Managing Construction Price Inflation

Blog Authors: Sarah Elliott and Suzanne Reeves  – Wedlake Bell

The construction industry has had to mitigate the effects of Brexit and COVID-19 and is now beset with additional inflationary pressures in the wake of the war in Ukraine.

Unfortunately, inflation is unlikely to be brought under control in the short term and will be with the industry for some time to come. This means that businesses across the supply chain need to find ways to manage the risks of cost escalation over the life of a project that are fair and proportionate to all parties. This may lead to a re-allocation of risk in existing and future contracts.

What is a fluctuations clause?

A fluctuations clause is a contractual term allowing the price of a construction contract to be adjusted to reflect changes in the law, the cost of materials and/or the cost of labour during the contract period.

Fluctuations clauses in standard form contracts were usually deleted when prices for construction projects were stable, because contractors were prepared to accept the risk of any increase in the cost of materials, plant and labour. However, recent events have caused price volatility not seen since the 1970s, particularly of key construction inputs such as energy, steel and timber, as well as wage inflation.  Fluctuations clauses increase the Contract Sum in accordance with objectively measured price rises.

There are a range of fluctuations clauses in standard form contracts and which ones are adopted needs to be considered carefully in relation to the overall project and duration. For example, certain fluctuations provisions may be more appropriate for projects of a longer duration or for particular materials that are subject to high price volatility.

Regardless of the provisions of the contract, if cost inflation is seriously impacting the project or one or more of the parties, then all parties should work together to find a way to manage it.

Where can I find fluctuations clauses in JCT contracts?

In JCT 2016 contracts, there are three fluctuations options to choose from to cover different types of price increases:

  • Option A covers contribution, levy and tax fluctuations (essentially statutory changes)
  • Option B covers labour and materials cost and tax fluctuations
  • Option C is a formula, which adjusts prices, using cost indices produced by the RICS.

Fluctuations clauses can be incorporated by reference in the Contract Particulars. The Contract Conditions also include the operative clauses in the payment provisions of each contract which are essentially additions to the interim payments. The current default provision is Option A but parties should consider whether for example Option C, which is broader in scope may be more suitable. The JCT Minor Works and Intermediate Building Contract forms only contain the Option A provisions and do not refer to the other JCT Options, but these other options can still be incorporated by clear reference. The logic for this is that these contracts are designed for simpler projects with shorter work programmes. The Contract Particulars also enable users to specify their own fluctuations provisions.  Options B and C are available on the JCT website.

If negotiating a contract how can inflation be addressed?

The starting point is whether the proposed terms and conditions allow for any price increases and if not, the parties should consider how it can be best addressed in relation to all the circumstances of the project.

If the works are being procured by way of a standard form contract and it is agreed that the contract’s fluctuations provisions apply, then this must be made clear by making an entry in the Contract Particulars and in any schedule of amendments to the contract that the fluctuations clauses are being used.

Attention must also be paid to the date inserted into the contract for the “Base Date” from which any fluctuation provisions will apply:

In JCT contracts, the Contract Sum is deemed to have been calculated at the agreed Base Date. The Base Date is usually stated to be the date of the tender or priced offer, which means that the risk of inflation between the tender and contact execution lies with the supplying party. However, if the date of execution of the contract or commencement of the works is used as the Base Date, then the risk of inflation over this period rests with the employer.

Considerations if procuring materials in advance

  • Check the terms of your contract and contract documents carefully to ensure that they are consistent and reflect precisely what has been agreed about early delivery and payment. Most payers will want ownership of goods for which they pre-pay to be formally “vested” in them by way of a “vesting deed” to guard against supplier insolvency and ensure that the goods cannot be used for any other project.
  • If materials are going to be stored off-site, consider who will pay the storage charges and when the legal ownership in those goods passes to the payer. Check suppliers’ terms of sale to make sure that if transfer of ownership of those goods is required early you are not prevented from doing so by “retention of title” provisions.
  • Place greater emphasis on security and protection for materials and fuel both on and off site. An increase in thefts is already being reported as prices rise.
  • If an off-site materials bond is a precondition of early payment, consider if what is required can be obtained and which party will bear the cost. The bond market has hardened considerably since COVID-19, therefore carefully consider the terms being offered.

What can be done about inflation in existing contracts?

If the contract expressly includes any basis for price adjustment, for example a term or provision that states prices will only be fixed for a specific time period that has now elapsed, the price may be adjustable.

If the contract does not include any fluctuations clauses or another way of being able to adjust prices, there may only be scope for additions to the agreed Contract Sum where there is either:

  1. a variation or change, or
  2. an entitlement to an extension of time and related loss and expense.

This will be by reason of specified delay events (Relevant Matters in JCT contracts). All will need to be within the meaning of the contract provisions so careful consideration of the background circumstances will be required. If there are grounds for such an application, it is important that contractors comply with all the contractual requirements to make a claim.

Even where no contractual right of recovery exists, the parties are best advised to be pragmatic and find a consensual way to deal with the issue.

What can I do if a shortage of materials is causing a delay?

JCT contracts provide for specific grounds on which a contractor can seek to claim an extension of time (EOT), known as “Relevant Events”.

Generally, proving force majeure is a high threshold which can be difficult to reach. This is particularly so under unamended JCT contracts because force majeure is undefined. It is therefore necessary to look to common law when considering whether or not force majeure may apply to the facts in any case. However, historically successful force majeure claims have been made in relation to disruption caused by regional or large-scale conflicts. The war in Ukraine is not a war that the UK is directly involved in, so it remains to be seen if the effects on trade with the UK are held by the courts to come within the common law meaning of force majeure.

Depending on the terms of the contract, a change in law that directly affects the execution of the works may be a Relevant Event for which an extension of time can be granted, for example if performance of the contract has been impacted by sanctions imposed on Russia and certain Russians by the UK.

Although under unamended JCT contracts force majeure and changes in law are not “Relevant Matters” entitling a contractor to claim for additional loss and expense for any EOT allowed, an EOT if granted will at least provide relief against liquidated damages. Further, if having regard to the contract terms there is a variation to the specification or change to the Employer’s Requirements instructed by the Employer to mitigate the effects of materials and labour shortages and delays, such instructions may be treated as a variation or change and be valued as such.

Can I lawfully terminate a contract if inflation makes it commercially unviable?

Termination is unlikely to be an option if the supplying party has made what has become a bad bargain and the contract itself does not provide for such a remedy in the relevant circumstances.

It is also a risky strategy because if the terminating party gets it wrong and unlawfully terminates, then it runs the risk of a claim being made against it for breach of contract. The damages claimed will include the additional costs of getting the work completed by others, as well as the costs and expenses incurred as a result of wrongful termination. Any party contemplating termination of a contract should carefully consider and/or seek advice on its terms, the circumstances that give rise to termination and the consequences if that step is taken.

Depending on the precise circumstances, the following may be relevant for existing contracts:

  • Does the contract have an express force majeure clause that precisely covers the post contract event giving rise to delay(s)/price increase(s) concerned? Events known about before the contract was entered into will not count. The courts will be reluctant to come to a conclusion that force majeure applies and will consider if the event in question materially undermines the commercial objective of the contract.
  • Are sanctions against Russian companies or individuals relevant? If so, does the contract deal with illegality in the circumstances? Illegality might also be a defence to any claim for non-performance by the other party.
  • Is there an express sanctions clause that relieves the supplying party of their contractual obligations? If so, does it apply?
  • After the contract was entered into, has performance become frustrated, that is impossible or radically different to what was intended, due to unforeseen circumstances which defeat the commercial purpose of the contract? This is a high legal threshold to prove and inconvenience, hardship or financial loss will not be sufficient.
  • Does the contract provide alternative remedies for shortages/delays/price increases, for example clauses allowing for substitutions/variations/extensions of time and can those clauses be utilised? If so, the courts are unlikely to be sympathetic to arguments that termination was appropriate.

For contracts currently being negotiated, termination clauses can be agreed for inclusion, either for specified circumstances, which will have to be carefully drafted, or for termination at will/without cause. However, a termination at will clause is currently unusual in English construction contracts.

Will works insurance cover an increase in costs if a claim is made?

Contractors’ All Risks (CAR) policies often include so-called escalation and inflation clauses to account for increases in the value of works undertaken during a construction contract.

However, CAR policies are not all the same. That which applies to a particular contract should be carefully checked to see if such a provision is included and if so, that it adequately covers not only current inflation but higher rates of inflation during the life of the project.

If the insurance cover is not adequate for a particular loss suffered and covered by the policy, the policy may contain an “average clause” proportionately to reduce the amount paid out to match the level of the policy. This means that if the insurance cover is inadequate the policy will not meet the total amount of the claim.

Is there anything else to consider?

In the current market, there is likely to be tension between employers and their funders requiring fixed prices for budgetary and funding reasons and the supply chain’s ability to deliver at fixed prices, and to a pre-determined programme, over the life of a contract. This is particularly the case for a long programme and ones that rely on materials that are in short supply.

As with COVID-19, all parties involved in construction projects are best advised to collaborate in finding solutions. More time spent planning ahead and thinking strategically about procurement is likely to be the first step towards successful cost management.


This article was originally produced by Wedlake Bell on behalf of and in conjunction with Build UK in September 2022. For more information, see: