Price Increases in Fixed Price Building Contracts Qld

Price increases in fixed fee building contracts are becoming a significant problem in building and construction law.

We get asked almost every day “can my builder increase the price of a fixed-price building contract?”

In most cases the answer is “no”. But there are a few exceptions, including:

1. Rise and fall clauses; and/or
2. Prime costs and provision sums; and/or
3. Contract clauses or special conditions.

In most cases, unless your building contract allows for it, a builder may not pass on material and labour price increases to the owner in a fixed-price building contract.

In this article, our Queensland building and construction lawyers outline the owners rights and some relevant case law in relation to price increases in fixed fee building contracts.

As a general rule, your builder cannot charge price increases in fixed price building contracts, except in a few circumstances. Please ensure that you get professional advice from a construction lawyer.

Before reading this article it is vital that you read the following:

1. Negotiating with your builder without legal advice may cause you to inadvertently breach the building contract or repudiate the building contract.
2. You may also inadvertently agree to the price increase.
3. A breach or repudiation may allow the builder to terminate and commence litigation proceedings to recover damages against an owner.
4. We strongly advise against negotiating amendments to your building contract before speaking to a qualified solicitor, as the consequences could be severe.
5. We offer advice and assistance to clients who need to amend or terminate a contract because of price increases in a fixed fee building contract.
6. DO NOT act on the information contained in this article without getting suitable legal advice, because all matters and contracts are different, and this information may not be suitable in your particular case.

What is a Fixed Price Building Contract?

Before we can answer the question of whether a builder can increase costs in a fixed price contract, it is important to understand what a fixed price building contract is.

A fixed price building contract contains a lump sum fixed fee to build the entire house including all materials and labour. Subject to a few exceptions, this price cannot be changed.

By entering into a fixed price building contract, the price you pay for your house is not dependant on the materials used or labour expended to complete the works.

In Queensland there are basically three (3) fixed price contracts that get used mostly, they are:

1. HIA Fixed Price Contract.
2. Master Builders Fixed Price Contract.
3. QBCC Fixed Price Contract.

They are different but have a lot of the same issues in relation to price increases.

The main reasons that building companies have been trying to increase the price of fixed price building contracts is because of increases in building costs and materials.

Increases in Building Costs & Materials

The increase in building material costs and labour costs is allegedly due to a number of different things in Queensland, including:

1. COVID-19 – and the effects of isolation on international shipping and building material supply chains.
2. Flooding – and the increased demand in building materials due to insurance builders fixing or rebuilding flooded homes.
3. Global Surge – in the cost and demand for steel, timber, and other building & construction materials.
4. HomeBuilder Grants – causing a surge in demand, combined with the spike in migration from other Australian States and Territories.
5. Low Interest Rates – and the abundance of cheap money and increased borrowing capacity has caused a demand for housing.
6. Russia / Ukraine – conflict causing an increase in the cost of machined timber products.

Some or all of this might be true.

It is unfortunate; however, this does not change the fact that a builder cannot cannot charge price increases in fixed fee building contracts, except in a few circumstances.

However, evoking one, some, or all of the above, some builders are attempting to increase the price in the fixed price building contracts.

Sometimes aggressively and by threatening delay and delay damages unless an owner pays.

There are only a few cases in which an owner with a fixed price building contract will have to pay because of price increases.  They include:

1. A price increase of prime cost items
2. A price increase of provisional sum items
3. Rise and fall clauses in the contract
4. An increase in statutory fees/costs.

We will explain these in more detail below.

A Price Increase of Prime Cost or Provisional Sum Items

Prime cost items are essentially fixtures and/or fittings that have not been decided on by the owner at the time of entering into the building contract, or the price is unknown at the time of entering into the building contract.

This can include items such as tiles, taps, light switches, clothesline, letterbox, fly screens, etc.

Section 1 of Schedule 1B of the Queensland Building and Construction Commission Act 1991 (Qld) (“the QBCC Act”) says:

“prime cost item”, for a domestic building contract, means an item, including, for example, a fixture or fitting:

(a) that has not been selected, or the price of which is not known, when the contract is entered into; and

(b) for the cost of supply and delivery of which a reasonable allowance is, or is to be, made in the contract by the building contractor.

Provisional sum items are allowances for works which are required to be undertaken but cannot be exactly priced at the time of entering into the building contract.

This can include plant hire, building materials, labour, services connections, and landscaping.

Section 10 of Schedule 1B of the QBCC Act says:

(1) A “provisional sum”, for a domestic building contract, is an amount that is an estimate of the cost of providing particular contracted services.

(2) However, subsection (1) applies only to contracted services for which the building contractor, after making all reasonable enquiries, can not state a definite amount when the contract is entered into.

(3) The reference in subsection (1) to the cost of providing the contracted services includes a reference to the cost of supplying materials needed for the subject work.

Prime cost and provisional sum items will usually have an allowance contained in the building contract.  These allowances do not include a builder’s margin.

If the prime cost or provisional sum allowances in the building contract are $0.00 or $nil, then there are no further prime cost or provisional sum fees to pay.

There is also usually a list of potential prime cost or provisional sum items – if applicable.

So, if there is no provision for prime cost or provisional sum items, then the fixed price building contract cannot be increased because of this.

If there is a provision for prime cost or provisional sum items, then the price can only be increased in the amounts stated, or in relation to the items stated (if any).

Section 26 of Schedule 1B of the QBCC Act says:

26 Calculation of provisional sums and prime cost items

(1) This section applies to a regulated contract providing for a provisional sum or prime cost item.

(2) The building contractor warrants the provisional sum or prime cost item has been calculated with reasonable care and skill, having regard to all the information reasonably available when the contract is entered into (including information about the nature and location of the building site).

You should also look for rise and fall clauses.

Rise and Fall Clauses in the Contract

A builder is sometimes entitled to include a ‘rise and fall’ clause in the building contract.

Rise and fall clauses are sometimes referred to as a cost escalation clauses or price adjustment clauses.

As the name suggests, the rise and fall clause allows the builder to pass on any price rises or discounts for any reductions.

If a contract contains a rise and fall contract, then the builder may be able to add the price increases onto the owner.

There are essentially two (2) different types of rise and fall clauses:

1. Formula-based rise and fall clause; and
2. Cost-based rise and fall clause.

A formula-based rise and fall clause is calculated upon a formula. The formula is used to calculate the increase in price, such as $ per M² for example.

A cost-based rise and fall clause will usually make reference to a cost variation, similar to a cost-plus building contract – cost plus % or $ increase.

Typically, a rise and fall clause may have features of both the cost-based rise and fall clause and a formula-based rise and fall clause.

However, there are strict requirements for a rise and fall clause to be enforceable in contract law. These include:

• Unconscionability – the rise and fall clause should not be unconscionable or unreasonable.
• Certainty – the rise and fall clause must be certain.
• Workability – the rise and fall clause should be workable.

Rise and fall clauses are very complex and relatively new and not well understood. So even if there is a rise and fall clause in your building contract, then it may be unconscionable, uncertain, and/or unworkable; or does not have the legal requirements of a rise and fall clause – and may be able to be struck out of the contract.

In Stanwell Park Hotel Co Ltd v Leslie (1952) 85 CLR 189, Dixon, Williams, Webb, Fullagar and Kitto JJ looked at the certainty of a rise and fall clause. They said:

The suggestion made for the defendant-respondent that the clauses were bad for uncertainty cannot be sustained nor can the further suggestion that there was a waiver on the part of the vendor of his right to adjust, under cll. 22 and 23, the four payments of 50 pounds and the four of 25 pounds made during the currency of the contract … The appeal should be allowed.

Rise and Fall Clause Example

An example of a rise and fall clause is something like this:

Where the building contract exceeds a period of six (6) months and where changes in prime material costs during the building period can be substantiated and exceed 5%, the change in material costs shall be claimed as a variation at a rate of cost plus 10%.

This is just an example, and not to be used as a genuine rise and fall clause.

However, if your contract contains a clause which looks similar to this, then the builder may be able to claim for price increases.  This might be included in the special conditions, for example.

If there is no rise and fall clause / cost escalation clause / or price adjustment clause in your Queensland building contract, then you may not have to pay any price increases in a fixed price building contract.

There may also be some room to include the increase in statutory fees/costs.

An Increase in Statutory Fees/Costs

A building contract will usually include a clause where the owner will be liable for the price increase of any statutory body, local authority, etc. after the date of signing the building contract.

This can include things like charge, levy, regulation, tax, or statutory or other authority fees.

However, these do not include the price increases due to the rise of the price of materials and labour.

There may be some other reasonable costs increases in a contract.

Contractual Entitlements to Increase Costs

The owner will usually be liable under the contract for some or all of the following price increases:

1. Compliance – if the owner has not complied with some clauses within a requested time, then the builder can charge extra.
2. Delay – if the build is delayed as a result of the owner, then the builder may be able to claim damages for delay.
3. Prime cost and provisional sum items – As above, if the contract includes an allowance for these, then the builder may claim them.
4. Site information – if the site information is wrong and it causes the build to be different, then the builder may charge a reasonable extra fee.
5. Site possession and access – if the builder does not get possession and access to the site causing delays, then they may be able to claim delay damages.
6. Suspension of works – if the builder is entitled to suspend works as a result of something the owner has done or omitted to do, then they may be able to charge an increased fee.
7. Variations – if the builder becomes aware of any unforeseen circumstances, then the builder can issue a written variation for any extra work required to be done.

In our experience, most of the building companies who attempt to unlawfully pass on the increased costs in labour and materials, will do this by issuing an alleged variation.

If there is a unilateral variation clause in the contract, then it may well be an unfair contract term pursuant to the Australian Consumer Law.

Cost Increases and Variations

A variation clause in a building contract is a clause which allows for a variation in the scope of works.

Variations are to be used only for unforeseen circumstances relating to the building works.

Increased costs because of COVID etc. are not able to be claimed as a variation.

The Master Builders put out a pdf in September 2021 in relation to price increases due to COVID-19, so it is hard now for a builder to make an argument that COVID-19 was unforeseen.  However, it is irrelevant because a variation means (inter alia):

1. an omission, addition or change to the works; or
2. a change in the manner of carrying out the works.

Generally, labour and material price increases are not variations to the scope of works under a contract – and as such, these costs should be incurred by the builder and not by the owner.

If your builder is trying to pass the costs increases of materials and labour in a fixed price building contract, then it is important that you seek legal advice as soon as possible, as there are requirements in building contracts to respond to variations in short periods of time.

The risk is that the builder tries to suspend the works and attempts to charge delay damages.

Price Increase because of Delays in Building

A builder may be able to claim extensions of time if the delay is not caused by the actions or omissions of the builder.

This can include extensions of time if the cause of delay is for material or labour shortages.

Some contracts allow a suspension of works for not accepting a variation, and the owners find themselves in a situation where they have been given an unlawful variation, do not accept it, and the builder suspends works and tried to claim delay damages on top.  For example:

1. An owner does not have to agree to the variation.
2. An owner must usually respond to the variation within five (5) business days stating that they do not agree to the variation, and that it must be withdrawn.
3. One risk with this would be that if the builder attempt to force this variation, then they can argue that this is a claimable delay (which it is not).
4. If the builder claims that it is a claimable delay, then they may try to make a claim for delay damages.

We have had matters like this, and it just gets messy and expensive.

Can my Builder Increase the Price on a Fixed Price Building Contract?

If you have a fixed price building contract, unless there is a contractual provision (as above) which allows for it, a builder cannot pass on a price increase to an owner.

However, before telling your builder that you have read an article online and they can shove their price increase, it is vital that you get legal advice.

It may be that your contract does not quite fit into one of the categories in this article, and you will need a solicitor to apply the law to the facts in your particular matter.

As a general rule, your builder cannot charge price increases in fixed price building contracts, except in a few circumstances. Please ensure that you get professional advice from a construction lawyer.

Building Contract Price Increase FAQ

We get enquiries every day about building and construction disputes and price increases in fixed price building contracts.  There is a lot of it going on as can be seen in the news.

We have developed a number of frequently asked questions.

Can a builder increase the contract price 2023 QLD?

If you have a fixed price building contract, and no contractual allowances for a price increase, then no, a builder cannot increase the price of a fixed price contract.

The builder can increase the price of a costs plus building contract.

What is a fixed price building contract?

A fixed price building contract contains a lump sum fixed fee to build the entire house including all materials and labour. Subject to a few exceptions, this price cannot be changed.

Can you modify a firm fixed price contract?

Yes. If the parties to a building contract both agree to increase the prices, or vary the contract, then the price / contract can be modified. Otherwise, there must be contractual clauses which allow one party to unilaterally modify a firm fixed price contract.

Can a builder charge more than the quote?

A builder can charge more than the quote if there are allowances in the building contract which allows the builder to charge more than the quote.  Otherwise, unless it is totally reasonable, a builder cannot charge more than the quote for building works.

What is rise and fall in a building contract?

As the name suggests, the rise and fall clause allows the builder to pass on any price rises or discounts for any reductions.  If a contract contains a rise and fall contract, then the builder may be able to add the price increases onto the owner.

How is a rise and fall cost adjustment made?

There are essentially two (2) different types of rise and fall clauses:

1. Formula-based rise and fall clause; and
2. Cost-based rise and fall clause.

A formula-based rise and fall clause is calculated upon a formula. The formula is used to calculate the increase in price, such as $ per M² for example.

A cost-based rise and fall clause will usually make reference to a cost variation, similar to a cost-plus building contract – cost plus % or $ increase.

How long will the building material shortage last?

The building material shortage will likely continue to a number of years.  The shortage is caused by COVID-19, flooding, the global surge in materials, HomeBuilder grants, low interest rates, and the Russia / Ukraine conflict. So, Australia is currently in the eye of the storm.

As a general rule, your builder cannot charge price increases in fixed price building contracts, except in a few circumstances. Please ensure that you get professional advice from a construction lawyer.