When did we fall out of love with ‘fluctuations’?

21/11/19
Fluctuation

When was the last time that you saw a contract for construction works which included a clause enabling the contractor to recover the increased costs of carrying out the works, or to use the correct, but seldom used term, fluctuations?

The first project I was involved with as a trainee quantity surveyor was on what was called ‘traditional fluctuations’.  The contractor and employer agreed a basic price list for materials incorporated in the permanent works and a basic hourly rate for trades and operatives, these were then the basis against which the contractor was able to claim actual price increases against material purchases and wage promulgations.  The next two projects I worked on cost increases were recovered on formula price index basis.  Since then I have not seen a contract that provided for fluctuations recovery and that is over a period stretching, regrettably over several decades.

A feature of many of the projects that we become involved in, either as an adjudicator or as consultants, is an argument over losses incurred by, usually, main contractors against their tender sum.  Although these losses may be attributable to a number of causes, often it is because the project simply cost more to deliver than the contractor thought that it would at the outset.

Contract procurement practices have changed over time, as has the practices of contracting and working methods.  From the Employer’s perspective the predominant focus is to achieve price certainty and a comprehensive risk transfer.  Whilst this may be perceived as being advantageous at the start of the project it may mask issues which ultimately emerge up and down the supply chain, which may affect the delivery or final cost of the project leading to disputes and company failures.  For their part main contractors have lost the skills to understand and manage cost and value, with a preoccupation on retrospective reporting and analysis.

The JCT 2016 standard contract suites still make reference to fluctuation options A[1] , B [2]and C[3] however only option A is included as a Schedule, options B & C being available separately.  I may be wrong, but I suggest that this might be because these options are used so infrequently that the publishers do not consider that it is worthwhile including the text of them with the published conditions.

In the current climate of uncertainty and potential for volatility in construction cost inflation it might be prudent for contractors to begin to insist on fluctuation clauses being incorporated into contracts that they are offered, particularly on large value and longer programme duration schemes.  The issue will then be whether the contract administrators’ and contractors’ personnel will have the skills to operate them.

Jason Farnell,

 Managing Director

 

[1] Contribution levy and tax fluctuations

[2] Traditional full fluctuations in labour and material costs

[3] Price adjustment formulae