Rising material costs: the contractor’s problem alone?
Pandemic. War in Ukraine. Rising energy and transport costs. The current world situation is making itself felt in the construction sector. As a contractor, do you have to simply take the hit, or are there ways you can pass on some of the increasing costs to your client?
Price adjustment clause
The price is an essential component of a contract and you can not just unilaterally change the price when the contract is in progress.
In principle, you can only make this adjustment if the contract includes a price adjustment clause. Although there is contractual freedom between companies, this clause must meet various criteria to be valid. First and foremost, the price must be determined or possible to determine, even if a price adjustment clause applies. Simply stating “the contractor can adjust prices at any time in accordance with the economic situation” is not a valid clause. The client cannot determine from this how the price will change.
A valid clause must also meet the following requirements:
- +The price adjustment must be bidirectional: prices must be able to reduce as well as increase.
- +Objective parameters must be used and the contractor must state clearly which parameters may affect the price.
- +The price adjustment can only be applied to a maximum of 80% of the originally agreed price.
- +Only the real costs may be taken into account and these must represent their actual share in the cost price.
- +The price adjustment cannot simply be coupled to a fixed index such as the consumer price index or health index.
Often, the original price is adjusted as a function of material costs and personnel costs. A correction coefficient is applied based on an index specified in advance, such as the “Mercuriale” (officially: Index I 2021) or the reference hourly wages published by Agoria.
If the construction project is covered under the Breyne law, there is a specific price adjustment clause that must be applied. Namely, a distinction must be made between the price of the land and the price of the works. The price adjustment cannot be related to the price of the land. In addition, just as above, the price adjustment may only relate to 80% of the original price. Only the fluctuations in labour costs and in material prices can be used as parameters. Furthermore, adjustments to labour costs may cover a maximum of 50% of the price of the works.
Unforeseen circumstances
Does this mean that if you have not included a price adjustment clause, your hands are now tied? Well, not entirely. If you have not included a price adjustment clause and the work is being done for a fixed price, you can check whether your contract with your clients includes a clause for “unforeseen circumstances” or a “hardship clause”. Clauses of this type state that if unforeseen circumstances occur making performance of the contract significantly more difficult (but not impossible) for one of the parties – by comparison to the prevailing economic situation when the contract was signed – the parties will renegotiate the price for performance of the contract. However, to invoke a clause of this nature, the clause must have been included in the original contract.
Do you have questions about your ongoing contracts? Perhaps you would like to add an appropriate clause to future contracts? Get in touch with us at contact@vdl.be.
We base our advice on current legislation, interpretations and legal doctrine. This does not prevent the administration from being able to challenge it or to change existing interpretations.
