The Rising Costs of Building - How to Minimise the Risks

An increasing problem for both builders and owners who wish to have renovations done or a new home constructed, is the rapidly increasing costs of basic building materials and in some instances, increasing delay in the supply of these materials. Basic building materials such as steel, glass and timber have significantly increased in price over the last two years.

This has created a situation where builders are reluctant to enter into a fixed price contract with a client.

Normally there is a three to six month delay between a builder providing a quote and the issue of a construction certificate which enables the builder to commence work. 

During this period, prices for basic commodities for the construction work may have increased by 10 to 15%. Also the commencement date may be delayed by the lack of available materials.

In these circumstances the builder naturally wants to protect himself against price increases by preparing a contract which allows a variation in the build cost when and if the cost of materials have significantly increased since the time of the quote. The owner however needs to know what the final build price is likely to be and the owners bank will not normally approve building finance with an open ended price.

Fixed price contracts, have in the past always included schedule of allowances in the contract price for items such as tiles, bathroom fittings, door furniture, carpets etc, which provides a price range for the owners to make their selections. If the owners select a more expensive item, a variation in the contract price occurs. (PC allowances). Standard fixed price contracts have also contained terms which allow for provisional sums to be estimated in the contract where an accurate quotation cannot be made. Example – excavation of the site.

The current problem with increasing prices can be resolved to some extent, by a fixed price contract including larger items such as kitchens and windows as PC items , and materials such as steel, and other basic building materials as provisional some items specifying the quantity and unit price on which the contract price has been calculated. In this way, the builders and subcontractors labour can remain a fixed price item, but allow a flexibility in final build price for an increase in material costs.

This will still create a problem for owners not having a clear indication of the final cost of their build and this may require some more flexibility between banks and borrowers as to the finance budget.

This problem can be dealt with by a variation in the standard terms of a Building Contract in ways which can protect both builder and owner. Call us to make an appointment.

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