Material shortages: how can the construction industry cope?

From copper to steel, wood, aluminium, metal, electrical materials, insulation materials and precast concrete, there is currently a shortage in construction materials of unprecedented proportions. As a result, the price of raw materials has been rising steadily for months, and delayed deliveries have prevented construction sites from being completed on time. What are the causes of this global shortage? What can construction companies and builders do?

The latest Statec data is clear: the construction price index rose by 4.3% from October 2020 to April 2021. This is the highest half-yearly change since April 1992. Two trades in particular showed a higher increase than the index: roofing at 7.3% and building enclosures – which include windows, garage doors and façades – at 4.6%. 

A crisis with multiple causes

There are several reasons for the current situation. The health crisis brought many production lines to a halt and completely disrupted supply chains. On average, it takes two to three months for a factory to return to full capacity. Then there was the recovery in demand when lockdowns ended – especially in the US and China, where demand is currently booming – and the abundance of international liquidity following the various stimulus packages. Trade tensions, particularly between the US and Canada over lumber, are also a factor.

What steps can companies and builders take?

For public procurement contracts, the Luxembourg Regulation of 8 April 2018 implementing the law of 8 April 2018 on public procurement includes measures to deal with exceptional situations such as the one we are currently experiencing.

As such, the contract can be amended if significant and unforeseeable market fluctuations have been observed in official quotations, market reports or commodity price publications since the submission of the offer. This amendment of the contract must take place via registered letter[1]. Even though, in theory, price adjustments are only taken into account in the final statement, you may request that interim adjustments be paid. In the event of a force majeure, you may ask the contracting authority to extend the delivery deadline – in which case you must objectively justify the causes of the delay in a detailed report – or even to terminate the contract (Article 44(4) of the Public Procurement Act).

If it is a private procurement contract, it will depend on how the contract, the quotation, the offer and the general terms and conditions have been drawn up.

As a general rule, a quotation is only a guideline. It only includes an estimate of the price. The final price will be set when the work is complete. However, if the final price is likely to be significantly higher than the initial quotation, you should inform your customer as soon as possible. Otherwise, the customer is entitled to claim compensation. In the event of a fixed-price construction contract where the price is set in advance, you can try to justify an increase in price or an extension of the deadline based on the legal theory of unforeseen circumstances. Unfortunately, this theory exists in the French Civil Code but not in Luxembourg law, so its admissibility is not guaranteed.

If the general terms and conditions contain contractual price variation clauses for circumstances such as increases in the price of raw materials, they would apply, provided of course that they have been expressly accepted by the customer via his or her signature.

 

[1] The Resource Centre for Technologies and Innovation in Construction (CRTI-B) provides an online simulator (http://revprix.crtib.lu/) for calculating price adjustments. 

What about future contracts?

Include a clause in future contracts stating that prices quoted and deadlines set are not definitive and may vary according to changes in the price of materials and the availability and delivery times of suppliers. Next, sign the quotations as soon as possible, explaining to customers the unusual price increase due to a shortage of materials. A signed quotation is a contractual commitment to the work. This enables you to plan your work properly and to better manage ups and downs in an uncertain economic environment. As for the customers, if you have given them a good enough reason to hire you, they know that they can rely on you to carry out the work and that they will not find a better price or faster delivery elsewhere.

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08/2021

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