The article considers the construction materials shortage. This is Part Two of a series considering the shortages in the construction industry by ALA Quantity Surveyor Ryan Grey. The first article on labour shortages can be read here.

Materials shortages have already led to well-documented price increases.

For example, British Steel introduced seven price increases in 2021 alone.[1]

Research by Roofing Megastore reports imported wood has seen a year on year increase of 74%. For structural steel the figure is 73%.[2]

This article will briefly investigate the primary reason for the construction materials shortage, what this means for the industry as a whole and what can be done to mitigate the risk and impact of this issue.

What is causing the shortages?

1. Shortage of Haulage Drivers

The reasons why the construction industry is experiencing labour shortages was explored in my first article. All these issues apply to the UK Haulage industry as well, as recently documented by the media. This has a direct impact on the construction materials shortage.

A lack of lorry drivers means there are less trucks on the road to transport materials around the UK.

2. Brexit (again).

• Quality Standards

One of the issues with Brexit is that the government is now in the process of replacing the CE markings (which have certified products in Europe since 1985), with the new UKCA mark as part of the agreed regulatory standards in last year’s Brexit deal.

Whilst the UK was in transition, both markings were accepted. However this period expired on 31 December 2021 . From 1 January this year, all new construction products must obtain the UKCA marking. This must be obtained at a UK test facility at a cost of up to £50,000.

Previously construction materials meant for use in the UK but transported from the EU could be tested at an EU facility, allowing for a quicker, cost-efficient delivery into the UK.

• Taxes, Quotas, Tariffs

Under the EU single market, UK businesses were able to freely transport goods around the EU and into Britain without any additional charges, taxes, tariffs or quotas. Post-Brexit, this has changed, and we are already seeing the effects of this.

Broadly speaking, any goods or materials now being transported into the UK are subjected to timely border checks with additional taxes, quotas, tariffs etc included. This results in more expensive goods taking longer to arrive.

Ultimately any increase in the cost of transporting goods into the UK will see a rise in the cost of materials to the contractor.

With goods taking longer to arrive there may also be a premium included in ensuring that the affected parties’ requirements are met first.

What can we do?

How can parties deal with the construction materials shortage?

Long term, the issue of transporting materials into the UK needs to be agreed by government. It is hoped that the delays stated above can be minimised to allow free movement of materials again, coupled with a price reminiscent of the pre-Brexit days.

Until this is agreed, the UK construction industry needs to be prudent and aware of how price rises may affect them. In the short term, we may have to get used to the construction materials shortage. Both Employers and Contractors need to consider the precautionary steps they can take to mitigate any risks associated with both material shortages and price rises.

Project Collaboration

The first thing to recommend which is nearly always the quickest and cheapest way to resolve material shortages and price increases is to communicate and collaborate with all affected parties. This is preferred to trying to tackle the problem single-handedly.

Trying to recover a project after a contractor has filed for bankruptcy is often a very timely and costly process, so it makes sense for all parties to work together to avoid the threat of insolvency for any of the parties involved.

Typically speaking, NEC contracts are perhaps better prepared in this regard than JCT as they promote collaboration between the parties.

The Contract

The next (and perhaps most important) step is to review the contract. In particular, clauses dealing with price, costs and delay.

Does the construction contract include fluctuation provisions? In practice, what do they mean in terms of risk going forward?

Lump sum contracts are common within the UK. Here, the contractor agrees to work to an agreed specification, for a specified price, to be completed within an agreed timeframe. Material shortages and price rises could impact all three.

Remeasurable and target cost contracts often contain fixed rates for specific items or activities. This may be significantly out of sync with market rates for materials by the time construction begins.

A significant change to the project often results in a variation or compensation event (depending on the contract suite used). But does the contract allows for variations or Compensation Events to be raised in this circumstance? Probably not.

Contract clauses are often amended to transfer risk away from the Employer, so it would be impossible to provide tailor-made advice within this article for each contractor.

Professional advice can be useful, but the first step is to simple read the entire contract (including attachments and amendments). You should pay special attention to clauses that deal with:

• The calculation of the contract sum,
• Advance payments,
• Extension of time entitlements,
• Loss and expense,
• Liquidated damages and delay,
• Relevant events and relevant matters,
• Force majeure clauses,
• Variation or compensation events, and
• Specification and substation of materials.

Once each of these areas has been reviewed, you will have a better understanding of your position.

Existing provisions within the contract

Existing clauses may be beneficial. For example, clause 2.2.1 of the JCT Design and Build 2016 Contract states that materials and goods “so far as procurable” to be as set out in the Employer’s Requirements. This becomes relevant if certain materials are not available, so replacement materials become an option.

JCT Contracts also include an option to allow for the adjustment of rates in respect of unforeseen additional costs due to inflation. Such clauses may provide a safeguard against any material price changes which are needed in order to complete the contracted works.

However, most contracts are heavily amended. Whilst this is one example of how the contract may allow for fluctuation provisions, it may not actually apply within your contract, even if JCT D & B 2016 is followed.

Depending on how certain clauses are written, there may be scope to rely on other provisions. For example the extension of time clause could potentially cover the disrupted supply of materials or labour shortages. Similarly, depending on the wording, these events may be considered force majeure events.

Whilst this may cause disagreement between the parties, if the contract is not clear on such an interpretation, this may offer room for negotiation. If this is not possible, matters may need to be decided via an alternate dispute resolution method such as mediation or adjudication.

Negotiation is actually the most cost and time efficient way of resolving an issue, which again leads back to the fact that most issues can be resolved with effective communication between the parties.

It is worth noting that within the NEC suite of contracts, the position is as follows:

• options A and B (fixed price), the contractor assumes the risk of inflation,
• options C and D (target price), the risk can be shared between the parties (risk allocation can be amended with the secondary option x1).

Again, this is the standard position which may be subject to amendment.

Contract Amendments

If one party bears all the risk, it may be worth considering a contract amendment.

Amending the contract by mutual consent in respect of the below points may prove beneficial to both parties:

• Changing the basis on which the contract sum is calculated. This could be by including a fluctuations provision.
• Agreeing to reduce or remove liquidated damages clauses.
• Agreeing advance payments for specified materials and goods that have longer than expected lead times. This would allow each item to pass the additional checks as a result of Brexit.
• Perhaps the most obvious course of action cold be to agree to amend the contract sum and/or the completion date.

Any negotiation is a complex matter. Parties may be reluctant to concede what they consider to be the upper hand. However, certainty and security of delivering the project is always preferable to risk and uncertainty. The threat that the Contractor or supply chain may go bust or leave the project in limbo for many months should bring all parties to the table.

Until a mutual agreement is reached, it is important that parties continue to protect their rights by following the contractual notices as and when required, whilst observing the agreed contract as originally intended.

Future Projects

These issues can be avoided for future projects. With a proactive approach to contract negotiation, there is an opportunity to agree clear terms which give both parties commercial certainty.

It would be wise to review the following issues:

Expected material shortages from EU sourced materials. Sourcing materials locally can reduce potential supply chain risk. By using locally sourced goods it also brings added sustainability benefits to the local environment. Value engineering may also be of use here.

Even using locally sourced goods and materials may not limit the delays in sourcing them.

It would be wise to consider contractual provisions for alternatives and what the cost impact could be. This could come in the form of advance payment for hard to source goods. Although this may guarantee contractor cashflow, it may not deal with sharp fluctuations.

Agreeing fluctuation provisions in advance is a proactive way to deal with the issue. This gives both parties certainty.

Brexit has led to a change in the laws regarding the transportation of goods from the EU into the UK. Whilst some of these laws are still to be confirmed (in the form of international trade agreements), future contracts can also address changes in tariffs, quotas, taxes etc on imported goods.

Prior to 2019, force majeure contract clauses may not have been considered in too much detail by many parties. Now it is essential that all future contracts contain robust covid provisions and force majeure clauses are drafted widely enough to consider new variants/outbreaks. Ideally these clauses should be drafted widely to deal with knock-on impacts. For example, by addressing materials shortages caused by for Covid. This could be outbreaks at suppliers, suspension of shipping due to lockdowns or other such events.

How ALA Can Help

ALA provides a pre-contract commercial risk review service. If you have been provided with a draft contract or tender package and would like advice on the implications of the proposed contract terms, we would be happy to help. We provide thorough, easy to read and practical reports on commercial risks with pragmatic solutions. Our advice considers a wide range of current issues, including Covid and the construction materials shortage.

To find out more and what services ALA can offer, please contact Tom Lamb or Byron Tyson.

Alternatively you are interested in joining the ALA apprentice scheme, please contact Karen Turlay-Rose.

 

 

 

 

 

[1] https://www.constructionenquirer.com/2021/11/08/steel-prices-jump-for-seventh-time-this-year/

[2] https://www.roofingmegastore.co.uk/2021-building-supplies-crisis