Contracts tend to consist of three main components: labour, materials, and profit. The prices of materials are expected to increase significantly because of the conflict in Ukraine. Those with fixed contracts, with a significant materials component, may have to choose between: (i) finishing the contract and going bankrupt, (ii) renegotiating the contract, or (iii) terminating the contract.
A construction contract normally has a significant materials component – most of the materials tend to become the built product. If the increased cost of materials is the same as the Contractor’s profit, then the Contractor may break even. If it exceeds the profit, the Contractor may make a loss. If the Contractor has multiple projects, then the losses may accumulate, leading to bankruptcy.
BUY MATERIALS NOW.
A Developer (eg home owner) who has a building contract with a Contractor, needs to discuss the foreseen price increases with their bank and contractor immediately. The risk of increased costs may be avoided if all the building’s materials are purchased now – before their prices increase.
A fair and low-risk method of purchasing all the materials now, is for the Developers to request their bankers to release all the funds for materials as banker’s checks, written directly to the material suppliers.
If the Developers’ banks are uncooperative, then the Contractors should negotiate a 6-month loan or overdraft facility with their bank, for the sole use of purchasing the building materials.
If the Developers’ and Contractors’ banks are uncooperative, then both Developer and Contractor should attempt to negotiate the purchase of the materials, with delayed (perhaps 3-month) payment terms. This would require the Contractor to take the profit component of the contract on the final payment from the Developer, and to work without delay.
Where contracts have not yet been signed, then an advanced payment may be negotiated to purchase all the materials at the start of the contact. This money may be paid directly to the material suppliers, to secure the materials for the Developer’s project, and reduce the risk of them being used on other projects the Contractor may be working on.
It should be noted that existing contracts may be amended, once the amendment is agreed by both parties. The aims of the contract should be the timely completion of the building, at the contract price. Given the likely price-increase risks, which were not anticipated before the war, both sides should be willing to negotiate any amendments to the contract that would facilitate achieving those aims in the current environment.
This advice is especially relevant to projects that are funded by the Government. If material costs increase, then taxes will likely be raised to pay for the increases. However, this increase is only relevant to projects that were procured through competitive tendering.
For no-bid contracts given to political supporters, Barbadian residents have already overpaid many times over on the materials – therefore, no increases of those contracts should be entertained.