New US tariffs (who knows where things will land) could well increase material costs and delay supply chains across the UK and Scottish construction sectors. Add to that investor uncertainty and currency fluctuations, and the risks are clear.
Now’s the time to revisit contracts and consider how well they handle volatility and how you can shape them to help absorb future shocks.
Lessons learnt
Will lessons learnt from the upheaval of Brexit and COVID help employers and contractors on construction projects manage a way through the volatility?
Standing advice in ongoing projects would be to review contracts to understand risk profiles and entitlements to time and money.
A key lesson learnt from the COVID era for contractors is that engaging early and directly with employers can be beneficial. Understanding an employer’s willingness to collaborate early on will undoubtedly lead to more informed and better commercial decisions.
But what can be done to build in some resilience on contracts currently being negotiated?
Price adjustment clauses (fluctuation clauses)
Although infrequently used and often quite complicated, most standard form contracts include optional indexation of cost fluctuation provisions. It’s well worth a refresher on what these cover.
Take, for example, the fluctuations options in the JCT/SBCC suite. Given the preference of employers for price certainty these aren’t commonly used, but provide for three options — A, B and C.
- Option A allows for upward or downward fluctuations on employment taxes and duties and taxes on materials, goods and fuels. This includes perhaps most importantly considering recent news, duties and taxes (other than VAT) payable on import, be that changes to existing rates, or the introduction of new duties and taxes
- Option B goes further to include fluctuations in labour cost as well as changes in employment taxes, and the market prices of materials, goods and fuels, which is deemed to include any duty or tax payable on it (other than VAT)
- Option C offers an indexing solution, adjusting prices by reference to a detailed set of formulae
Option X1 of the NEC suite of contracts offers an optional indexation provision, under which the parties use indexation to determine any change to the prices at each assessment date. While this approach can protect against big economic swings it might not be of as much use in the context of tariffs imposed on imported products or shortages in material supplies.
It’s important to remember that these options allow prices to move up as well down and, because historically they don’t get used that often, need some careful consideration by those not-so-familiar with the approach. Key considerations to factor in include —
- Identify the high-risk materials (eg steel) that might be impacted
- Check what price adjustments are linked to — eg published indices/market price databases
- Are there caps on fluctuations or potentially unlimited exposure?
Force majeure clauses
These clauses excuse a party from performance if extraordinary events beyond their control occur, as an illustration, here’s a look back at some force majeure commentary from the pandemic.
It may help a contractor to delay or suspend work without liability if tariffs disrupt supply chains or make performance commercially impractical.
But tariffs may not qualify as force majeure, so check for events listed like “government actions”, “international trade restrictions”, or “government imposed import duties” — and check also what’s covered by “changes in law”.
Check also that force majeure provisions cover extensions of time and not just termination.
Change in law clauses
This type of clause may open the way to renegotiate or claim recovery if tariffs affect project delivery or pricing, but only if it’s clear non-UK laws affecting supply chains are covered. For that you’d be looking for wording along the lines of “any jurisdiction relevant to material procurement”, for example.
Other practical measures to mitigate risk include —
Advance purchase
An obvious one — source material at prices before tariffs take effect and lock those in. That may require amendments to contractual mechanisms to allow the supplier to invoice you, and for you to pay upfront, for long-lead items. That may also mean looking at options like holding funds on joint deposit or advance payment bonds to facilitate early purchasing. Other considerations to factor in are transfer of title in off-site materials.
Supply chain risk allocation
Consider whether there are options to negotiate shared liability with suppliers and subcontractors to avoid absorbing all the risk in one place — but focus on risk allocation rather than risk dumping, the latter being a recipe for future disputes. Make sure all the contracts are back to back when it comes to any fluctuation, force majeure and change in law clauses.
Insurance and bonds
Most policies won’t cover tariff risk but consider whether performance bonds can help mitigate downstream consequences of delay or non-performance.
Mirroring behaviours during Brexit and COVID as parties negotiated terms to de-risk the impacts of materials being held up in port, additional import taxes, emergency site shutdowns or social distancing rules, as well as unexpected price hikes, we expect to see specific provisions for such events being drafted in as amendments to standard forms.
And repeating the most frequent line of advice we share — notify early and often.
Many claims founder because a contractor didn’t give timely notice. Are your internal processes to flag risk events robust enough?
Every project is different — if you’d like to talk through what this means for yours, please do get in touch.