute materials are necessary to be made, they are treated as a 'change' which then allows an extension of time and the additional cost to be added. This clause could relate to a specific schedule of 'at risk' materials.
5. Collaborative working – for those who are tasked with commissioning works within organisations who require the facility or project where there is no option not to go ahead, a collaborative form of procurement looks an attractive proposition. Not least, the process allows the project to evolve and decisions can be made during the commissioning stage rather than trying to 'value engineer' the price down. Of course, it does require an investment of time and resources, but it provides a better of understanding of the distinction between cost and value.
Unfortunately, none of these suggestions fully address the situation where there is a scarcity of labour. There is a presumption in construction contracts that the contractor will obtain sufficient and suitably trained labour to meet the agreed completion date. Of course, if the reason of the labour shortage is due to an out-break of COVID then that can be addressed in a distinct clause. However, it is difficult to address in a contract the situation where labour leaves site because another site is paying more or, a subcontractor doesn't turn-up on the day it said it would. The lack of a reliable skilled workforce has meant that the industry has had to look at topics such as: off-site manufacturing; new technical and professional apprenticeships; directly employed personnel and working conditions. It is likely that this issue will increasingly become part of any tender evaluation as the failure to complete a project on time is an issue for both the client and the contractor.