Economic pressures and persistent supply chain disruptions are driving building expenses to unprecedented levels across Australia, creating significant challenges for the construction sector.
Ben Kuzman from RMB Lawyers, a specialist in building and construction law, states that builders and contractors must understand how to navigate these escalating cost pressures effectively.
Understanding Your Building Contract Type
Severe shortages in essential building materials and skilled labour, combined with robust demand for residential construction, have fueled record growth in project expenses. The type of agreement signed between builders and homeowners fundamentally determines who bears the burden of these increasing costs.
Most residential projects use either 'fixed-price' or 'cost-plus' contracts, each with distinct implications for financial risk.
Fixed-price contracts establish a lump sum for construction work, with price adjustments typically limited to variations in project scope or delays beyond the builder's control. This structure means builders largely absorb the risk when material and labour costs rise unexpectedly.
Navigating Contractual Safeguards
Cost-plus contracts offer greater flexibility for price changes, as the final contract price reflects actual building costs plus the builder's margin.
Builders should exercise particular caution with fixed-price agreements, especially during periods of economic volatility. Over recent years, overreliance on fixed-price contracts has pushed numerous builders into financial distress or outright failure when actual project costs exceeded contracted amounts.
When entering fixed-price arrangements, builders should ensure they utilize specific contractual provisions to distribute cost increase risks more fairly. These include 'prime cost' or 'provisional sum' clauses that provide variable allowances for items with unknown prices at contract signing.
Similarly, 'rise and fall' clauses employ a calculated formula to pass market price increases for specific building materials directly to the homeowner.
Protecting Your Business in Uncertain Times
It is crucial that builders carefully review project scope and provide accurate pricing when presenting 'fixed price' contracts. Underestimating project expenses carries substantial risk, potentially forcing builders to complete more work, or more expensive work, than anticipated at the agreed price.
The alternative—seeking contract variations to adjust price or scope—remains entirely at the homeowner's discretion, creating additional uncertainty for builders.
As the building industry continues grappling with upward cost pressures, RMB Lawyers recommend builders and contractors seek professional legal advice to carefully manage these rising expenses within their contracting arrangements.
Builders can find more information at RMB Lawyers or by calling 1800 681 211.
