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Don't let fixed price contracts ruin your business profitability

The past two years have seen unprecedented inflation in the prices of construction materials and increased labour costs due to a shortage of skilled people across the industry. Now the sector is having to take another hit with the end to the use of rebated red diesel or rebated biofuels, such as Hydrotreated Vegetable Oil (HVO), which took effect from 1st April.

This inflation is not so much of an issue where the contract allows for fluctuations in costs, but unfortunately the impact can be severe for contractors and sub-contractors, particularly for those who are working in fixed price contracts.

In fact, a recent report by Construction Enquirer made clear the stark consequences of how fixed price contracts can harm a business. GMI Construction's latest figures revealed that its profits for the last 12 months fell to £1m from £2.9m previously, which it puts down to all its projects being fixed price.

So what's the solution for contractors and sub-contractors?

Let's start with the ending of the red diesel benefit. The deadline for its cancellation was announced in the budget of March 2020 - so any contracts entered into after then should have been priced to take account of the increase in the cost of diesel that we are seeing now.

If your contract was signed prior to 11 March 2020, you may be able to claim (depending on your contract's wording) that the red diesel change could constitute a change in law. If your contract was agreed after that date, it could be regarded as "foreseeable" and there would legitimately be an expectation by the employer that the contractor or sub-contractor priced the contract to reflect this upcoming change in law.

Check your contract to see where you stand. Doing nothing will inevitably impact your business in some way, particularly when you consider that the cost of fuel is at an all-time high.

More broadly, if you are entering into fixed price contracts, make sure you agree with the employer satisfactory provisions for variations and for fluctuations in supply chain prices and labour costs. Failure to do so will usually result in the contractor or sub-contractor bearing the brunt - just like GMI has.

To help contractors and sub-contractors minimise the risk, Quantum CPM provides a service which will ensure any unfavourable terms are flagged up before the contract is signed. Our Contract Vetting service will give you the information you need to challenge the terms, with the intention of negotiating a more agreeable contract, or make you aware of what you are entering into.

It is a low cost service that could save you a fortune in the long run, giving you access to legally trained contract specialists who can provide professional advice at a level most businesses will already seek from accountants and solicitors.

To find out more please contact us.