Construction supply shortages ramp up

This article is from December’s edition of Aggregate, which featured a month-by-month review of 2021. This is August’s entry. To read the complete newsletter as a PDF, click here.

In August 2021, material shortages (which had been causing problems in the construction industry for months) finally began to make worldwide news.

Dubbed the ‘perfect storm’, a number of factors contributed to the shortages. The biggest of these was the surge in demand for materials. Governments worldwide put money into construction to kick start struggling economies following the height of the pandemic. Additionally, many projects that would otherwise have previously completed were restarting, and a huge number of residential projects were underway, largely prompted by individuals spending more time in their homes and so wanting to make improvements.

In addition to the demand surplus, Brexit, congested transport routes, rises in shipping costs, container shortages and even climate change compounded the problems, with key materials including bagged cement, timber, steel and aluminium all being affected. As a result of this, contractors began to suffer huge delays to lead times, and prices for materials soared.

For many years, the standard industry position has been that contractors take the risk for material delays and material price increases. And indeed, this has not been a real concern for contractors for several decades. The events of 2021 have changed this. While some contractors have successfully negotiated some leverage with employers on ongoing projects, supply shortages likely do not constitute an event of force majeure in the same manner that Covid related delays are thought to.

There appears to be no clear end in sight to the supply shortages, with industry press currently reporting that the shortages will likely continue for a minimum of 6 months into 2022. It is therefore important that parties understand this, and if possible reduce their risk when negotiating new contracts.

Some of the options available to contractors, who ultimately are the party most exposed with traditional contractual setups, are as follows:

Fluctuation provisions – the JCT suite of contracts include three optional fluctuation provisions which are designed to compensate contractors in the event of material price increases after the contractual base date. The provisions are rarely used but the most appropriate option in these circumstances is Option B. The relevant clause in NEC is the secondary option X1. Again, this provides for price adjustment for inflation but is rarely used.
Advance payments – advance payments should enable contractors to order materials at an earlier stage to hopefully avoid delays due to long lead times and also to hopefully prevent further price increases. Employers may be more receptive to a request for an advance payment, especially if the contractor will enter into a bond as security.
Letters of Intent – the industry has seen an increase in the use of LOIs, to enable contractors to order materials as soon as possible so as to fix prices.
Provisional sums – provisional sums are priced on a fair and reasonable basis at the time they are instructed and so a contractor carries far less risk on these items.
Prime Cost items – again prime cost items ordinarily relate to works where the materials have not yet been selected and so contractors carry far less risk on these items.
EOTs – contractors may be able to negotiate extension of time provisions that apply in the event that materials are delayed beyond required dates set out in a schedule. Although this will not assist where prices have increased, it will at least give relief against potential delay damages.

Although negotiations across the market still appear to be very much employer-led, the events of 2021 have seen contractors push back hard with new contracts. How far this continues and the effect it has on project pricing and delivery is sure to be one of the big stories of 2022.