Rising construction costs : how best to mitigate the impact

Whilst AECOM’s recently published survey was based on figures from London contractors, it is clear that construction cost inflation is affecting projects across the whole country. Growth in our industry is slowing, but this is not reflected in prices, which are predicted to rise a further 7% in 2016. 

All parties in construction build in an element of risk protection against insolvency: with employer insolvency still a real and present danger, contractors continue to build in a margin to allow for this.  Add to this the increased costs of skilled sub-contractors brought on by the worrying lack of skilled tradesmen and women in the UK and we have a perfect storm for increased prices.

Employers will be keen to nail down contractors on cost as soon as possible and so the threat of inflation may see an acceleration in projects getting off the ground.  However, if procurement is rushed, details may be scant, causing contractors to tender higher prices rather than risk their profit margin.  One way to avoid this which is fair for all parties, is for employers to split the works into smaller packages, perhaps dealing with any demolition, strip out or remediation works first, whilst still finalising the details of the design and build (whether as “D&B” or a more traditional structure). 

In a similar vein, two-stage tenders can be useful not just for working up detailed design, but for carrying out a proper value engineering process on a project.  One particular client of ours is currently gearing up to use a JCT PCSA and D&B structure to put this into practice.  Two-stage tendering also has the advantage of fostering collaborative working as the contractor and employer work together from an early stage. 

Once “in contract”, employers still risk being the victim of construction cost inflation if they instruct variations to the works.  Whilst sometimes changes are unavoidable (and of course sometimes a contractor may propose a change that actually saves money), the general rule is that it is not just time = money, but change = money too!  It is vital for contractors and employers that change procedures in a contract are clearly drafted and properly operated.  Mistakes in either of these areas increase the chance of a final account dispute which is a cost that all parties will wish to avoid. 

 To learn more about variations and how to de-risk the process (for employers, contractors and sub-contractors alike), please join us at the seminars we are hosting in March and April, which are presented jointly by BPE and Hill International: /why-bpe/blog/2016/02/2016/02/construction-engineering-seminar-with-hill-international/

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.