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.

Under a fixed price contract, the builder is responsible for any costs above the fixed price except in certain circumstances. This means that any fluctuations in the cost of labour or materials (whether increases or decreases) are generally borne by the builder.

There are limited circumstances in which a builder may adjust the contract price, such as:

• where the client requests a variation or the variation is due to a change to statutory requirements,
• where adjustments are permitted for prime cost or provisional sum items, or
• where the contract otherwise expressly allows for an increase.
  
  

Under 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.

Depending on your state, there may be some restrictions on using cost plus contracts.

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 (labour & materials) where 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 adjust these amounts if needed.

Unfortunately, even when material and labour issues continue, it is unlikely a court would intervene and help the builder. It is likely the court will consider that future material price increases should have been contemplated by the builder 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.

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 increases and reductions in the cost of performing work to the client, according to an agreed formula, despite there being a fixed price under the contract.

No. HIA contracts do not include rise and fall or cost escalation clauses. This is for two reasons:

• In some jurisdictions, 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.
  
  

It is HIA’s position that these types of clauses are best prepared by a legal professional on a case-by-case basis as a special condition to the contract.

No. However, HIA is happy to discuss the pros and cons of having these types of clauses in your building contracts.

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.

• 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.