Impact of rise of material price in a construction contract

Q1. What are the standard forms of contract available in Malaysia for construction sector?

Answer: 

Generally, the type of standard forms of contract are divided into two divisions, one being the public sector standard forms of contract and the other being private sector standard forms of contract.

In the Public sector, standard forms are issued by Jabatan Kerja Raya(JKR) and there are PWD Form 203A(Rev.1/2010), PWD Form 203(Rev.1/2010), PWD Form 203N(Rev.1/2010), PWD Form 203P(Rev.1/2010) and PWD Form DB(Rev.1/2010). The truth to speak is that PWD forms of contract is perceived to be more beneficial to the employer.

Meanwhile, the standard forms of contract in the private sector are produced by authorities or professional bodies in Malaysia as follows:-

a. Pertubuhan Akitek Malaysia(PAM);

b. Asian International Arbitration Centre(AIAC);

c. Construction Industry Development Board(CIDB);

d. Institution of Engineers Malaysia(IEM).

Q2. What are the foreign standard forms of contract adopted by Malaysian in the construction industry?

Answer: 

The most popular form of foreign standard forms of contract adopted in Malaysia construction industry is issued by International Federation of Consulting Engineers(FIDIC). Foreign standard forms of contract is often used when the construction projects contain international elements like contracting parties residing in different countries or when it is funded by international agencies such as World Bank and the Asian Development Bank.

Other foreign standard forms of contract include those published by Joint Contracts Tribunal(JCT), Institution of Civil Engineers(ICE), Institution of Mechanical Engineers(IMechE) and Institution of Electrical Engineers(IEE).

Q3. Can a contractor claim for price fluctuation of construction materials under a contract?

Answer: 

The contractor must refer to their respective contract provisions to ascertain if the nature of the contract is a fix price contract and who is the party liable for the unexpected surge of material prices. Generally, the local construction contract does not provide for price variation clause and thus places the risk on contractors to absorb any price fluctuations.

Q4. Is Price Fluctuation on material price a force majeure event?

Answer: 

Generally, the local jurisdiction does not take in price fluctuation alone as force majeure event no matter how unforeseeable the event of fluctuation is. In other word, unexpected fluctuation in price will not be considered as a force majeure event.

Q5. What does PAM form of conditions contract say about price fluctuation in term of material cost?

Answer: 

Refer to Clause 13.0 of PAM Contract 2006, it is expressly stated that the contract sum is not to be adjusted under any circumstances. In this regard, it simply means that increase in material price in construction is to be absorbed by the contractor itself.

Q6. What does IEM form of conditions of contract say about price fluctuation in term of material cost?

Answer: 

Refer to Clause 54 of IEM Form of Contract 1989, it states that the contract sum shall not be varied by any reason including increase of material cost unless there is special provision for variation of price. In relation to this, it simply means that increase in material costs is to be absorbed by the contractor itself.

Q7. What does PWD form of conditions of contract say about price fluctuation in term of material cost?

Answer: 

Refer to Clause 30 of both PWD 203 and PWD 203A, it states that there will be a special provision to the conditions of contract for fluctuation of price contained in the appendix attached. Therefore, fluctuation of price shall be claimable if there is special provisions being agreed by the parties and attached as appendix to the conditions of contract. The contract price will be revised accordingly based on the special provisions for fluctuation of price.

Q8. What does AIAC form of conditions of contract say about price fluctuation in term of material cost?

Answer: 

Refer to Clause 12.5 read together with Clause 42 of AIAC standard form of design and build contract 2018, it appears that increase in material costs is not a factor to be considered for price adjustment under Clause 42 therein. Therefore, the contractor would have to bear the risk of price fluctuation to absorb any additional costs arise thereof.

Q9. What does FIDIC contract say about price fluctuation in term of material cost?

Answer: 

Refer to Clause 13.8 of FIDIC contract, it expressly provided for adjustments for changes in cost, but the provision only has effect if the parties establish a table of adjustment and enclose it as an appendix to tender. Therefore, a contractor who has signed a FIDIC contract must ensure to comply with Clause 13.8 to enclose a table of adjustment as appendix in order to qualify itself to claim for adjustment for changes in cost.

Q10. How can a contractor safeguard its interest to prevent being affected by price fluctuation in term of material cost?

Answer: 

The contractor is advised to insert price variation clause into respective contract if the circumstances allow especially during this pandemic period for the material price to be determined based on current market value instead of fix sum under the contract. Alternatively, the contract shall reserve it rights to claim for price fluctuation on material costs during tender or to enclose a table of adjustment in the letter of tender.

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-