Last edited 17 Dec 2015

Fluctuations in construction contracts

Fluctuations are a way of dealing with inflation on large projects that may last for several years. On smaller projects, the contractor will be considered to have taken into account inflation when calculating their price (a firm price). However, on the larger projects, the contractor may be asked to tender based on current prices (prices at an agreed base date) and then the contract makes provisions for the contractor to be reimbursed for price changes to specified items over the duration of the project (a fluctuating price).

Fluctuation clauses in contracts may allow for:

  • Changes in taxation.
  • Changes in the cost of labour, transport and materials.
  • Increases in head office or administrative costs.

Generally the contractor is not entitled to fluctuations after the completion date.

The amount of fluctuations may be calculated from nationally published price indices (for example Joint Contracts Tribunal (JCT) bulletins) rather that calculating actual cost increases which would be very time consuming.

Payment calculations are then based on a project programme for activity and a payment chart against the programme resulting in a cash flow projection. Quarterly percentage assessments of inflation for labour and materials are then added to the projected figures thus allowing for price fluctuation. If industry negotiated labour rates are known in advance or a particular commodity such as steel is subject to spiralling price rises, additional allowances may come into play.

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[edit] External references

  • Guide to DB05, Sarah Lupton, p101. Available from RIBA bookshop.
  • Architect's Legal Handbook, Ninth edition, Anthony Speaight and Gregory Stone, Architectural Press 2010, Page 200. Available from RIBA bookshop.
  • Estimating and Tendering for Construction Work, Martin Brook, Third Edition, Elsevier Butterworth Heinemann, 2004, P185. Available from RICS books.