January 12, 2021
India has experienced a tremendous hike in the price of iron-ore in the last four months. This has resulted in the continuous increase in the price of all steel materials like reinforcement steel, steel plates, and other rolled sections like angles, channels, steel beams, hollow sections of all types, from lighter to heavier sections. This increase in January 2021 prices is to the tune of almost 50% from the price of July 2020.
Reason for the price hike
On one hand, the iron ore production in the current fiscal till October has reduced by almost 30% in comparison to that of the last fiscal (2019-20). At the same time, the export of iron ore has increased by a whopping 70% in the first half of the financial year in comparison to the same period of the last year. This is due to the temporary shortage of steel in the wake of COVID in the international market. India is an open economy and thus it has been affected by the event and the steel prices have increased with the international steel prices. To prevent the price hike the steel producers have written to the Prime Minister of India demanding a six-month ban on the export of iron ore.
Unquestionably, the primary effect is on the construction and manufacturing industry. The cost part of all the projects and businesses that use steel as a primary input material has been directly affected by it. The cost of completion of the building and other construction projects and steel product manufacturing units has been substantially increased.
Is the risk covered?
This has two perspectives, from the contractors’ and the client-side. In projects where there is a price variation clause, the contractor will not have much impact. The price variation clause generally has a base price, and any hike above that price is compensated by the client. In cases when the purchase price is below the base price the benefit is passed on to the client with a rebate by the contractor, and in general, the contractor is not affected. Although there is a change in the percentage profit but in terms of absolute value there is not much effect to be borne by the contractor, only except the non-payable quantities and the wastage part. Hence the risk of the contractor in case of a price hike is to control the wastage part only.
From the client’s side, the risk is not covered as they have to absorb the extra cost. For non-profit projects, there is no way to pass on the cost to the end-customers, and for the other projects also, when the end product price is already fixed (e.g., residential units where the price is already finalized with the end-customers) the client would have to absorb the extra cost.
On the other hand, in the case of the fixed price turnkey contracts or Built-Operate-Transfer contracts the contractors have no room for getting any compensation for the additional charges. Even for the traditional item rate contracts, if there is no base price and only index-based price variation the contractor will not be much benefited as the general increase of material price indices will not bring much compensation to the contractors. From industry experiences, it is observed that the law-courts do not accept claims of contractors on account of price hike of materials, be it unprecedented if there is no such relevant clause in the contract mentioned explicitly.
A reverse scenario
Another interesting case may be the projects where the project is delayed beyond the original contractual period. The above conditions will just go upside down in this case. Now, if the delay is in the account of the client, the contractors can claim the compensation even if there is no compensation clause in the contract for the price hikes, as they are incurring this additional cost for the fault of the client. Similarly, even if there is a price compensation clause for the price hike, the client may refuse to pay the same if the contractor has been proved to be accountable for the delay that happened in the project.