Materials price adjustment clause: A new contractual tool in the construction industry

Since the summer of 2020, the construction industry has dealt with significant volatility in the price of certain materials and equipment. This issue is clearly related to the shortage of raw materials and equipment, and more generally to the disruption of the global supply chain that we have been experiencing since the beginning of the pandemic.

In a market where construction contracts for public works are largely awarded on a lowest-bidder, lump-sum basis, the uncertainties associated with price volatility create several problems for both clients and contractors entrepreneurs¹.

Faced with this situation, the various associations and other industry players have taken steps with the main public contracting authorities to find a solution. 

The Société québécoise des infrastructures (SQI) recently announced the temporary inclusion of a price adjustment clause in some of its projects, mainly starting in 2022. 

Materials and equipment covered

The list of materials and equipment covered by the price adjustment clause is published on the SQI website². As of December 20, 2021, a total of 46 materials and pieces of equipment were included and listed according to different specialties, including: steel, lumber, gypsum, copper, generator equipment, heating and cooling equipment, etc. 

This list could be adjusted by the SQI based on market needs. Moreover, possible adjustments relate exclusively to the price of materials and equipment. Costs related to labour, tools, transportation and handling as well as administration and profits are specifically excluded and cannot be subject to price adjustments.

How the price adjustment clause works³ 

Submitting the price breakdown form

This step takes place during the contract award phase. In order to receive a price adjustment, the successful contractor must complete the Formulaire de ventilation du prix des matériaux et équipements sujets à ajustement (Price breakdown form for materials and equipment subject to adjustment) by entering, for each material and equipment for which he or she wishes to benefit from an adjustment, the corresponding price included in the bid. This form must be sent by the contractor to the SQI project manager within the time limit prescribed by the latter. If this is not done, no adjustment may be requested by the contractor while the work is being carried out.

Calculating the adjustment

The adjustment, upward or downward, will be calculated on the basis of the applicable index as published by Statistics Canada. Thus, when processing each of the monthly payment requests, the SQI will identify, for each of the materials and items of equipment selected by the contractor, the difference between the benchmark initially prevailing at the deadline for receipt of tenders and the one prevailing in the month of the monthly count.  

Only variations greater than 5% will be considered for the purpose of calculating the price adjustment. Therefore, if for a given month, while the contract is being performed,  the index were to increase by 15% compared to the benchmark prevailing when bids were due, the price adjustment would be 10% for the material in question. 

Payment and settlement of accounts

The calculation of applicable adjustments will be made only when:

• 100% of the price of each of the materials and equipment identified by the contractor is included in the monthly claims; and when
• all applicable indices are published by Statistics Canada. 

The total amount of the adjustment – either a price increase or a credit – will be confirmed by the issuance of an amendment to the contract. In the event of a downward adjustment, SQI will offset the contractual amounts.

All SQI forms and guides are available directly on the following website: www.sqi.gouv.qc.ca/relationsclients/Pages/clauses_ajustements_prix_materiaux.aspx (French only).

Conclusion

Not all SQI projects will include a price adjustment clause. Bidders should therefore pay particular attention when analyzing the tender documents⁴. 

In addition, it appears that the price adjustment clause is currently only being considered as a temporary measure for a 24-month period, until approximately November 2023. 

However, it will be interesting to see if other public sector clients will follow suit in the months to come and if this measure could eventually allow for a more efficient distribution of risks to the benefit of all players in the construction industry.