Members have been letting us know that the ongoing impact of COVID-19 is causing delays in the supply of building materials from both local and overseas sources across the country. Combined with the unexpected increase in uptake of the HomeBuilder grants and a secondary boom in late 2021 there continues to be significant pressure on the availability of labour and price increases are remaining across the building supply chain.
While the extent of the delays and cost increases will vary in each state HIA is aware that this is leading to cost pressures and is impacting the timely progress of many building projects.
Here are some of the commonly asked questions about how to manage price increases and delays to residential building work.
Can I pass on price increases to products and materials?
In most cases the answer is no, but it can depend on the type of contract you are using and any specific clauses in that contract.
If you are using a fixed price contract, then the builder is responsible for any costs above the fixed price except for those costs:
- incurred because of variations requested by the client or
- matters outside the control of the builder, such as a fire, war, strike or natural disaster.
If you are using a cost-plus contract, the client agrees to take on any changes in price. The client is charged for the actual cost of construction “plus” profit, which is normally expressed as a percentage of the costs of construction.
But I thought I could pass on a price increase through Provisional Sums and Prime Costs?
Provisional sum or prime cost items for specific trades may provide some protection against cost increases.
Prime cost items are a fixture or fitting that has not been selected, or the price of which is not known when the contract is entered into.
Under the contract the builder must provide a reasonable allowance for these items however the end price may change depending on the items final cost. This might include the supply and installation of tiles when the homeowner has not made a final selection about which tiles to use. The price can be adjusted accordingly and no variation to the contract is needed.
Provisional sum items are an estimate of the cost of providing particular contracted services that the builder cannot state a definite amount when the contract is entered into. This might include excavation work.
In both cases these items and a reasonable estimate of their costs should be identified in the contract which sets out how to make adjustments to these amounts if needed.
But what if continuing to work under the fixed price contract becomes unprofitable?
Even if the effects of COVID-19 and government stimulus push up prices, it is unlikely a Court would intervene and help out the builder. Future material price increases should have been contemplated when the contract was quoted.
Just as an owner is not able to reduce the amount paid if the price of materials decreases a builder is not entitled to pass cost increases to the owner.
So, when you have entered into a fixed price contract, there are very limited ways increases in the cost of labour and materials can be passed onto the client.
I have heard a lot about ‘rise and fall’ clauses or ‘cost escalation’ clauses what are they?
A cost escalation clause is a provision that allows the contract price to increase to reflect increases in costs of labour and materials or costs increases due to delays in carrying out the work.
A rise and fall clause is a provision that allows the builder to pass on to the client, increases and reduction in the cost of performing work. Generally, changes in the price of labour, materials or any other specified factor can be adjusted and passed on to the homeowner according to an agreed formula, despite there being a fixed price under the contract. This can lead to the homeowner paying a lower price.
Does my HIA contract include a ‘rise and fall’ or ‘cost escalation’ clause?
No. HIA contracts do not include rise and fall or cost escalation clauses. This for 2 reasons:
- In some places across the country these types of provisions are banned and will either be considered void or unlawful if included in a residential or domestic building contract.
- Where these provisions are allowed, they are complex to draft and administer and can result in a builder being worse off.
What about variations? Can I use a variation to pass on price increases?
You may be able to pass on a price increase through a variation if there has been:
- An omission, addition or change to the building work; or
- A change in the manner of carrying out the building work.
This may be suitable where a product or material is being substituted and this results in a price increase.
So how can I respond to price increases during construction work?
It depends…
- Under a fixed price contract, unless there is a contractual provision which allows you to, you cannot pass on a price increase.
- Under a cost-plus contract, you can pass on price increases as you are charging the client for the actual cost incurred, at the time you incur it.
Will HIA draft a rise and fall or cost escalation clause?
No. However HIA is happy to discuss the pros and cons of having these types of clauses in your building contracts.
Can I ask for more time to complete the building work?
Yes. While HIA contracts deal with this slightly differently across the country, generally if something happens during construction work that causes a delay that was:
- Caused by something outside of the builder’s control; and
- Was not reasonably foreseeable at the time you entered into the contract; You can ask for an extension of time to complete the work.
I signed the building contract in September 2020 and commenced work in February 2021, and I have been told that I won’t be able to get a product for 2 months, what should I do?
Considering the impact of COVID-19, announcements regarding HomeBuilder and the significant take up of the grant, it was unlikely that in September 2020 you would have known how these factors would impact on the supply of material. In these circumstances it is reasonable for you to claim an extension of time.
I signed a building contract in January 2021 and commenced building work at the beginning of March. I am having trouble securing trades to ensure the work continues smoothly, what should I do?
From the beginning of 2021, product, material and labour delays and shortages were becoming apparent. So, from January 2021 builders really needed to start factoring in these delays to the building period. While this might make it difficult to claim an extension of time it is always worth discussing with your client and asking for more time.
What if the client is unhappy about allowing me extra time to complete the work?
In some states, such as NSW, you do actually need your client to agree to an extension of time. In other states you don’t. In both cases you could:
- Monitor the progress of the construction work and track it against contracted timeframes.
- Talk to your client and communicate any delays or disruptions as soon as possible.
- Provide evidence to support your claim. Economic information or correspondence from suppliers may help convince a client that the delay was not foreseeable at the time of signing the contract.
- As a last resort use the dispute resolution clause in the contract.
HIA has developed a Tool Kit for members and their clients to help manage delays and price increases during a residential building project. Members an also contact a HIA Workplace Advisor for advice and assistance on 1300 650 620.
Craig Jennion
Housing Industry Association
Executive Director - Hunter