With the continuing impact of factors such as Brexit, the war in Ukraine and the COVID-19 pandemic, construction costs have and indeed continue to rise significantly. This has led to all stakeholders in the construction industry becoming far more acutely aware of the impact of inflation on project delivery than has traditionally been the case in the past.
Up until recently, inflationary risk was considered to be within the remit of the contractor and therefore would not be considered in great detail. However with the onset of inflationary pressures, it has become a hotly negotiated point within contract agreements as contractors are no longer willing to (or simply can’t afford to) solely take the burden of the potentially significant rise in cost.
The sorts of approaches to inflation that we have seen include:
- Negotiation on inflation risk on a product by product basis; with detailed due diligence on the supply chain and greater use of open book price recording;
- Incorporation of various indices into the contract and a risk share mechanism;
- Employer’s expressly buying out the inflation risk for an agreed sum;
- Inflation risk being assumed by the contractor up to a specific value or up to a specific point in time, after which point the inflation risk is shared between the parties;
- Different approaches to inflation being taken on materials as compared to labour;
- Employer’s simply having to take the inflation risk in its entirety.
One thing for certain is that the old approach of simply deleting Clause 36 of the RIAI (which was the clause that allowed contractors to recover inflation costs) is no longer acceptable on the vast majority of projects.
In that vein, it is worth noting that on those projects where inflation risk has not been properly considered and allocated, it is often the case that the parties have to deal with inflation at a subsequent point in time as it is simply not practical for contractors to bear all of the risk. This does increase the likelihood of disputes arising.
It had been hoped that issues with inflation would have eased by now. However, that has not happened. In fact, the problems with inflation have become so pronounced that the public works forms of contract are being further amended to allow contractors greater relief for inflation. The amendments to the public works forms of contract are due to be published shortly and these will, no doubt, be influential when negotiating private sector contracts.
For further information in relation to this topic or any related matter, please contact Conor Owens, Partner or Siomha Connolly, Solicitor or your usual contact on the Construction & Engineering Team.