The overall input price inflation for the construction industry is the highest level it has been in more than 24 years. To put this in context, the annual inflation rate in the UK increased to 2.5% in June 2021 which is only the highest it has been in three years.
In addition, eighty percent of those surveyed by the Chartered Institute of Procurement and Supply reported longer supplier lead time and short supplies across the board particularly where materials are sourced from the EU.
What does this mean for building contracts on new projects?
- Fluctuation provisions – long out of favour as we have enjoyed low rates of inflation, now contractors are increasingly asking for the right to more money due to fluctuations in the cost of materials and/or currency.
- Advance payment for early orders to secure factory slots and protect the programme. Of course, employers are likely to want security against that, whether in a bond or vesting agreement. Bonds come at a cost and vesting agreements are not straightforward to enforce.
- Extensions of time & loss and expense - contractors are particularly concerned about delays in materials from the EU (partly due to Brexit and Covid-19) as well as shortages and we are seeing more risk share arrangements to manage that.
We are sure to see much more discussion on these points.