Helping to provide solutions for a stressed out supply chain

Five business people in smart clothes standing on a wooden floor

The construction team at Greene & Greene, from left to rightN, eil Grigg, Anna Britland, Hugo Greer-Walker, Sarah Western and Rob Adam - Credit: Greene & Greene

Sue Wilcock speaks to partner at Greene & Greene Solicitors, Sarah Western, about supply chain issues and what can be done to mitigate the impact on construction contracts. 

Most of us will be aware of the worldwide shortages in materials that have dominated the news recently. The causes, to name but a few, include an increase in domestic construction projects during the pandemic, the effects of Brexit, a warmer winter affecting timber production, an increase in shipping costs, and a shortage of HGV drivers. All of which have combined to hit the construction industry particularly hard, causing delays to projects, and prices to increase significantly. 

Sarah Western explains: “If you are thinking about undertaking a construction project at the moment, it’s understandable that you may be thinking twice.

"According to ONS, there was a 20% rise in prices in July 2021 and prices are expected to continue to rise into late 2021, albeit at a slower rate. The Construction Leadership Council has stated that prices are unlikely to stabilise until 2022. It should be noted they are saying a stabilisation of prices; it is exceptionally rare and very unlikely that the cost of materials will go down. 

“Here at Greene & Greene, the construction team have had increasing queries from both clients and contractors concerning the problems they are facing at this time. 

“Under most construction contracts, it is the contractor who bears the risks around shortages and any increase in prices and delay in delivery. This has put many of them in a tricky position as they have been stung by the increases in the price of materials, which they are then unable to pass onto their customers under the terms of their contract. In addition, where the unavailability of materials has caused a delay, contractors have been affected by liquidated damages clauses enforced by their clients.” 

So, what positive steps can be taken to lessen the negative impact materials shortages have on construction contracts? 

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Phil Branton, director at Wincer Kievenaar Architects, thinks that for current projects that are experiencing challenges, the best approach is to work collectively. He says: “Given the materials shortages, it is important for the design team to work with clients and contractors to maintain flexibility and adapt to material availability to get best value for projects.” 

James Potter, MD of Superstructures, agrees with Phil, and thinks that those involved in a project’s design and specification need to maintain an open and candid dialogue with contractors and suppliers. 

He says: “These are the people that know best about where the challenges lie around the supply of materials and skills, as they are at the cliff face so to speak. So, we must defer to their knowledge and expertise and work collaboratively, to get the project delivered.” 

However, as Sarah explains, there is more that can be done for those contracts yet to be entered into. 

“If a client wants absolute certainty on costs and programme, clients are likely going to have to agree to both a higher contract sum and a longer contract programme than they would have done two years ago. 

“Alternatively, contractors and clients could consider sharing the risk of payments, for example by agreeing to up-front ordering and payment. It is worth noting that this approach would probably require some form of security for the client’s protection, such as vesting certificates and/or advance payment bonds. Another option to balance the risks is for contractors to ensure that the contract applies the optional volatility clauses, which historically have not been used in a stable market. 

“The delay or non-availability of certain materials also means that the chances of having to instruct a change under the contract are very high, and again, parties should aim to work together to manage the costs of these events, rather than leaving one party out of pocket. 

“Ultimately, it must be remembered that with significant inflation of the costs of materials, the contract will determine who bears that risk, so negotiating your contract carefully is even more important than ever. 

“Both client, contractors and other professionals in the industry should check their contracts and seek professional advice on where improvements can be made to help protect against the rising costs of our current volatile market. Greene & Greene can help with this. We offer a full service construction practice, advising clients on contract terms as well as a full spectrum of dispute resolution services.”