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Global Vantage: Inflation, Inflation, Inflation – London tops list of world’s most expensive places to build

April 2022
Antony Smith and James Hughes

Arcadis has released its latest International Construction Costs Index (the “Index”), which ranks the costs of construction in 100 locations around world. London takes top spot, with a host of other cities in the UK and Ireland – including Bristol and Dublin – also occupying the top 25.

Inflation, rising materials prices and pressures on logistics networks are all suggested as factors which have contributed to increasing costs in the construction sector – and it isn’t just at home where costs are going up. The Index highlights an upwards trend for prices across most international cities. This includes those in the US, which recorded some of the highest levels of inflation in the Index. Whilst costs in Asia seem to have remained more stable, the long-term outlook is less certain, with markets such as Hong Kong vulnerable to disruption from restrictions on imports from Mainland China and elevated materials prices. Similarly, Australia and the Middle East appear to have managed to keep costs down for the time being, but that has, at least in part, been driven by weaker than expected demand. Should workload return, a strain on existing resources could lead to the type of inflationary pressure that has already been seen in other regions.

With the above in mind, it is vital that contractors / consultants ensure that construction contracts include appropriate drafting that limits their exposure to rising costs.

For longer term projects, this might include using a price adjustment clause. This can allow parties to agree that the price of the goods / services that they are to supply under the contract will increase (or decrease) at specified intervals in accordance with a general / industry benchmark, or by a fixed percentage / sum. The benchmark or fixed percentage / sum against which the contract sum will be varied will need to be considered carefully, as well as the frequency of any adjustments and whether any increase / decrease should be capped. However, some of this process may be streamlined through the use of industry standard forms, For example, NEC4 Secondary Option X1 is a price adjustment for inflation clause, and there are also fluctuation provisions for use in JCT contracts.

Another way of helping mitigate financial risks in contracts is to agree a limit on liability. With costs sky-high, individual contractors / consultants will not want to be left with the lion’s share (or all) of the bill, particularly if they have only contributed to a relatively small proportion of the works. Generally, any limit of liability should be on an aggregate basis, with matters falling outside of the limit of liability restricted (e.g. to only to those matters which cannot be excluded by law). It may also be appropriate / necessary to include sub-caps on liability (e.g. in relation to fire safety and/or cladding risks).

It is also important that contracts offer flexibility. For example, where a contract requires the contractor / consultant to procure goods / materials, provisions which limit their ability to choose the supplier should generally be avoided. Similarly, it may be helpful for contractors / consultants to suggest wording that allows for the use of materials which need only be similar / comparable to those specified in the contract, to help mitigate the impact of the costs of a particular product increasing. If costs-savings are realised by way of using alternative suppliers and/or products (or any other methods of costs reduction), then consider also whether the contract includes (or should include) an ‘incentives’ provision, which could provide for payment of an additional fee in recognition of any associated benefit(s) to the client. Capitalising on expertise gained from other projects could be a useful way of taking advantage of these types of provision, although any restrictions on using know-how etc. across projects will need to be properly followed.

To summarise, whilst rising costs look set to bring (or are already causing) difficulties for contractors / consultants across many international markets in the coming weeks and months, with careful contract drafting and proper risk allocation, they can be managed.

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