As countries around the world counter the economic effects of COVID-19 by undertaking infrastructure projects and stimulating domestic construction, this has impacted global construction markets by creating:
To tackle these issues requires a proactive approach from Contractors and understanding by Principals in how best to deal with these issues.
At present the Australian economy is experiencing a shortage of several building materials, which include:
The reasons for these shortages are well documented and are expected to continue for the medium term. ABC News has reported that while domestic timber production is up 17%, there are major delays and soaring costs up and down the building supply chain due to a global timber shortage.
Some strategies to manage a shortage in construction materials include:
To combat the challenges associated with price increases in various construction materials some options are for Contractors to:
In terms of managing material costs the easiest option for a Contractor is to nominate items expected to be in short supply as provisional sum items or alternatively to contract on an open book ‘cost reimbursable’ basis. However, this will leave the Principal exposed to price fluctuations which may exceed its project budget. For residential projects which are subject to bank finance, this is unlikely to be acceptable.
Whilst bulk ordering materials and storing them off site may seem drastic, it is an option that may ultimately prove the most economic for Contractors and Principals in sizable projects. This option will generally require the Principal to agree to facilitate payment for materials to be stored off site before they are incorporated into the works. If material costs in several months’ time have substantially increased then the additional storage and security costs may prove a worthwhile investment by a Principal.
It needs to be kept in mind that the application of the above options may be limited by consumer laws. In Victoria for example, the Domestic Building Contracts Act 1995 (Vic) prevents cost plus contracts that are less than $1 million, and does not permit the use of cost escalation clauses in contracts that are less than $500,000.
If a project is suspended due a material shortage then the Contract needs to address how to deal with the time and cost consequences of this problem. When considering the cost consequences this includes cost consequences of mobilisation, remobilisation and demobilisation.
Should you have any queries or require any further information regarding strategies to deal with construction material supply issues, get in touch with the Gadens team.
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Daniel Middleton, Partner
Adrian Clifford, Special Counsel
Eylem Onal, Lawyer