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Reimbursement for increase in Minimum Wages

8 replies [Last post]
Fri, 2007-09-28 08:46
Devamalya De
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Dear All,

Say the Minimum Wages of Labour has gone up while the contract is in force (elapsed duration as on date 40% of total duration). Contractor forwards claims as to certain major items executed during the period the Minimum Wages has gone up like reinforcement cutting, bending, tying etc (labour component 60%), shuttering (labour component 30%), concreting (15%). However, a certain Clause in the Contract categorically specifies rates as firm throughout the project duration, irrespective of increase in cost of material, labour, fuel, etc . In such a scenario is the Client morally responsible for reimbursing the extra cost incurred by the Contractor or can he straight away turn it down citing the contract conditions? If turned down is the issue of such magnitude as can snowball into Arbitration etc.? What are your thoughts on the issue?
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Wed, 2007-10-24 07:32
#1
Waleed Mahfouz
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I DON’T THINK THAT THE CONTRACTOR CAN REQUEST FOR ANY ADDITIONAL COSTS, AS HE SHOULD CONSIDER AND EXPECT ALL RISKS. THIS IS THE TRAP FOR ANY CONTRACTOR.
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Thu, 2007-10-18 17:09
#2
Geoffrey Boulton
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As was said by James, you would be better off looking under the clause dealing with changes in the law than under those dealing with the durational validity of rates and prices. You may be fortunate and find that somebody negotiated well and such things are covered - then again, maybe not.
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Mon, 2007-10-15 11:40
#3
Andrew Flowerdew
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Generally the increase is not recoverable by the contractor. An increase is not a change in policy, the policy is to give a minimum wage in the first place.

It’s just one of those risks which everybody in business (who pays the minimum wage) has to suffer and take onboard - and on long duration contracts, take account of when pricing.

I would suggest it would need clear wording in the contract to recover what is a general risk to all in business.
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Tue, 2007-10-09 09:48
#4
julius achy
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Hello Guys,
In a lump Sum contract where issues of this nature can arise,there is always a clause too that deals with Change in Government policy such as Tax,VAT or this issue of minimum wages review.The client is liable to reinburse all the extra cost that might arise from this increase in minimum wage cos it has no alternative than to comply to regulations of the land.
The only aspect this will not be entertained is the effect the minimum wage increase will have on the items yet to be purchased,which in this content amount to fluctuation,cos fluctuation is forbiden in a lump sum contract.
Therefore i always advise that minimum wages increase should be treated as variations and not fluctuations.
But in all cases, make sure you read every contract clause letter-by-letter and not line-by-line.

TX
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Wed, 2007-10-03 03:16
#5
James Barnes
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My point was moral responsibility won’t be enshrined in the contract (although perhaps on the statutes, depending on where you’re working, but I’m not aware of one anywhere I’ve ever worked)

ongoing working relationship and intrinsic business interests (eg a specialist contractor who is the only one capable of providing the product you need) are other factors I should have mentioned and ones that you very correctly point out as reasons to find a negotiated settlement. Always being ware of course that an ongoing working relationship is a double edged sword. Give in too easily and see what happens next time. Ditto for relying on a "unique" contractor

It will all come down to politics is my guess and would suggest that a way to compensate the contractor without appearing to have done so (perhaps by rejecting his labour cost claim while approving some other contentious ones as balance) then finding a more "fairly" worded clause for the next contract would be one way forward.

As for sample clauses I don’t have any, but I’m sure some of the more legally minded here can halp you out. Otherwise perhaps look to FIDIC, ICE or JCT standard forms, something may present itself. I know that there used to be clauses in ICE to cover changes in materials costs over long projects but it’s a long time since I’ve looked at one of those. Otherwise the client’s own lawyers should be able to help you out. Afterall, they probably came up with the exclusion clause in the first place...

Or.... drive him to the point of bankrupsy then buy him out.
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Wed, 2007-10-03 03:07
#6
James Barnes
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My point was moral responsibility won’t be enshrined in the contract (although perhaps on the statutes, depending on where you’re working, but I’m not aware of one anywhere I’ve ever worked)

ongoing working relationship and intrinsic business interests (eg a specialist contractor who is the only one capable of providing the product you need) are other factors I should have mentioned and ones that you very correctly point out as reasons to find a negotiated settlement. Always being ware of course that an ongoing working relationship is a double edged sword. Give in too easily and see what happens next time. Ditto for relying on a "unique" contractor

It will all come down to politics is my guess and would suggest that a way to compensate the contractor without appearing to have done so (perhaps by rejecting his labour cost claim while approving some other contentious ones as balance) then finding a more "fairly" worded clause for the next contract would be one way forward.

As for sample clauses I don’t have any, but I’m sure some of the more legally minded here can halp you out. Otherwise perhaps look to FIDIC, ICE or JCT standard forms, something may present itself. I know that there used to be clauses in ICE to cover changes in materials costs over long projects but it’s a long time since I’ve looked at one of those. Otherwise the client’s own lawyers should be able to help you out. Afterall, they probably came up with the exclusion clause in the first place...

Or.... drive him to the point of bankrupsy then buy him out.
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Tue, 2007-10-02 14:31
#7
Devamalya De
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I am afraid moral responsibility is not of any individual(s). It is the collective sense of equity prevailing in a business meant for the long-term where the driving moto is not to antagonize any stakeholder. Considering that the Contractor can be an associate (involved in all of the Client’s projects in the last 4-5 years and having an yet-to-be executed order value of USD 100 m with the Client, niche offering in the market of the latter intrinsically linked with the specific contractor’s involvement in the project etc.), I believe negotiation is perhaps the only solution as you have mentioned. While the Contractor may look for any clause indemnifying it against legislative changes, can the Client consider inclusion of such clauses in future contracts indemnifying it against similar claims? Do you have any such sample clause or write up? Please revert.
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Tue, 2007-10-02 03:36
#8
James Barnes
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Morally responsible?

you’re in the wrong industry ;)

If I were the contractor I would search for another clause indemnifying me from legislative changes, but I doubt I’d find it. It’s the sort of risk that clients usually write across to their contractors, if not in the standard terms then in Special Conditions.

OTOH, pragmatic responsibility to the project as a whole is a different matter. Assuming there is no contractual responsibility to pay, the client needs to ask himself the following;

If the client accepts that the contractor did not forsee this increase and so has not budgetted for it; Is the contractor at risk of bankrupsy if we force him to absorb the cost?
If he does go under and defaults on the contract, what would be the cost of sourcing a new contractor?
What compromise might the contractor accept (pain share)
What additional concessions might the client squeeze from the situation (for example, the client pays all or part of the increase and the contractor agrees to a slightly accelerated programme or to drop other claims etc)

If the risk to the project is greater than the cost of finding a solution, then I suggest the client negotiates, but it’s unlikely that they have a contractual responsibility to do so.

/2p
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