The price revision clause in the age of inflation and shortages

The construction industry is facing a significant increase in material prices. Added to this is a surge in the inflation rate, caused in particular by the end of the COVID-19 pandemic, the war in Ukraine and various shortages of raw materials. How can a contractor protect themselves contractually in the face of unexpected increases in material costs?

The risk varies greatly depending on the type of contract between the construction contractor and the client-owner. We will very briefly analyze two types of service contracts that are common in construction law, namely the contract with increased costs and the fixed price contract.

The contract with increased costs

This contract, commonly referred to as” Cost Plus ” is defined in article 2108 of the Civil Code of Quebec:

“2108. When the price is established according to the value of the work performed, the services rendered or the goods provided, the contractor or the service provider is required, at the request of the customer, to report to him on the progress of the work, the services already rendered and the expenses already incurred.”

In the current context, this type of contract is to be preferred in order to avoid the contractor assuming alone the risk of an unexpected increase in the price of materials or inflation, without having to provide for it contractually. However, the contractor will have an interest in informing his client of the progress of the costs incurred as the work is carried out in order to avoid a dispute at the end of the project.

The fixed price contract

As for the fixed price contract, also called” fixed price contract ”, this is defined in article 2109 of the Civil Code of Quebec:

“2109. When the contract is a fixed price, the customer must pay the agreed price and cannot claim a reduction in the price by claiming that the work or service required less work or cost less than expected. Likewise, the contractor or service provider cannot claim a price increase for the opposite reason. The fixed price remains the same, although changes have been made to the originally planned terms of performance, unless otherwise agreed by the parties. ”

In a fixed price contract, entrepreneurs will have every interest in including a written price revision clause in the contract. Obviously, customers must agree to the inclusion of such a clause when signing the contract, which may initially be indicated in the contractor's submission. Also, this clause should provide for a mechanism for the diligent delivery of all supporting documents proving the variation in prices, between the time of the tender and the completion of the work, and the unforeseeable nature of this variation.

This clause can also be advantageous for the client-owner. In fact, the authors Me Pierre Cimon and Me Ian Gosselin wrote that “although on the surface these [price variation] clauses seem to be for the sole benefit of the entrepreneur, they actually offer undeniable advantages to the owner. Indeed, their purpose is to encourage above all the completion of the work by systematically excluding cancellation due to error, in return for the assurance given to the contractor to adjust the price of his contract in such an eventuality.”¹

To note

Such a clause cannot be included unilaterally in a tender for a public contract awarded by tender or in a submission to the BSDQ when the tender documents do not allow it.

Also, if you want to include a price review clause in a contract or private quote, please consult a law firm, as some factual elements can have a significant impact on the validity of such a clause.

We invite you to consult the ACQ website (acq.org/general public/major files/price-rise-and-scarcity of materials/ ) in order to know all the steps that the Association takes for you. In particular, with its partners and the SQI, the ACQ worked on a clause to adjust the price of certain materials to the contractual documentation for certain projects.

1 Ian GOSSELIN and Pierre CIMON, “The responsibility of the owner” in Olivier F. KOTT and Claudine ROY, Construction in Quebec: legal perspectives, Montreal, Wilson & Lafleur, Montreal, Wilson & Lafleur, 1998, 1998, p. 382.

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