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Post-Brexit construction contracts...

December 2016 - Issue 88

Consideration of the inclusion of price fluctuation clauses

It is still widely unknown as to whether the UK is heading for a hard or soft Brexit. Anticipated likely consequences of Brexit include the possibility of restrictions on the free movement of people together with limited access to the EU’s internal market. Therefore, it is best to be prepared as increased costs in the construction industry are foreseen due to:

Currently, the market is dominated by lump sum contracts priced on a largely “fixed price” basis, which, with consideration of the above, may cause contractors some problems. This is because under this type of contract there is not much room to claim any extra money if the costs do unfortunately rise. Although contractor relief is available, it is rare that economic hardship will be enough to trigger this.

A way of dealing with this uncertain risk, until the UK officially leaves the EU in around March 2019, is to consider including a price fluctuation provision. A number of industry contracts already contain either a price fluctuation clause (FIDIC Yellow Book cl. 13.8) or list the price fluctuation clause as optional (e.g. JCT D&B 2011). Previously, it was usual for most parties to remove this type of clause, as low inflation meant costs were stable or any increases could be foreseen. We are now seeing movement away from this routine position.

Price fluctuation clauses are very flexible, usually there will be a pre-agreed method to work out price as costs increase or decrease for example, specifying which published indices will be used to make the necessary adjustments or allowing relief if the cost for material or labour increases. However, it is vital to consider seeking specialist advice to ensure the specifics of each project are well thought out and to ensure all parties are clear about the effect of a price fluctuation clause.
 

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