Managing Cost Pressures in the Building Industry

Posted 10-05-2022
Written by admin 101

Economic factors and supply chain issues have seen building costs increase substantially in recent months. RMB Lawyers’ Building & Construction division explains it is important that homeowners are aware of how to manage these costs pressures.

Shortages in key building materials and labour, combined with strong demand for residential building work, have contributed to record growth in construction costs. Faced with these market conditions, builders are seeking to pass increased costs on to customers.

The type of building contract entered between the builder and client, and the provisions contained in this document, will determine who is responsible for increased costs.

Common residential building contracts are ‘fixed price’ and ‘costs-plus’ contracts.

Fixed price building contracts provide a lump sum price for building works, with contract price fluctuations generally permitted for variations to the works and time delays outside the builder’s control.

The scope for changes to the price of building works is greater in cost-plus contracts, which provide for a contract price based on the costs of building plus the builder’s margin.

Prospective homeowners should therefore seek to enter fixed price building contracts and, to the extent possible, ensure that the terms of these contracts limit the ability of builders to pass on rising materials and labour costs.

However, homeowners should be aware that fixed price contracts increasingly include terms that make the homeowner responsible for bearing rising material and labour costs. Such provisions include broad ‘prime cost’ or ‘provisional sum’ clauses providing variable allowances for certain items where the actual price is unknown at the time of entering the contract.

Where the price becomes known, such provisions can be used to capture any market increases in the price of these items. Similarly, ‘rise and fall’ clauses provide a formula used to calculate and pass on, any increases in the market price of specific building materials.

Homeowners who are considering entering into a building contract must consider the period during which a tender or contract price remains open for acceptance. In practice, this time is increasingly being shortened to allow builders to revise the price of building work as costs increase. 

Homeowners who are already party to a building contract may face calls from their builder to re-negotiate the terms of their contract or requests for variations designed to capture rising costs. However, unless the terms of the building contract allow for re-negotiation or variations of this nature to occur, homeowners may not be obligated to bear increasing costs.

If you have experienced or concerned about a recent building contract, your first step should be to contact our office to arrange a free consultation. You can contact us by by phone or our 'Ask a Question' tool on our website.