Materials and labour shortages – Builders’ workloads are at the highest level in over a decade but the rising cost of materials, material shortages and a lack of workers pose a major threat to the UK’s construction sector. Construction output is falling as a result of these material price increases and skills shortages; restricting smaller builders’ ability to recover from the pandemic.  The Federation of Master Builders (FMB) has commented in response to the release of Office of National Statistics (ONS) construction output data.

Brian Berry, Chief Executive of the FMB, said:

“While it’s brilliant to see small, local building companies and sole traders bouncing back from the difficulties of 2020, record workloads and enquires are bringing significant challenges. An extraordinary 98% of small builders now face rising prices for building materials, with the same number expecting this to continue into the autumn. Half of those who responded to our survey are struggling to hire a carpenter or a bricklayer. Without these fundamental inputs, how can Britain build back better?”

Following a 24-year high in June, July’s dip in IHS/Cips index is widely blamed on ‘Brexit friction’. A combination of materials supply problems, labour shortages and steep rises in purchasing prices contributed to the ease in growth and were widely noted as a catalyst for the slowdown. Total construction new orders grew by 18% in the second quarter compared with the January to March first quarter period. The problems lie with the scarcity of some materials, and also the lack of reliable delivery times. In simple economics, it costs manufacturers more to get it over here with tariffs that they have to pay that they didn’t have to pay before, supply and demand means that wholesalers and building product suppliers can charge more, so here lies the problem. The same applies to labour shortages. A lot of European workers went home at the beginning of the year and cannot return if they even if they wanted to because they’re not allowed to work here.

The effect that all this has on developers and building contractors is worrying. These companies will contract with a building owner or a client, or an employer for a certain amount of money to do a certain amount of work in a certain amount of time.

If they enter into contracts, and then subsequently find that the price their price is too low, there is no mechanism to allow them to increase their costs, because the contract would say that the job had been under-priced. If the price of timber or windows has doubled, and it’s beyond the contractor’s control, a client might agree to accept the cost, but if the two parties don’t agree, the contractor may see no alternative than to give termination notice of the contract, or simply walk away.

On projects that are currently running, this will look like unexpected price rises and delays because a contractor cannot find labour. A client could allow the extension of time in the contract, but there is no clause to say it is allowable because of a shortage of labour. A contractor can’t claim an extension of time. There has to be an agreement understanding the situation at the moment so that existing contracts don’t come to a grinding halt if the two parties can’t agree.

Another huge issue for developers is the implications for funding. Often a large proportion of their project has funding. Depending on contingencies within agreements, the lender becomes involved, so it’s crucial that there is an open dialogue with all stakeholders.

A solution would be to introduce fluctuation clauses into the contract that allows for an increase or decrease in prices for longer-term projects. It seems to me that this may have to happen more often for smaller domestic projects. If you are spending £60k on your (London) extension for example, and see a 10-20% cost hike, that’s quite significant!

If you’re using a contract administrator, like an architect or a quantity surveyor or project manager, they probably use a JCT minor works contract.

There are fluctuation clauses in D&B and Standard JCT contracts but not in Intermediate and Minor Works – which are used on most SME developments. Although both Employers and Contractors will have no appetite to construct bespoke fluctuation clauses, and the contract administrator to evaluate and determine them, my advice is to at least discuss a working method of including a fluctuation method into these smaller contracts. It is important for developers to put an adequate contingency in place and have a realistic and open dialogue with funders about the very real likelihoods of upward costs even during small projects.

👉👉 Please give me call/email if you’d like to speak about how to protect your project.👈👈

This summary of fluctuation clauses from Designing Buildings Wiki ( ) is a useful aid. “Fluctuation provisions in construction contracts provide a mechanism for dealing with the effects of inflation, which on large projects lasting several years can be very significant. On smaller projects, the contractor will be expected to take inflation into account when calculating their price (a firm price). On larger projects, the contractor may be asked to tender based on current prices (prices at an agreed base date) and then the contract makes provisions for the contractor to be reimbursed for price changes to specified items over the duration of the project (a fluctuating price). 💡 Most minor or intermediate contracts do not have this provision included.

Materials and labour shortages Fluctuation clauses in contracts may allow for:

  • Changes in taxation.
  • Changes in the cost of labour, transport and materials (sometimes referred to as ‘escalation’).
  • Increases in head office or administrative costs.

Generally, the contractor is not entitled to fluctuations after the completion date. The number of fluctuations may be calculated from nationally published price indices (for example Joint Contracts Tribunal (JCT) bulletins or public records) rather than calculating actual cost increases which could be very time-consuming.

Payment calculations are then based on a project programme for activity and a payment chart against the programme resulting in a cash flow projection. Quarterly percentage assessments of inflation are then added to the projected figures allowing for price fluctuation. If industry-negotiated labour rates are known in advance or a particular commodity such as steel is subject to spiralling price rises, additional allowances may come into play.”

There are three principal headings under which the adjustment for fluctuations might be considered:

  1. Contribution, levy and tax: the contract sum is usually based on the normal on-costs payable by the contractor by virtue of their status as an ‘employer’ of people. This would include things like taxes, National Insurance and other forms of excise duties and statutory contributions. Where the contract permits, the contract sum may be adjusted for changes in the rates or amounts at which these taxes or duties are paid, or in certain circumstances where new taxes are introduced, or old ones discontinued. 💡 This is unlikely to affect smaller contracts
  2. Labour and materials cost: the contract sum is based on the cost to the contractor of labour and materials current at a specific moment in time. (This is sometimes referred to as the ‘base date’.) Where the contract permits, the contract sum may be adjusted for actual changes in these prices. 💡 This is what we are talking about here.
  3. Formula adjustment: essentially a ‘hybrid’ where, instead of using the actual increases in labour, materials and equipment, the contract stipulates a formula, so that the contract sum may be adjusted, by applying the formula with a series of indices to calculate the increase or decrease for the relevant part of the work. 💡 This is far more complicated than ‘b)’ and not relevant for minor or intermediate contracts.

The risk of fluctuating prices can be dealt with as follows:

  • contractor to price the risk (a fixed or firm price contract); or
  • allow provision for contractor to recover full or limited fluctuations on certain prices (a fluctuating price contract).

JCT Design & Build, and Standard contracts can include fluctuation clauses, but the JCT Intermediate contract only allows for fluctuations when named sub-contractors are being used i.e: only the named subcontractor’s prices can fluctuate. The JCT Minor Works contract has no such clauses.

Please give me a call/email if you’d like to speak about how to protect your project, click here

We work with developers and landowners to maximise the potential of their sites and increase their ROI. The developments range from 9 units to upwards of 50 units and often include areas of other uses such as commercial, retail, and F&B. We have excellent working relationships with a range of trusted consultants and suppliers and can advise on all aspects of these developments; from feasibility stage through to completion. We have developed an efficient and accurate site viability programme to assist developers and landowners evaluate their sites and this is offered at feasibility stage.


RICS Guidance Note: Fluctuations (1st Edition, August 2016)

Designing Buildings Wiki

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