Inflation within the UK Construction Industry and Fluctuation Provisions in Building Contracts
by Sam Ansell, Quantity Surveyor
The UK construction industry is currently enduring generational levels of inflation that most industry professionals will likely not have faced in their working life. With the cost of materials and labour continuing to escalate reaching a 40 year high, it is evident that this issue needs to be addressed.
Fluctuation Provisions are optional clauses within most forms of construction contracts which enable the contract sum to be adjusted in the event of changes to costs during the contract period. They offer a ‘bail out’ to contractors signing up to fixed price lump sum contracts during periods of volatile inflation. Industry professionals must explore this method of dealing with inflation, as contractors have been seen to move away from single stage procurement and competitive tender processes due to prolonged market instability.
In recent years, Fluctuation Provisions have been largely overlooked within the industry due to long periods of low inflationary risk. Following the UK construction industry’s recovery from the 2008 Global Financial Crisis, inflation has been mostly stable and predictable without much cause for concern. In the ten-year period between 2006 and 2015, the average rate of annual inflation was less than 3%. However, since 2016 there have been several factors which have greatly impacted cost inflation. Largely due to Brexit and COVID, international trade has increased in difficulty and the availability of skilled labour has significantly reduced. According to the BCIS Site Wage Cost Index, within the UK construction industry between the first quarters of 2021 and 2022, skilled labour wages increased by almost 20%. In addition to Brexit and COVID, international tensions and conflict have been making trade deals increasingly challenging. Materials such as timber, OSB, steel, and fuel seem to be most radically affected by the resulting inflationary pressures.
The purpose of Fluctuation Provisions is to provide compensation by adjusting the contract sum in the event of inflation, therefore the reasons for their disuse are evident. During periods of such stability, there is no demand for such a mechanism within building contracts. The recent uncertainty of cost and risk of inflation must be cause for the industry to pay Fluctuation Provisions renewed consideration, as it is no longer reasonable for the risk of inflation to be solely borne by the contractor. Fluctuation Provisions could provide contractors with the safety net they require to embark on single stage tenders as they once would, as opposed to including large contingencies for unpredictable market volatility within their bids.