Where would you rather eat if you were on a budget? At a fixed price ‘all you can eat’ buffet or in a diner where the menus don’t come with any prices? Are you the sort of person who prefers a fixed rate mortgage, a tracker or a variable rate? With UK inflation reaching double figures, cost uncertainty is now a daily fact of life. But how does that translate into contracts?
Take on Less Certainty
“I can give you my price today… but tomorrow it might be different.” Budgeting on longer-term projects, such as construction and engineering projects, is proving nearly impossible at the moment due to cost uncertainty. Stable prices have meant we have ignored the options in standard form contracts to allow the parties to share the impact of cost increases fairly.
What are your risks and what are the alternatives?
If you’ve signed a fixed price contract, the risk is the contractor has to absorb all those price increases, most of which are outside its control. Your contract may allow the contractor to ask for more money or to propose changes to meet the project’s outcomes with a different scope. Whichever applies, you both need to start a conversation about the options. Clients rarely want to force their contractors into insolvency, but few have a ‘pot of gold’ to pay for unlimited cost increases.
If you’ve not yet signed a contract:
- check the validity of estimates or quotes and any qualifications on tender prices.
- discuss fixing the price for specific elements of the scope (where prices are stable), and leaving the rest as prime cost, provisional sums or cost-plus (less cost certainty at the start).
- include a clear mechanism for increasing the contractor’s input costs against estimated/base date prices or using a price index.
- if most of the input costs are changing rapidly, consider moving to cost-plus (or target cost).
- if there are specific materials that are fluctuating wildly in price, agree that the client can buy them direct and free issue them to the contractor.
- where possible, join a trade association which allows members to bulk buy in advance.
If you don’t agree any price, or a clear way of determining the price, your contract may not have the certainty it needs to be legally binding. A contract can be enforced even if payment is for a ‘reasonable sum’, although it may take a tribunal to determine what is reasonable (which is not great for invoicing purposes!).