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HIA is aware that the ongoing impacts of COVID-19 combined with increased building activity due to the HomeBuilder grant is leading to price increases across both labour and materials.
When accounting for and responding to price increases you should:
Two basic forms of contract are used in the residential building industry:
Under a fixed price contract the builder agrees to bear 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.
Even if a rise or collapse in the market dramatically pushes up the price of materials, it is unlikely a Court will 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 as the risk rests with the builder.
Try and make sure any commitments you have made in a fixed price contract with an owner match those obligations the suppliers have to you.
Under a cost plus contract, the client agrees to take on any escalation in prices. The client is charged for the actual cost of construction “plus” profit, which is normally expressed as a percentage of the costs of construction.
Many owners baulk at using cost plus contracts. They want a degree of certainty in knowing how much the job will cost.
Depending on your state, there may be some restrictions on using cost plus contracts.
You may be able to include a price adjustment clause in a fixed price contract.
This type of clause enables the contract price to be adjusted when there is a shift in price for a particular material.
Any price adjustment or rise and fall clause will have to be carefully drafted with the increase in contract price based on a formula, which will require disclosure of the contracted price of the material with the actual cost. Actual increases will need to be substantiated.
There are also some general principles that apply when using rise and fall clauses:
Drafting and applying these clauses is complex and, for these reasons, HIA contracts do not include rise and fall clauses.
There are different requirements in relation to rise and fall clauses across the country and may be subject to certain requirements.
Can you include a rise and fall clause in your residential or domestic building contract?
Only for works over $500,000 or if the clause complies with the regulations (there is currently no regulation providing for a clause at this time).
Depending on the nature of the work it may be possible to use provisional sum or prime cost items for specific trades to give an element of protection against cost increases.
While you should always provide a reasonable estimate for a prime cost or provisional sum item over-utilising prime cost and provisional sum items may make some clients uncomfortable.
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