Nobody working in construction over the past few years can have failed notice price fluctuations and huge cost increases, particularly around materials. As project managers and surveyors we keep a close eye on the cost of our clients’ projects. It is our role to do our best to ensure the project delivered is the project commissioned, not only in terms of time and quality but also cost.
We have heard of suppliers who will only fix the price of materials for a few hours. Yet Employers will almost always want to manage the risk of cost over a project period which could be several months or years. These price fluctuations can be incredibly challenging. In some cases, it can be the difference between a successful project and a financial disaster.
So: What solutions are available then, to tackle these huge increases in cost, when very often we are required to commit to a project cost at the outset?
There are some contractual options available. Most of the main forms of construction contracts have a ‘fluctuation’ clause or option in them. This can allow for a price ‘index’ for an item that will allow for the fluctuation of that item over time. However, selecting the correct index is key to success. It’s important to bear in mind that price indices may work in either party’s favour over the course of a project.
Some other possible solutions include:
Here the Contractor works to the cost of the materials, plus a percentage or margin to cover profit and overheads/preliminaries. This, unfortunately, is unlikely to be popular with many Employers!
Allowing for a second stage of procurement spreads the risk across the project period. The contractor will be appointed to carry out the first stage of the works. They will then generally be appointed later for the second stage. At the second procurement point, an updated cost tender can be submitted. This in turn avoids committing to a fixed cost at the earliest stage.
It may be possible to place an order early, thereby fixing the price of the item. However, this may be an issue if delivery is then made and storage is needed. A project we know of in London, ended up storing 1000s of kitchens in a warehouse during the pandemic, just to ensure they could deliver them as required by the contract.
Alternative Specifications / Value Engineering:
This is a process we are very familiar with at Chawton Hill. Substituting identical or similar materials and supplies for those specified, by agreement with the employer can prove a very helpful solution. It helps with the challenge of materials that either escalate in cost or become unavailable. This was a technique we successfully employed on a recent project in Surrey.
Ultimately it may not be possible to do much about cost increases. But there are ways of mitigating the risk of the huge fluctuations we’ve seen in recent years. By using an experienced advisor with a strong network of suppliers and good industry knowledge, it’s possible to minimise risk. In some cases, it’s possible to completely avoid risks. If you need help ensuring you get the best possible value on your next project, get in touch today.