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The risk presented by construction materials shortages

21 May 2021
The construction industry has more than its fair share of challenges and, as we hopefully emerge into a post-COVID world,  the ongoing demand for its services is manifesting in both shortage of construction materials and associated significant inflationary prices.

Headlines this week are cladding and roofing orders cannot be fulfilled until January 2022 and more significant steel price increases.

Other affected construction materials include:

  • Steel: Global demand is leading to a lack of supply with British Steel currently not accepting new orders. Not only is this relevant to structures but also electrical steel cable.
  • Aggregates: The increased activity in the infrastructure sector is absorbing current supplies.
  • Timber: The increasing demand related to environmentally friendly construction and with housebuilding back up to full speed has resulted in real pressure on the availability of softwood supplies which are mainly imported.
  • Plastics: Polyethylene and polypropylene raw material shortages and increased global demand is resulting in significant cost increases. 

Construction clients have enjoyed recent decades of benign services from the construction industry, with contractors and consultants willing to contract on fixed prices and accepting unfair risks in the favour of clients.

However is the construction industry able, in the current circumstances, to continue to take the risk of fixed price construction contracts?

The obvious answer is no, but how should contractors / sub-contractors / consultants protect themselves against increased material prices and delay from material shortages?

  • Fluctuations: Ensure submitted construction tenders / bids are not fixed price and are based upon the incorporation of appropriate price fluctuation mechanisms. Investigate what price indices these provisions relate to ensuring they are representative of the proposed work. Ensure the application of retrospective adjustments to ensure the rapidly changing market circumstances are accounted for.
  • Force majeure: Review the contract definition in the context of uncontrollable material shortages.
  • Relevant events and matters: Propose including material shortages as a contract relevant events and matters providing protection against contractual penalties for delay and recovery of associated loss and expense.
  • Programmes: Include explicit tender programme information including dates when the orders and supply of material are required. This will be essential evidence to set against actual events.
  • Notices: Ensure sufficient resource is included to ensure that all associated contract notices are made to protect contractual entitlements.

In this current period of uncertainty it is only equitable for construction clients to accept the risk associated with materials shortages and increased costs. 

For once the insurance industry should not be asked to fund any related issues.

Leaving the risk with the construction supply chain only has one inevitable outcome.

Contact us for more information.

Further Reading