In construction, free issue materials refer to construction materials that are provided by the Client or Main Contractor, rather than being procured and supplied by a Sub-contractor or Supplier as part of their package of works. This can include raw materials such as steel, cement, and bricks, as well as fabricated items such as windows, doors, and mechanical and electrical components.
When free issue materials are used, it means that the cost of the materials is not included in the Contractor's / Sub-contractor's or supplier's price. Instead, the Client or Main Contractor is responsible for procuring and supplying the materials to the Sub-contractor for use in the project. The Sub-contractor is then responsible for the installation and incorporation of the materials into the project.
Free issue materials are often seen on projects where the client is taking the lead in terms of ensuring the specification is to their wishes, such as a domestic project, or at the opposite end of the spectrum where there may be a very high-grade finish, such as a high-net worth apartment building. In addition, it is often found on commercial fit-out projects, with a large degree of FF&E items (Furniture, Fixtures and Equipment).
The impact of using free issue materials can be significant, particularly for smaller Sub-contractors and suppliers who may not have the resources or expertise to manage the logistics of handling and incorporating external materials into their work. There may also be additional risks associated with the quality, timing, and delivery of the materials.
From a contract perspective, the use of free issue materials can raise a number of issues and considerations. Firstly, it is important to clearly define the responsibilities of each party in the contract. This should include details of who is responsible for procuring the materials, who is responsible for any damages or losses incurred during transportation, who is responsible for ensuring the materials are to spec as per the designs, and who is responsible for the quality of the materials.
There are multiple benefits to using a free issue approach. Most especially during the current downturn on the construction market, inflation, recent energy crisis and availability of materials and labour.
Firstly, it can reduce pressure on a Contractor's cash flow, either as a Main / Principal Contractor, or Sub-contractor, especially on larger projects. Generally, this is managed by entering a supply and install contract with amendments to allow for free issue of elements, which provides some flexibility for unexpected material costs.
Further, as a way to avoid risk exposure, Contractors are preferring a free issue approach as a client or Main Contractor will take contractual responsibility for procurement, programme and lead time issues.
It is important to consider the use of free issue materials to whatever insurance coverage is in force.
Depending on contractual requirements, it may be necessary to arrange storage of the items prior to installation, with the risk of these items being transferred upon receipt.
Further, the value of the materials should always be included within the declared project value ahead of presentation of the risk to insurers, or renewal of the policy. This is a requirement whether a project specific policy, such as a CCIP or an annual policy, and the burden rests with the party requesting insurance to ensure the value of the works and project is adequate.
Failure to adequately consider the additional increase to the value of the overall contract and project may leave a Main / Sub-Contractor or supplier underinsured and at risk of their claim either being reduced or not covered should the underinsured value constitute a breach of contract with insurers.
In addition, it is important to consider the impact of delays or issues with the delivery or quality of the free issue materials and impact of these to the overall project timeline. Scenarios where consideration of such risks has not been adequately addressed within the contracts may leave a financial burden as there may not be the appropriate cover in place without contractual liability.
When considering a claim for free issue materials, it is important that the contractual position is fully understood to ensure the correct party are making the claim and are entitled to an indemnity. Valuation of the materials may also be complicated as the insured party will not likely being the ones who will need to procure replacements, and the costs may simply be redirected through interim payment valuations.
Overall, the use of free issue materials in construction can provide benefits in terms of cost savings and flexibility. However, it is important to carefully consider the risks and responsibilities associated with this approach, and to ensure that appropriate measures are in place to manage these risks effectively, and ensure appropriate insurance cover is in place.
RHP are a specialist firm of Loss Adjusters comprising experts in construction, power, renewables, liability, rail and cyber.
For more information about construction insurance, or how RHP may help you, please contact Philip Roberts, Operations Director on p.roberts@trhp.co.uk
