Partner London
"UK-based construction projects that rely on imported materials may experience significant cost increases."
While the regulatory changes originate in the United States, their impact is felt globally due to the interconnected nature of supply chains. UK-based construction projects that rely on imported materials—particularly steel, timber and mechanical components—may experience significant cost increases. It is therefore essential to assess how such international developments interact with domestic contract law and standard form agreements used in the UK.
Most commentators have thus far focussed on the legitimate question as to how such a regulatory change under the laws of the United States might, in itself, serve as a trigger for entitlement under any applicable ‘change in law’ and/or force majeure provisions. Such claims, however, very much turn on the particular wording of contracts and whether a US regulatory change (as opposed to a regulatory change under English law, for example) would qualify. It is, however, equally important to consider how increased costs, including increases in tariffs, can be recovered on other grounds such as a contractual right or as part of a loss and expense claim.
Looking at the most common construction contracts in the UK, this article focusses on how increased costs can, in principle, be recovered as part of loss and expense claims under the JCT 2024 Design and Build Contract (“JCT”) and the NEC’s Engineering and Construction Contract, 4th Edition (“NEC4”).
Increased costs as a contractual right
There are several contractual claims which can potentially capture tax or tariff increases. Firstly, a contractor may be able to claim for such increases on its materials as part of an increased costs claim where the contract includes an economic price adjustment (“EPA”) clause or a similar provision.
Under the JCT, there are two key fluctuation options by which increased costs can be recovered. Whilst parties often exclude the fluctuations options at the outset, it would be important to consider the contract terms and particulars to be sure such rights are excluded.
Option A provides a mechanism to adjust the contract sum due to changes in contributions, levies, and taxes and is therefore most suitable to cover the risk of tariff changes. If there are any changes in the rates of tax or duty on materials, goods, electricity or fuels in the execution of the works, the contract sum can be revised accordingly.
Under NEC4, similar option clauses are available, but again it is quite rare for them to be incorporated. The relevant secondary option is Option X1, where the employer agrees to accept the risk of inflation, which may include increased material costs due to tariff changes.
As these provisions are optional and often excluded, contractors and subcontractors may look to make claims for increased costs as part of a loss and expense claim instead.
For example, consider a UK contractor who has agreed to a fixed-price contract and later faces a 25% increase in the cost of imported steel due to new tariffs. If the contract includes JCT Fluctuation Option A or NEC4 Option X1, the contractor may be able to recover the additional cost. However, if these options were excluded, the contractor would need to rely on loss and expense provisions or common law remedies, provided the cost increase can be causally linked to a qualifying event.
Increased costs as part of a loss and expense claim
There are two types of loss and expense claim: contractual and common law. Most of these claims are founded upon events which are outside of a contractor’s control and result in the regular progress of the works being interrupted, but they may be brought simply as a result of a breach. Claims under express provisions of a contract do not require a breach, only the existence of a defined event, a “Relevant Matter” under the JCT contracts or a “Compensation Event” under NEC. Such events may then give rise to two types of loss: delay and/or disruption.
To support any claim for increased costs, contractors must maintain detailed records, including supplier quotations, delivery schedules, correspondence and procurement logs. These documents are essential to demonstrate causation and quantify the loss. In the absence of such evidence, even well-founded claims may fail due to lack of substantiation.
Claims at common law
There is no automatic right to delay or disruption costs, but they may be recoverable if they constitute losses flowing from a breach of contract. The aim of recovering such loss is to ensure that the injured party is put in the same financial position as it would have been if the project had not been delayed or disrupted.
"It follows that increases in the cost of materials (due to tariff changes) during an extended or disrupted period should be part of the losses recoverable."
Following Hadley v Baxendale, any losses suffered must have been reasonably contemplated at the time that the contract was made. This is described as losses “as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.”
There are several English law precedents confirming that parties can recover increased costs suffered as a result of delay, such as the cost of utilities and scaffolding on site or the cost of hiring plant for an extended period (such as Costain Ltd v Charles Haswell & Partners Ltd [2009] EWHC 3140 (TCC); Walter Lilly & Co Ltd v Mackay and DMW Developments Ltd [2012] EWHC 1773 (TCC)).
It follows that increases in the cost of materials (due to tariff changes) during an extended or disrupted period should be part of the losses recoverable. One word of caution about common law claims, however, is that they can be excluded by express wording within a contract, so the parties can decide whether to keep this avenue open or close the door on it from the start. The option of such common law claims remains very much alive under standard JCT contracts, where rights are preserved, but is excluded from standard NEC contracts, by way of their exclusive remedies clauses.
Claims under JCT 2024 and NEC4
To make a loss and expense claim under JCT 2024 or NEC4, there must be a Relevant Matter or a Compensation Event (respectively) that has impacted the works. Whether or not a Relevant Matter/Compensation Event has occurred is fact-specific. For the purposes of this article, it is assumed that such an event has occurred.
To recover cost increases as part of a loss and expense claim, it is necessary to show that the delay or disruption has actually caused the increased cost to be incurred (because, but for the event or delay, the relevant materials or equipment could have been procured at lower cost).
Subcontractors may also be affected by tariff-related cost increases, particularly where they are responsible for procuring imported materials. Main contractors should ensure that subcontract agreements include appropriate back-to-back provisions that mirror the main contract’s entitlements and procedures. This alignment is crucial to ensure that cost recovery at the subcontract level is not inadvertently excluded.
JCT 2024
Under JCT 2024, a contractor is “entitled to reimbursement” of loss and/or expense if it is caused by a deferment of giving possession of the site to the contractor under clause 2.4 or if increased costs are caused by a Relevant Matter (JCT 2024, clause 4.19.1).
This clause gives the contractor the right to recover all direct losses, including increased costs such as the increased cost of raw materials due to tariff uplifts, if they are caused by a Relevant Matter. Pursuant to clause 4.22, any increased costs which are claimed under the loss and expense provisions will be added to the contract sum.
NEC4
The NEC4 suite of contracts provides a number of different optional provisions, each with distinct risk and cost management features. Claims under Options A or B (and potentially under Options C, D and E) for increased cost, such as an increase in the price of materials caused by a Compensation Event, are, in principle, recoverable as part of the” Defined Cost” incurred by a contractor, provided that such costs are not classified as “Disallowed Cost”.
If there is delay and/or disruption caused by an event that falls within the definition of a Compensation Event, then increased costs incurred during that disrupted or delayed period, are in principle recoverable.
It is important to note that both JCT and NEC4 contracts impose procedural requirements for submitting claims. Under JCT 2024, clause 4.20 requires the contractor to notify the employer as soon as the likely effect of a Relevant Matter becomes apparent. Similarly, NEC4 mandates early warning notices and detailed quotations for Compensation Events. Failure to comply with these procedures may result in the loss of entitlement, even where the underlying claim is valid.
Conclusions
Whilst each contract and matter turn on their specific provisions and facts, the standard forms of contract referred to herein provide clear scope for capturing increased costs. The key question is likely to be whether the increased costs in question were in fact incurred as a consequence of the delay or event (causation) and whether they have been properly mitigated.
The starting point for any such claim is to establish that a Relevant Matter or a Compensation Event has occurred, so as to give rise to a claim for loss and expense in principle.
It is therefore clear that under the standard JCT and NEC contracts there is scope for the recovery of tariff-related cost increases, so long as they can be tied back to valid entitlement or breaches of contract. Inevitably, however, such claims will be highly fact-specific and contractors and subcontractors will require clear evidence and records to substantiate their losses.
The real key to successfully bringing (or defending) such claims is obtaining specialist construction law advice as soon as such issues arise.
Trainee Solicitor Mike Gorry also contributed to this article.
Key contacts
Partner London
Senior Associate London
