Last edited 13 Jan 2017

Fluctuations in construction contracts

Fluctuations provisions in construction contracts provide a mechanism for dealing with the effects of inflation, which on large projects lasting several years can be very significant. On smaller projects, the contractor will be expected to take inflation into account when calculating their price (a firm price). On 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 (sometimes referred to as 'escalation').
  • 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 or public records) rather than calculating actual cost increases which could 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 are then added to the projected figures 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.