New agreements and price increases: what to do?

It is the talk of the day: extreme price increases of construction materials and raw materials. It not only raises questions for contractors during ongoing projects, but also when entering into new agreements. In that case, what points of interest are there for the contractor?

Toward the client

1. Perhaps an open door: it is preferable to discuss the consequences of (further) extreme price increases with the client prior to concluding the contract. Despite the fact that the client will often want to agree on a fixed price, the contractor may still want to discuss the distribution of risks on the basis of the following questions:
   
   A. for which materials may or may not the contractor pass on a price increase, and possibly under what circumstances?;
   B. from what percentage may the contractor pass on a price increase (to what extent does the normal entrepreneurial risk extend); and
   C. what distribution key do the parties use in the event of such a price increase?
   
   
2. Prevent the client from including a price-fixing clause (or similar clause) in the contract. A 'simple' price-fixing clause does not automatically mean that the contractor cannot pass on extreme price increases. For that, the principal must in principle also explicitly exclude Article 7:753 BW, Section 47 UAV 2012 and/or Article 5 AVA 2013. This is because these provisions give the contractor the right to charge a price increase to the client under specific conditions (thus despite the price-fixing clause). If a client insists on including a price-fixing clause, the contractor would therefore do well to add a text with the following purport: "this does not affect the claim in accordance with the law and the UAV 2012/AVA 2013."
   
   
3. Client and contractor can agree on a risk arrangement . With a so-called risk arrangement, they share the risk of price increases by indexing prices. The indexation applies only to prices agreed upon in the arrangement, such as labor costs, fuel and building materials. Importantly, while a risk arrangement reduces the contractor's risk, it does not eliminate the contractor's entire risk. This is because in the case of extreme increases such as at present, the agreed index is often exceeded or the index figures lag too far behind reality. For this reason, it is good for the contractor to consider in advance what risk arrangement will be agreed upon.
   
   
4. Specifically with respect to Woningborg contracts, it is important to note that (Article 8 of) the General Conditions exclude in principle the passing on of a price increase. Based on the General Conditions, the contractor can (under conditions) agree otherwise in the purchase/contract by including a risk adjustment item up to the maximum of which can be passed on. In the absence of such a deviating agreement, the contractor has few options against his client in the event of a price increase. In that case, the contractor can still consider a modification of the work or a different building material to be used that does not affect the value, quality, appearance, appearance or usability of the home (Art. 6 General Conditions) or a reliance on 6:258 BW (unforeseen circumstances). Only a high threshold applies to the latter article. Especially in relation to private clients, an appeal to unforeseen circumstances will rarely succeed.

Toward the subcontractor

1. To reduce the risk of the subcontractor passing on a price increase, the contractor can agree to a price-fixing clause. This is therefore the reverse situation compared to the relationship between contractor and client as discussed above. It is important here that the contractor explicitly excludes Article 7:753 BW, Section 47 UAV and/or Article 5 AVA 2013 because only a price-fixing clause does not prevent the effect of these articles. In that case, the contractor can include the following clause in the subcontract:
   
   "the parties agree that the price is fixed for the duration of the work, the risk of price increases lies entirely with the subcontractor and that article 7:753 BW and section 47 UAV/article 5 AVA 2013 are excluded".
   
   
2. In addition, the contractor can factor into the subcontract the specific circumstance of extreme price increases. That is, try to foresee as much as possible. In that context, name as many circumstances as possible, for example: extreme price increases for procurement/construction materials such as steel, lumber, etc. In this way the contractor reduces the chance that in the future the subcontractor will be able to successfully appeal to Art. 6:258 of the Dutch Civil Code (unforeseen circumstances) and the court will be able to modify or (partially) dissolve the contract as a result.
   
   
3. Related to the above is that the contractor should be careful when declaring general conditions applicable by the subcontractor (and/or the supplier) in the offer or the contract. Indeed, this set of general conditions regularly states that any price increase may be passed on to the contractor, see, for example, article 7 of the Metaalunie Conditions. It is important that the contractor explicitly rejects such conditions and confirms in writing that subcontractor/supplier cannot invoke them against him.
   
   
4. Finally, before entering into the subcontract, the subcontractor will often first issue a quotation with a standstill period. This simply means that the price issued is valid until the date stated. In today's uncertain market, a subcontractor will be reluctant to issue a long gestation period. In such a case, the contractor can "discount" a gestation period with the subcontractor/supplier. This automatically means a higher price for the contractor, but the contractor thereby buys security and cushions new price increases within the gestation period. The contractor would be wise to align the maturity period in the subcontractor's bid with the period he agrees with his client.

Claim principal and contractor not always the same

If the contractor contracts with both a principal (or main contractor) and sub(sub)contractor, the contractor will often want to contract back-to-back. This does not always go well, because the same provision that the contractor agrees with both his principal and his subcontractor can work out differently. An important and well-known example is paragraph 47 UAV 2012 on passing on cost-increasing circumstances. This provision entitles the contractor (or the subcontractor) to compensation if there is a significant price increase in the entire work.

The total work of the subcontractor (for example, a bricklayer or roofer) is usually only a small part of the entire job (for example, building an office building or apartment complex). As a result, a subcontractor's percentage price increase toward the contractor is more likely to qualify as "significant," than for the contractor toward its client. This may mean that the subcontractor may claim additional payment as a result of price increases toward the contractor, but the contractor does not toward its principal. While to both contracts Section 47 UAV 2012 has been declared applicable.

More than legal issue?

Past and present experience shows that the consequence of price increases (both extreme and less extreme) is a recurring issue. The question is whether a clause that transfers the risk of this entirely to one party is the most appropriate solution. Especially in view of long-term collaborations and entering into a framework agreement, for example. As mentioned above, entering into discussions in advance is preferable. In addition, there are now more and more voices in the construction sector that a different method of procurement can ultimately offer a (partial) solution. This involves the reuse of materials and raw materials, making the contractor less dependent in the longer term on the purchase prices for (increasingly scarce) materials from around the world. In short, a sustainable solution to (extreme) price increases may go beyond a unilateral legal division of rights and obligations.