Cost escalation clause

Discussion in 'Legal Issues' started by Nabsinna, 10th Nov, 2021.

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  1. Nabsinna

    Nabsinna Well-Known Member

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    Hi all,

    We signed a fixed priced contract. I was wondering how do we protect us from any future cost escalations due to increase in cost of materials and labor ?

    We did place a special condition that it is fixed priced contract. Does this have any weight?

    Kindest Regards
    Nab
     
  2. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Generally no unless it's written properly by a solicitor and your builder agrees to it. I now understand the special clause you mentioned in the other post - that one was added by you.
    It probably carries no weight as it contradicts a number of the other special clauses which presumably the builder has written.
    Although many construction contracts are labled fixed price they have a number of elements that allow increases and it generally would be unfair not to have them, these revolve around
    - time taken to get finance - it is not the builders fault if it take 3mths (for example) to get finance and construction costs go up during that time
    - time taken to get to site - it is not the builders fault if you have purchased untitled land or require a council DA that takes 3-6mths (for example) and construction costs go up during that time
    - items which are prematurely quoted - it is not wise for a builder to fix price for siteworks etc if engineering has not been done yet
    - you may requests upgrades - this would increase the price and therefore the price fixed is invalid
     
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  3. Nabsinna

    Nabsinna Well-Known Member

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    Thanks Westminster. However, based on your reasoning- I would argue I can minimise the variation?

    The established commencement date its February.
    99% chance finance will sorted in the next 3 weeks.

    Builder is also doing the demolition which should commence mid January- hence no owner related delays on getting on site

    Full engineering given prior to the quote. So builder should be able to factor it in

    I agree, this might be a variance. However, it would be in our control

    I suppose my main question is with timber prices going up and demand of tradies goes up and thereby wage etc--> How can I protect myself from absorbing those costs, which the builder should reasonably anticipate for.
     
  4. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    You can protect yourself from supply and service prices going up by understanding if there are any parts in the contract that can allow it to be on charged to you. Most HIA and MBA contracts are written quite fairly but you need someone to show you which clauses allow it then work on if you have mitigated that or if they need to be ammended or if you think they are fair and just.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Most recent contracts will include vague clauses to that effect. Often "hidden" in plain sight in "builders allowances" which may be vastly less than actual expected cost or the included allowance covers a product you wont ever want. The builder will blame cost rises on the low allowance or its out of date. The consumer wont know what "bricks" are worth v allowance and just assume the allowance is sufficient when it may not now even cover the cost of the most basic brick let alone further increases etc. Or include grey mortar only etc The price for bricks may include the builder calculated on-site cost not the lowest quote for supply from a major wholesaler. eg May include a 15% markup on "retail" per 1,000 with a breakage and waste allowance.

    Variations are also a hidden trap. Variations are usually priced with hefty margins and there is no plan B. Take it or leave it. eg You know the builder spec is a Brand XXX appliance. You vary to Miele. They quote a high price less a token "allowance" for the budget spec. You later see you could buy the same model for less than their changeover add-on so what was the allowance for ? . Much less based on a package special at Harvey Norman. Of course, that is pick up. Even if the builder has a wholesale cost they wont sell to you for that. Variation can be where 50%+ of profit lies in the world of contracting. Its why the consultant "upsell" is so important for builders.

    Most people sign off on allowances never knowing what it actually buys. Some builders and display centres are better than others at addressing it. Often packages with the "gold" standard inclusions are extra cost but may be cheaper that individually upgrading. Its efficient and often a supplier rebated deal. In reality 80% of sales will upgrade and so in practice the other 20% are actually downgrading.
     
  6. Nabsinna

    Nabsinna Well-Known Member

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    I agree - I have just gotten a lawyer to go through the contract for me. Highlighting any issues. Interestingly she is a property lawyer who was actually a CEO prev for a Med-Larg Building company. Hope, this provides some advantage.


    Excellent insights. I did most of the major color selections but may choose a premium brick or stone etc later on. Is it advisable to add on these allowances into the quote with potentially to be credited back to me if not used? At least then ill be covered by the bank for any upgrades and do not need to go full out of pocket.
     
  7. Sydneyboy

    Sydneyboy Active Member

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    I wouldn't say that the HIA and MBA contracts are written fairly. They have been prepared to protect builders' interests. In NSW, the Fair Trading contract would be more closely aligned with what is fair.

    In any case, you can have the best contract in the world with no scope for any legitimate increase, yet if your builder refuses to continue unless you agree to pay more, there is not much you can do. Even if you do get them to absorb price increases, do you want them to be incentivised to cut costs elsewhere to maintain their profit margin?

    That's why going with someone with excellent referrals from people you trust is important. I'd pay more to go with someone a friend has used rather than an unknown any day of the week.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    These are specific contracts for a single house not suitable for a townhouse project.

    No, the contact is not fair to all parties, it is for consumer protection.

    The Act refers to defined stages for progress payments whereas other contracts will require % complete, QS assessment or bank certification for a monthly progress claim.