The construction industry is no stranger to tackling uncertainty in its supply chain. The global pandemic, war in Ukraine and other places, Brexit and the impact of climate change have all taken their toll on the cost of both materials and resources. Each of these has had an impact on the cost of construction.
More recently we’ve seen the announcement by President Trump in the USA that tariffs will be imposed upon various countries around the globe. The impact of these is still yet to be fully understood. However, predictions have ranged from a massive drop in the cost of steel as China tries to rid itself of an oversupply it cannot manage, to a huge increase in the cost of steel as markets tackle uncertainty!
But what should you do, if you’re a contractor? How can you manage the risk of cost uncertainty resulting from issues affecting your supply chain?
The Contract
Of course, we would say the contract is the first place to start. For a QS it’s always the starting point. What does your contract say about price and cost fluctuations? Check the contract and identify what it says. Contracts are not designed to be easy to get out of. If you have a fixed price contract then it’s unfortunately probable that the risk will land with you.
However, all is not lost. The CLC recommend developing a relationship with other parties to the contract and working together to tackle challenges collaboratively. Ultimately, it’s in nobody’s interest to see a project fail or a company become insolvent as a result of rigidity in contract terms. So, consider attempting a negotiation if possible. Openness and honesty should lead to a better chance of success. The old adage may be appropriate: a problem shared is a problem halved.
Fluctuation Clauses
Many contracts will include an option or a clause to help tackle issues of cost fluctuation. It may be that your contract already has such a provision. Again, check the contract and identify what is in there and what is not. This useful article from Helen Johnson of CMS gives some helpful advice around what to look for and how to make the most of such provisions. It also gives some ideas on how to use pricing indices to help manage fluctuations proactively.
The ProActive Approach
We have seen clients successfully tackle pricing and material issues through their own supply chain negotiations. An experienced QS may have a strong relationship with certain suppliers and may be able to negotiate directly with a supplier for particular materials. Using a trusted advisor or QS practice could help to deliver better costs without the need to resort to the contract.
Records…
As always, we’d advise keeping good records. Understanding the costs and getting an accurate idea of change will be crucial to any negotiation and any adjustment in cost. Without good records it will be difficult to successfully negotiate any kind of adjustment, so do ensure your records are up to date, well-ordered and carefully managed.
And as always, if you need help with this or any other issue, get in touch and we or our network of construction and legal advisors will be happy to help with anything we can.
