Sharp and rapid increases of building material costs due to COVID 19 shortages have been widely reported.
These increases make it difficult for building companies to give accurate quotes. Some will no longer give a fixed price at present due to the high risk involved. Builders are looking to pass on increased costs to consumers. This may be unavoidable, however consumers should ensure they have a degree of control over the additional costs they could incur, otherwise they are effectively writing a blank cheque.
Key areas in a build contract where a cost blowout can occur are:
1. Cost Fluctuation/Escalation Clauses
These clauses allow the builder to pass on any material price increase to the consumer, usually automatically without any consultation.
Tip: The contract should provide that any such price increase is to be treated as a variation to which the consumer must agree before work on that item commences.
2. Prime Cost Sums
These are items which at the time of entering into a contract, the price for that part of the materials is uncertain or outside of the control of the parties (i.e. to be supplied by a third party, such as kitchen cabinetry or garage door) so an estimate is allowed in the build price to cover them. If the items actually cost more than the amount allowed, the builder is able to pass on the additional sum.
Tip: Try to avoid including Prime Cost Sums by agreeing on the items and getting quotes from third-party suppliers before the contract is signed. Where this is not possible and the actual cost of the items is more than the Prime Cost Sum allowed, the contract should provide that the items are to be treated as variations to which the consumer must agree.
Where the specified materials are not reasonably procurable, the builder may substitute materials of similar quality and nature and pass on any difference in price to the consumer.
Tip: The contract should specify that substitutions, or those over a certain value, are to be be treated as variations to which the consumer must agree.
The build contract should include a clear procedure for variations or adjustments to the work, including those matters set out above. All variations should be in writing, and include a description of the work, changes to the dates and any price adjustment. There should be a requirement that a builder not commence work on any variation without the consumer’s approval.
It is possible, to a certain extent, for consumers to take back control of the costs they incur by ensuring any build contract they enter into has a robust variation clause and requires the builder to obtain their approval to cost increases rather than being able to automatically pass those on. This allows the consumer to check with their bank that they can cover the proposed increased cost before agreeing, or to consider cheaper alternative materials or removing items of work from the build contract to keep within their budget.