Material and labour shortages in the construction industry: how can parties manage the risk?

In a previous article, we discussed shortages of materials in the construction industry and the potential risk this poses to parties to construction contracts. Here, we consider the current situation and the contractual mechanisms available to parties to help mitigate the risks.

What is the current situation?

On 30 March, the Construction Leadership Council (CLC) issued a statement suggesting the supply of construction materials remains stable with good stocks and availability of most products – including steel. Nevertheless, supply challenges continue to impact some construction materials, including bricks, aircrete blocks, roof tiles and gas boilers.  

According to the statement, price inflation remains “the major concern”. Price increases of 5-10% have already been announced by many manufacturers this year, and the CLC highlights reports of suppliers only holding quotes for tender prices for 24 hours, resulting in uncertainty for contractors and subsequent hesitancy. 

Furthermore, the shortages are not confined solely to materials. Labour shortages post-Brexit continue to impact the construction industry and according to the CLC “show few signs of abating”.

Why are we experiencing shortages?

The cause of these shortages is multifactorial. As may be expected, it is partly driven by the impact of the Covid-19 pandemic. However, other factors have conflated to exacerbate the situation, including supply issues linked to Brexit, a global shortage of shipping containers, and the consequences of Russia’s invasion of Ukraine.

Whilst Ukraine, Belarus and Russia accounted for only 1.25% of building products imported into the UK last year; the CLC is actively monitoring the indirect impact of sanctions on Russian steel and its impact on the upstream EU market. Shortages on the continent could still have a knock-on effect in the UK market. 

Labour shortages which were prevalent pre-pandemic and Brexit are also now more acute, owing to workers returning to the EU and the increasing cost of employing migrant workers. The CLC also highlights that President Zelensky’s calls for Ukrainians to return to the country to fight could lead to a severe workforce shortage in the shipping industry, which could create further delays in the supply chain.

How can the risks posed to construction projects be managed?

It is in the interests of all parties to ensure the risk of delays and shortages are appropriately managed. For employers, the main risks are delays to completion and the solvency of the contractors. For contractors, the risks include exposure to rising prices and liability under LADs as a result of delays. 

Fortunately, there are a number of contractual mechanisms that parties can use to mitigate and manage such risks. These include:

1. Adopting price fluctuation provisions – whilst these may be heavily resisted by employers, they can help to keep a project on track by protecting cash flow and reducing the risk of contractor insolvency by enabling contractors to recover additional costs in certain circumstances. 
2. Provisions allowing contractor’s to use alternative materials in the event those specified in the contract are not obtainable – this may be the most attractive option where the choice is between delays or alternative materials.  
3. Extension of time rights.

There are also important practical measures to be taken. Early engagement with suppliers and maintaining good communication between the parties will be key, as well as keeping records of any shortages or price increases, including the cause of them and any impact on time and money.  

Parties who have already entered into construction contracts need to carefully contemplate the terms of their contract, and the best practical methods available for mitigating risks. If they have not included some or all of the provisions outlined above, they may need to consider renegotiation or, in extreme circumstances, even require termination of the contract. 

Whilst employers will understandably be keen to minimise their exposure to increased payments under a contract, it is in no one’s best interest for a contractor to become insolvent mid-way through a project. In such circumstances the employer would be forced to source a replacement contractor; which would invariably lead to payment of increased costs in any event, and also cause delays to the project.

If you require any advice on issues relating to delays and increased costs of materials on your project please do get in touch.