A Guide to Fair Pricing: Mastering Construction Cost Adjustments
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.
Float in Construction Scheduling: Who Owns It and Why?
This article examines ownership of float in construction, for an introduction to the concepts, see this article. Float, a fundamental concept in project scheduling and programming, represents the flexibility or delay tolerance within a project schedule. It signifies the amount of time by which it is possible to postpone an activity without impacting the overall project timeline. In particular, the critical path and contractual completion date.
The concept is relatively simple. However, its ownership and use can be complex, often subject to contractual interpretations and industry best practices.
Who Owns the Float?
Understanding the ownership of float (or slack) in construction project schedules can be challenging for many reasons. These include the specific type, the level of project planning expertise, and contract terms, or absence thereof. Take a look at the end of the article for a list of documents used in the creation of this article.
Shades of Ownership in Construction Contracts
AACE International clarifies that, in the absence of specific contractual language, ‘network float’, defined as the float available on any given path, is a shared commodity so no single party is at a disadvantage[1]. On the other hand, ‘project float’ is the time between the planned completion date and contractual completion date where the project is planned to complete before it is contractually obliged[2]. Where the contract is silent, project float is owned by the contractor. It can be used to accelerate the completion of a project or mitigate contractor-caused delays.
The Society of Construction Law (SCL) sets out that ownership is contract dependent. In one example, the SCL suggest that unless the contract states otherwise, if a delay event occurs which is employer related, and there is total float remaining, an extension of time (EoT) can be granted if the event will use all float available. This means it can be used to mitigate employer delay events.
The SCL discuss varying permutations of float ownership and resulting outcomes. They rightly point readers to their own project contracts for clarity. Ultimately, understanding and applying the principles of ownership requires a careful analysis of project context, contractual agreements, and industry best practices. Such an analysis will ensure, project teams can effectively manage project schedules, mitigate risks, and achieve project success.
The NEC Contract
According to standard NEC phrasing, ‘free float’ is shared and consumed on a first-come, first-served basis. Delays caused by compensation events or slow rate of progress can be mitigated using free float. In contrast, ‘terminal float’ and ‘time risk allowance’ are owned by the contractor.
To protect their rights, contractors using NEC4 must ensure that their project programs clearly show total or terminal float, and time risk allowance. Failure to do so could jeopardise their ability to rely on these types to mitigate delays.
JCT & FIDIC
As far as JCT contract wording goes, float is generally considered a shared resource. It is available on a first-come, first-served basis. This means that any party, whether contractor or employer, can use available float to mitigate delays.
Unlike NEC4 and JCT contracts, FIDIC contracts do not explicitly define float ownership. This means that parties involved in a FIDIC contract must agree on float allocation and use. Ideally this happens before any disputes arise. We cover this, and much more, in our Understanding Claims Under FIDIC 2017 course content.
By being clear about float ownership up front, project participants can avoid potential conflicts and ensure the efficient management of project schedules.
Where float is not properly accounted for, disputes may result. The consequences could include significant financial losses if one party is found responsible for covering the full claim.
A Breakdown of Float Ownership by Document
The following table summarises who owns what type of float according to various sources:
| Ownership According to Contract
| ||||||
| Contract Doc | NEC4 | JCT | FIDIC 2017 | AACE Protocol
| SCL Protocol | CIOB Protocol |
| Free float
| Shared | Shared | N/A | Shared | N/A | N/A |
| Total float
| Shared | Shared | N/A | Shared | N/A | N/A |
| Time risk allowance
| Contractor | Shared | N/A | Shared | N/A | N/A |
| Terminal float
| Contractor | Shared | N/A | Contractor | N/A | N/A |
The Evolving Landscape of Ownership
Despite the guidance provided by industry best practices and contract documents, determining ownership remains a complex issue. Each project has unique circumstances that can influence how float is allocated and used.
As technology continues to shape the construction industry, project timelines are becoming increasingly dynamic. Changes and unforeseen challenges are inevitable. It is therefore vital to carefully consider issues like float, concurrent delays, and delay analysis during contract negotiation.
By carefully considering these factors and seeking expert advice, when necessary, project teams can minimise the risk of disputes and ensure they meet their goals. Finally, should you be interested in learning more about delay analysis and how scheduling and planning techniques can be used to manage and assess delay, check out our delay analysis courses.
Documents Referred To:
- AACE International Recommended Practice No. 29R-03 Forensic Schedule Analysis
- CIOB Planning Protocol 2021
- SCL Delay Protocol 2nd Edition
- NEC4 suite of contracts
- JCT 2024 suite of contracts
- FIDIC 2017 suite of contracts
This article was written by Paul Woodley BSc, LLB, MCIArb.
[1] s 1.5 sub-s B. AACE. (2011). Forensic Schedule Analysis: TCM Framework: 6.4 – Forensic Performance Assessment. AACE International, Inc.
[2] s 4.3 sub-s E. AACE. (2011). Forensic Schedule Analysis: TCM Framework: 6.4 – Forensic Performance Assessment. AACE International, Inc.
Can a FIDIC Engineer Reject the Contractor's Programme?
One question that is often asked by students is “what actions can the FIDIC engineer take after reviewing the contractor’s initial programme?”. Many people think that the engineer may ‘reject’ the programme if he/she has reason to do so, but this is incorrect.
Let’s have a look at what Sub-Clause 8.3 (Programme) of the 2017 Edition of the Red Book has to say on the subject.
Firstly, it includes a lengthy list of requirements and inclusions that the programme should comply with. The detailed wording has been reduced here for clarity:
- The programme shall be prepared using programming software stated in the specification.
- The commencement date and the time for completion, of the works and of each section.
- The date the contractor will be given right of access to and possession of the site.
- The order in which the contractor intends to carry out the works.
- The review periods for submissions.
- The sequence and timing of inspections and tests.
- All activities, logically linked and showing the earliest and latest start and finish dates and the critical path.
- The dates of days of rest and holiday periods.
- Key delivery dates of plant and materials.
- A supporting report which includes:
- a description of all the major stages of the execution of the works
- a general description of the methods which the contractor intends to adopt in the execution of the works
- the contractor’s estimate of the number of personnel, and equipment required on the site.
Sub-Clause 8.3 (Programme) then goes on to deal with the engineer’s actions after receiving the programme for review:
‘The Engineer shall Review the initial programme… submitted by the Contractor and may give a Notice to the Contractor stating the extent to which it does not comply with the Contract …’
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Cause and Effect: The Key to Successful Construction Delay Analysis
I’m sure that you have heard the advice that if an extension of time claim is going to succeed, the claim must demonstrate a link between cause and effect. The claim must demonstrate that the event(s) on which the claim is based affected the time for completion. Showing the impact and time involved is key.
Delayed activities may not be on the critical path. If this is the case, the delay event may consume float. In turn, this may cause subsequent activities to become closer to the critical path. But if the event does not affect the critical path and thus, the time for completion, there will be no extension of time.
Risk Allocation
The risk allocation of the contract may make the contractor responsible for the effects of some delays. If there is no entitlement to additional time in the contract there will be no extension of time.
Sometimes contractors realise towards the end of the project, that they will not complete on time. In such a case, delay penalties will likely be applied and they will incur overrun costs.
At this point, they might consider they need an extension of time. This is in contract to considering whether entitlement to an extension of time exists. Consequently, they hurriedly submit a claim for multiple delay events. They assert that all these delays entitle them to an extension of time up to the date that they completed. This is known as a global claim. In all but exceptional circumstances, it will be rejected by arbitrators and the courts and thus, by contract administrators. This is because such a claim does not demonstrate the effect of each event, either individually or cumulatively, on the time for completion.
How To Show Cause And Effect?
So how can we demonstrate a link between cause and effect in our claims? The answer is by carrying out a suitable form of delay analysis. The purpose of such an analysis is to illustrate the effect of the claimable delay event on the time for completion by using suitable programming techniques.
There are many forms of delay analysis. The selection of the most suitable method depends on several things, including:
- The existence of suitable programmes.
- The quality of the baseline programme.
- The quality of the records.
- Where the project is in terms of execution at the time the claim is being prepared.
Considering all factors is key to successful analysis. The Society of Construction Law’s Delay and Disruption Protocol gives excellent advice on this subject.
Necessary Knowledge
Delay analysis can be a complicated subject and demands suitable knowledge and skill. It is, therefore, necessary to have suitable resources available to prepare this very essential part of the claim.
If you are the person responsible for preparing the claim and you are using others to perform the delay analysis, you don't have to be a programming expert. However, you need a strong overview of the subject so that you understand the protocols, techniques and how to identify specific causes and their effects. This will enable you to check and demonstrate a number of things:
- The accuracy of the analysis.
- Why the particular form of delay analysis is suitable.
- How the analysis was performed.
- What the analysis demonstrates.
If this topic interests you, you'll be delighted to find that we now offer delay analysis e-courses. Take a look and join us to bring your knowledge up to speed.
How To Avoid Disputes From the Outset
Hewitt Decipher Partnership recently presented a webinar on international arbitration. Panel members included a barrister, an arbitrator and a solicitor. They were joined by HDP employees who provide expert advice to legal professionals working on construction disputes. The aim was to look at how to avoid claims.
Whilst these professionals earn fees from disputes, the overwhelming consensus was that the best way to deal with disputes is to not have them in the first place.
So, what can we do to avoid disputes right from the start of the project?
Progress Updates – Fact or Fiction?
Contractors often shoot themselves in the foot when preparing progress updates for the employer’s team. Many times, we see months’ worth of updates that present a rose-tinted view of project progress.
While it may be tempting to keep reporting good news month after month, be wary. A less-than-competent consultant may believe such reports because good news will not involve them in additional and troublesome work. However, you could be causing problems for yourself further down the line.
Problems frequently arise when the contractor needs to submit a claim for an extension of time. It becomes very difficult for them to subsequently tell the employer’s team: “I know we kept telling you that there was no delay to the completion date, but actually there is, and it’s not our fault, so please can I have an extension of time.”
A progress update, as-built programme, or updated programme (all different names for the same thing) is created using the latest agreed programme. It uses planned start and finish dates plus the percentage of progress for any activity started but not finished. The logic contained in the programme and the programming software will then predict the completion date based on progress to date.
Before I specialized in contractual matters and claims, I was a project manager for both contractors and consultants. When my planning team produced a progress update, I wanted only one thing from them, and that was…
THE TRUTH.
If the update predicted early or on-time completion, then I knew we were doing okay. But if the update was predicting a delay, I needed the planners to tell me the cause, or causes, of the delay so that we could take action.
If the delay was caused by us or was due to something that we were responsible for under the contract, we had to find ways to recover the delay. This could mean working longer hours or mobilizing additional resources.
But what if the delay was caused by the employer or by something that is at the employer’s risk under the contract? In this case, we needed to identify the cause, submit the necessary notices, and make preparations to submit a claim.
So, what would I report to the employer’s team in our monthly progress reports under such circumstances? Again…
THE TRUTH.
Many contractors will not agree with this tactic and will be reluctant to tell the employer’s team that the project is in delay for any reason at all. The contractor should admit to their own delays but explain the steps they are taking to mitigate them. Generally, the employer’s team will accept that delays do happen and will appreciate that the contractor is being proactive in dealing with them. Telling the employer’s team about predicted delays will only support subsequent claims, particularly when the cause is something that will entitle the contractor to an extension of time.
This, of course, only works if the contractor does not simply bury their head in the sand and hope that the delay will go away. Trust me, it probably won’t. The contractor must actually take mitigating action to recover their own delays. Make sure to send the necessary notices and submit a claim without undue delay.
So, what is the alternative to telling the employer’s team THE TRUTH? Manipulate the programme so that it no longer predicts a delayed completion date? Unfortunately, this is what many contractors do to avoid giving the employer’s team any bad news.
The fact that this knee-jerk reaction is not sustainable through multiple progress updates and will not support any legitimate claims for extensions of time seems lost on such contractors.
Fact or fiction? I will leave you to decide the best approach.
Understanding the importance of contract administration is vital to avoiding claims. Discover more with our Understanding Claims Under FIDIC e-course.
Time at Large - An Explanation
A blog reader asked for an explanation of “time at large”. This is not something that I have personally come across in practical terms. For the advice that I am about to give, I am indebted to my ex-boss, Roger Knowles. Roger provides an explanation in his book, 150 Contractual Problems and their Solutions. Roger explains it arises:
"when a contract is entered into with no period of time fixed for completion. Where this occurs, the contractor’s obligation is to compete within a reasonable time."
I have never experienced such a situation and I expect that when it does occur, it will be on Read more
Can Artificial Intelligence Perform the Role of a Construction Planner?
It seems stories and articles about artificial intelligence are everywhere you look at the moment. A common question is whether AI can eventually replace a human’s job completely.
This got me thinking about how AI might feature in construction. Will it start to replace people in projects? As a project planner, I wonder, will a computer ever be able to do my job?
The construction industry continues to evolve, but it can still be slow to embrace new technology. Construction planning is complex and multifaceted. Tasks can include project management, allocation of resources, risk, and programme scheduling.
Given this, I don’t think robots will be replacing us anytime soon. However, in this article, I discuss how AI could assume the role and responsibilities of a construction planner. Might there be advantages to AI taking over the planning function of projects?
Advantages of AI in construction planning
Automating tasks
Artificial intelligence can process large amounts of data at a faster rate than humans. This means it can automate and speed up time-consuming tasks. By analysing resource requirements for a project, AI could generate schedules, optimise monthly workflow, and produce monthly reports. Of course, we should base these processes on the information inputted. So, we wouldn’t be rid of human involvement just yet. However, if AI were to perform these tasks human planners could focus on problem-solving and decision-making.
Risk Mitigation
Construction projects are inherently risky. Delays, cost increases and overruns are not unusual. AI could help identify all of these risks. If AI could review historical data and simulate several scenarios, this could provide early warnings and mitigation strategies. Having this type of data could increase the success rate of projects.
Disadvantages of AI in construction planning
Human Judgement
AI makes decisions by analysing the data available and choosing the one with the best chance of success statistically. Where it struggles is making judgements around unforeseen events. Human intervention is still required to validate and interpret what AI generates, at least for now. Planning requires making considered decisions. In my view, only human judgement can make these decisions. AI is not there in its latest form, but who knows in the future? But for now, AI lacks the ability to predict a lot of changes. From adjustments in design to delays due to personal issues, there are some things a computer can't know.
Records and Data Quality
AI is heavily reliant on data. It needs quality records to produce an accurate analysis and make correct decisions. It is well-known that in the construction industry, record keeping is inconsistent. For AI to work, our data input and record-keeping need to vastly improve.
Changes in Environments
Construction projects are subject to frequent changes. Design changes, unforeseen weather events, changes in resources, events that occur on-site and emergencies are all common. AI needs to have the ability to react quickly to these events and to remain effective. AI needs to handle real-time data and adjust accordingly. This data also needs a way of being inputted into the AI system.
Conclusion
Artificial intelligence shows great potential in being able to improve the role of a construction planner. However, it is not ready or capable of replacing human judgement and expertise in this role - at least in its current forms. The use of AI in construction planning could help mitigate risks, enhance efficiency, and provide valuable insights. This will be an interesting area of development over the coming years.
In my opinion, a construction project still needs planners today and will for a while. Planners make difficult judgments, take stakeholder preferences into account, and adjust to rapidly changing project environments. On a building site, AI is incapable of negotiating and engaging with other humans, at least for now. But we may see AI playing a supporting role in construction planning very soon.
If you are looking to develop your skill set, or perhaps trying to avoid a robot taking your job, take a look at our online e-courses here.