In this article, I will be explaining what fluctuation provisions are, how they affect construction contracts and some of the key things you need to know.
What are fluctuation provisions?
Fluctuation provisions are clauses in construction contracts that allow the contract sum to be adjusted to take account of changes to the price of labour, materials and other miscellaneous costs throughout the duration of a construction project. You may also see them described elsewhere as “variation of price”, “variation in cost”, “rise and fall” or “cost-adjustment”.
The use of fluctuation provisions has been an option in standard-form contracts, however, they have been strongly resisted by employers and have rarely been used in practice. But, due to the current state of the construction market, and the economy in general, the use of fluctuation provisions in building contracts has increased.
How do fluctuation provisions affect construction contracts?
In many construction contracts where fluctuation provisions have not been used, the risk of price rises are borne primarily by the Contractor. At the time of tender, the Employer and the Contractor agree a contract for a certain price. If the materials or labour required then go up in price, the Contractor is the one who suffers. So, the aim of fluctuation provisions is to transfer some or all of the effect of price changes from Contractor to Employer by adjustment of the final contract price.
It’s important to note that different contracts tend to deal with fluctuation provisions in different ways. For example, JCT includes this in the Contract Particulars, whereas NEC has a Secondary Option X1 that would need to be selected when the contract documents are assembled.
Do you need fluctuation provisions?
Due to changes in energy, labour and material costs, there has been a lot of uncertainty for contractors when it comes to setting a lump sum price to complete a project. As a result of this, contractors have been more dependent on the inclusion of fluctuation provisions. Without this, they either cannot tender for the project or would need to include a higher tender price to address the risks involved. As fluctuation provisions are becoming more common, it is now an issue that both parties need to consider. However, it would have previously been accepted by both parties that no such provisions would be incorporated.
When do you not need fluctuation provisions?
It is important to remember that it is not always appropriate to include fluctuation clauses. Whether or not it is appropriate to include fluctuation provisions, will depend on a number of issues – the type of contract used, the nature and duration of the project, the risks involved in the project, the materials being used and lender requirements.
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