Building Contracts and Inflation: Can a builder increase the contract price?

KEY TAKE-OUTS:

• The rise in cost of living has impacted the Building and Construction Industry leading to increased building costs including supplies and materials.
• It is important to chose your type of contract wisely when making a decision to build or renovate your home (Fixed Price v Costs Plus). Generally speaking, a fixed price contract is most appealing for residential builds.
• You should ensure you know your rights and obligations under a building contract and follow the contractual terms to avoid a breach of contract or dispute with your Builder.
• In limited circumstances, increased costs can be passed on by a Builder to a Homeowner depending on the type of contract entered, the terms of the contract and the reason for the increased cost.

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Building materials price increase 2022 Australia

Following the recent rise in cost of living, it is not surprising that the Building and Construction Industry has also been impacted including the increased costs of building supplies and materials such as timber. As a result, many people currently in the process of building or renovating their home are noticing an increase in variation claims or amended building costs as a result of Builders passing on the increased costs of building supplies and materials to the Homeowners. Depending on the type of contract entered into by a Homeowner and the terms of the contract, this will determine whether a Homeowner is or is not liable for these increased costs.

Building contracts: What is the difference between fixed price and cost plus?

In residential building, there are two main types of contracts – fixed price and cost plus.

• What does a fixed price building contract mean? A fixed price contract outlines the exact costing of the total build before the works begin and it is not dependant on resources used or time expended. The price provided under a fixed price contract is a lump sum amount that covers labour and materials required to complete the total build or scope of works.
• What is a costs-plus building contract? A cost-plus contract is a contract where a Builder obtains materials and services throughout the stages of the building process and the costs are passed to the Homeowner with an agreed margin to cover overheads and profit. Under this contract, the Builder may provide a reasonable price estimate for the job based on what materials are required and the estimated time it would take until practical completion. However, as the amount is not fixed any additional costs incurred would be issued to the Homeowner to cover expenses which were not previously determined.

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When should a costs-plus contract be used?

In determining which type of contract to enter into, it is common ground that cost plus contracts are not recommended for residential building works and should be used for specified purposes where it is difficult to assess an overall project and cost, but the budget has flexibility.

Understanding Building Contract Terms

When you enter into any contract with a builder, it is important to understand all terms of the contract including your obligations under the contract to avoid a situation where you may breach the terms. It is also important to understand your costs and liabilities under a building contract. Building contracts can be complex and require knowledge of highly legislated and regulated laws to navigate through the rights and responsibilities you have as a Homeowner. Accordingly, it is recommended that you have your building contract reviewed by a lawyer or licenced conveyancer prior to signing. Coutts is able to assist you with building contract reviews.

Can a builder increase the contract price because of cost increases?

A Builder is only able to pass on increased building costs in limited circumstances. We discuss these circumstances below:

Variations

The scope of works set out in a building contract will generally identify the works to be undertaken under the contract including the specifications and plans associated with the building works and covered by the contract price. However, there are circumstances when a variation may be issued by a Builder.

 What is a variation to a building contract?

These circumstances include, but are not limited to, the following:

• Changes made to the original plans and specifications;
• Alterations to design;
• Changes to materials;
• Increased quantities;
• Changes to the sequence of works;
• Additional work as a result of unforeseen circumstances such as hitting rock.

Both Homeowners and Builders may seek building works to be varied and the building contract usually provides details of the process to be followed regarding variation notices. If a party to the contract does not follow its contractual obligations regarding variations, then there is a risk that a breach of contract may occur which may lead to disputes and claims between the parties.

Accordingly, it is important that valid variation claims are dealt with correctly to ensure that the additional charges can be dealt with and the project can continue without further delay.

Building Delays

Building contracts usually specify a date for Practical Completion, usually this date is a set period from the date of commencement. If there is no specific date listed, the law implies a term that the works have to be completed within a reasonable amount of time.

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What are delay costs in construction?

There are a range of reasons as to why a builder may delay a build, which could validly result in increased costs. Notably, the Covid-19 pandemic and adverse weather conditions has caused significant delays and limitations to residential building sites over the past two years. This can result in

Although most residential building contracts allow for delays, a builder must act reasonably and diligently to complete the works. If they are unable to complete the works within the required time, they must serve a Notice of Extension of Time Request and a Notice of Delay on the Homeowner within a reasonable timeframe.

Delays may sometimes be caused by a Homeowner interfering with a site or making changes to the scope of works or materials to be sourced for a job. These types of delays can also result in a breach of the contract and cause the contract to lapse as the terms initially agreed upon may become void. In these circumstances, the Homeowner may be liable for any additional costs to the Builder as a result of the delays.

Provision or Prime Cost Items

What is prime cost and provisional cost? Under a building contract, provision or prime cost items are items that are not a fixed price but rather an allowance is allocated for these items. If the costs of these items exceeds the allowance made under the contract, then the Builder is entitled to pass on these additional charges to the Homeowner under the terms of the building contract.

Statutory Costs

Residential Building contracts generally contain a clause indicating that additional statutory charged can be passed on by the Builder to the Homeowners. These charges may including increased levies, government regulations, taxes or other authority fees. However, these statutory costs do not include the rise in the price of material or labour (in the event of a fixed price contract).

Rise and Fall Clause

In some circumstances, building contracts may including a provision called a “Rise and Fall” clause.

What is a rise and fall clause?

This type of clause is not a standard or common clause in residential building contracts, however, can be included in special conditions. A “Rise and Fall” clause allows a builder to pass on increased costs to a Homeowner. For example, increased costs as a result of COVID-19 or a rise in material prices may be recovered from a Homeowner if there is a specified clause allowing it within the building contract.

Do I have to pay when the builder increases the contract price?

Liability for payment is determined by the terms of the building contract, as well as any reasonable and valid notices provided by the Builder during the course of the building works. This means that it is extremely important to understand the terms you are agreeing to before you sign.

What can you do if your builder is taking too long?

It is important to note that if the Builder does not complete the works within the time allocated under the contract, the Homeowner may be entitled to damages for the Builder’s failure to complete the building works on time. In this regard, it is important for Homeowners to review the liquidated damages clause of their building contract prior to entering into it.

The Builder may also be able to make a claim for delay due to any omission or interference by the Homeowner. These types of claims are again dependent on the terms set out in the employment contract.

If you are a Homeowner and believe your builder has wrongfully charged you for an increase in costs under a fixed contract price, or you have faced loss due to lengthy building delays, or your Builder is attempting to claim damages from you, please do not hesitate to reach out to our friendly Commercial Litigation team to discuss your options moving forward.

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What Next?

The best way to resolve any type of building dispute is to firstly for the parties to communicate with each other. Closed communication can make the issues much harder to resolve.

It is also important for all communications between the parties to be recorded in writing, so that there is a clear paper trial of what has taken place and been discussed and agreed between the parties throughout the building works.

Coutts is able to assist both Homeowners and Builders in respect to disputes under a building contract including advising them of their obligations and rights pursuant to the terms of the contract.

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