Fluctuation provisions in construction contracts are designed to adjust the contract sum. This might be needed to reflect changes in labour, material, and associated costs. By adding fluctuation clauses, you can mitigate the risk of price volatility during the project.

However, in my experience, these provisions are rarely included in contracts. This often stems from a reluctance by the employer to assume the potential risk of significant price increases. Often the contractor is left to bear the full burden of material price fluctuations. This risk can be substantial and difficult to predict, especially on multi-year, large-scale construction projects.

What can you do if labour and material costs rise?

Let me put this into a relevant real-world context. Back in 2022, I acted as the commercial lead on a project just as the global pandemic was ending and war in Ukraine was looming. Working for the main contractor, my role was responsible for the procurement of the supply chain, and it turned out to be a testing experience.

The tendering steelwork contractors would not fix their quotations for more than a day due to the volatility in the market. Other contractors were also reluctant to quote on fixed prices for works too far into the future, unless a margin of safety was included in the contract sum.

Taking that stance in such challenging times was completely understandable. Our issue, as the contractor, was that the contract we had in place with our employer was agreed in 2021 on a fixed-sum basis.

A deed of variation

Thankfully, the employer understood the position and showed empathy. They accepted that their main contractor was facing a tough situation, which could even be potentially business ending.

Through a process of negotiation, we agreed to a deed of variation to increase the contract value. But it wasn’t a simple process and took a great deal of time and substantiation — and, ultimately, led to a delay to the original completion date.

Looking back in hindsight, that was the right decision and an example of the best face of our industry. Official data from the Insolvency Service in the UK, revealed that 4,165 construction firms in became insolvent in the twelve months ending on 31 March 2023.

Three key steps to ensure a successful outcome on your project

Having a provision in your contract for price fluctuations or an employer who is willing to come to an agreement is not the end of the matter. You will still need to compile a credible document that demonstrates why the prices should be amended. When doing so, there are three steps to consider:

1. Establish a narrative

Claimants often identify events in price escalation requests but fail to connect them directly to the cost increases. This leaves it up to the reviewer to infer the link. Provide a clear narrative that explicitly details how specific events caused the price fluctuations and quantifies their impact.

2. Provide relevant index or cost adjustments

The FIDIC form, for example, often utilises cost indices to calculate price adjustments. These published indices provide a clear and consistent method. Alternatively, claimants can demonstrate the actual cost difference by comparing the current material price to the originally estimated price.

3. Substantiation

To come to a successful conclusion, you are going to have to demonstrate that the price fluctuation you are claiming is accurate. Good record keeping is essential. The use of indices is a straightforward approach due to the fact they are transparent and publicly available. Even so, you’ll still have to illustrate to the reviewer what the data is telling them, leading them to a logical conclusion. Cost-based adjustments, however, demand robust record-keeping to validate both the original and revised costs.

Documenting and substantiating cost adjustments under FIDIC

Under FIDIC (2nd ed., 2017), Clause 13.7 addresses adjustments to the contract price for changes in the cost of labour, goods, or other inputs. It’s an optional provision that parties can choose to incorporate in their contract.

The application of Clause 13.7 is contingent upon the inclusion of a “schedule of cost indexation” within the contract. This schedule outlines the specific indices and coefficients to be used for calculating the price adjustments.

FIDIC guidance notes suggest that this sub-clause is particularly relevant when it would be unfair or unreasonable to expect the contractor to solely bear the risk of significant cost escalations. This typically occurs in projects with long durations or in volatile markets where price fluctuations are difficult to predict.

This article was written by Steven Woolnough, Chartered Quantity Surveyor, MRICS, MCIOB, MCICES, MCIArb.

To understand more, the practical use of FIDIC 2017 intermediate course covers variations and adjustments. Visit the webpage now to see the full course outline.