Struggling with rising construction costs?  Learn how contractors can review existing construction contracts for fuel price relief, rise and fall clauses, and commercial solutions.

As global fuel markets remain volatile, the price of petroleum and diesel has surged.  This does not only impact commuters and freight transportation; it significantly inflates the cost of materials, heavy machinery operations, material production, and site logistics.  For construction professionals, this market instability creates a pressing need to review existing contracts to determine if price adjustments are possible.

In this article, we outline the critical steps for contractors to review their current contracts and assess potential entitlements.

1.  Identify Your Pricing Model

Prior to delving into the terms of the contract, it is important to understand your baseline exposure.

• Lump sum/fixed price: Generally, the price risk remains with the contractor.  Without an express adjustment mechanism, these contracts offer limited room for cost recovery unless a force majeure or other relief clause exists in the contract.
• Cost plus: Depending upon the cost-plus arrangement, this may allow the contractor flexibility in making claims for payment in that the actual cost plus margin is passed on directly to the principal.  This means that any actual costs incurred due to the increase in fuel prices may be claimed by the contractor.
• Schedule of Rates: Determine if your rates are fixed for the project duration or if they include built-in fuel adjustment mechanisms or whether you can increase your rates on a periodic basis.

2.  Review for “Rise and Fall” or Escalation Clauses

Check for specific clauses that link prices to market indices.

• Check for operability: If a clause exists, verify its triggers.  Ensure it covers your specific needs and is not restricted to materials that are not fuel-dependent.
• Identify exclusions: Some contracts (like lump sum contracts) explicitly state that the price is “firm and fixed”, which effectively ensures that the contract price will not be affected by external forces.

3.  Assess for any Entitlement to “Time” or “Money”

If there is no “rise and fall” or escalation clause which is operational, review the contract for other clauses which may give rise to an entitlement to more time to complete the works or services as a result of fuel shortages or the cessation of the supply of fuel (in the event that occurs), or money as a result of the price increase to fuel.

Examples of such clauses are set out below.

• Force majeure event: Depending upon the definition of a “force majeure event” under the contract, shortages in fuel or the complete cessation of the supply of fuel, may be considered a force majeure event.  However, it is worth noting that such clauses generally only provide relief as to time and not money, however it may give you an opportunity to renegotiate.
• Change in law: If, in the future, there is government intervention as a result of fuel shortages (for example, caps on how much fuel can be purchased or supplied), this may trigger the ability of the contractor to obtain relief for any additional costs incurred as a result of that change in law.
• Variation: In the event a variation is directed to undertake additional work, it is worth checking how that variation will be priced as, instead of being priced based on rates in the contract, it may be based on the actual cost incurred by the contractor.
• Extension of time regime: Depending upon the events for which a contractor is entitled to claim an extension of time, and provided all criteria are met (for example, the cause of delay affects activities on the critical path), the contractor may be entitled to claim an extension of time.  In the event an extension of time is granted, the contractor may also be entitled to claim delay damages, however this will be highly dependent on the contract.

4.  Notification Requirements

If it is determined by the contractor that it is entitled to make a claim under a clause of the contract, it is extremely important for the contractor to check how it may claim that entitlement, including any periods in which it is required to serve notices to be entitled to relief.

In some cases, a contractor may not be entitled to relief or to make any future claims in relation to the relief which the contractor was intending to claimed, if it fails to deliver a notice on time, which is known as a “time bar”.

5.  Explore Commercial Solutions

While the terms of a contract are important, it is also worth considering whether a commercial strategy can be pursued with the principal given that the increase in fuel prices is inherently out of the contractor’s and the principal’s control. A delay claim may allow you to negotiate other terms of the contract to ensure you to return to site earlier than anticipated.

Ultimately, construction contracts are designed to allocate risk, and in times of extreme volatility, the effectiveness of that allocation is put to the test.  If your contract lacks an automatic price adjustment mechanism, your legal pathway to recovery may be narrow.  Success in these scenarios therefore relies on the disciplined application of the contract, but also the ability to pursue commercial outcomes with the principal.

Mikaela Davis is a Senior Associate at Paradise Charnock Hing with over 6 years’ experience in construction law.  If you would like to learn more about your entitlements, either as a principal or a contractor, under any of your contracts currently on foot, please reach out to Mikaela via email at mikaela.davis@pch.law.