Cost increases across the industry, what does your contract say?

As members are aware, the ongoing conflict in the Middle East has contributed to significant increases in fuel prices across Australia, with further volatility anticipated. Given fuel is a critical input across supply chains, these increases are flowing through to transportation, materials and trade costs across the building and construction industry, placing pressure on project margins and delivery.

This evolving cost environment presents real commercial and contractual risks for builders. In light of these pressures, members should carefully consider both their existing contractual entitlements and the steps that can be taken to better manage risk in future projects.

What does the Contract say?

The first step is to review your contract to determine whether it provides an entitlement to claim increases in the cost of trades, materials or supplies, whether by way of variation or another mechanism. While some contracts may provide relief, entitlement is not automatic. Each contract must be interpreted and applied in accordance with its specific terms.

MBA ACT Lump Sum Residential Building Contract

Under the Master Builders ACT Lump Sum Residential Building Contract, builders may be entitled to claim a variation in certain circumstances under Clause 15.

Relevantly, Clause 15(b)(v) provides that:
‘A Contract may be varied by changes in the price of trades or materials due to a shortage of trades or materials that was not foreseeable at the date of this Contract.’

To be valid, a variation must:

• be in writing
• clearly describe the nature and scope of the variation
• be provided to the other party before the work is carried out
• be followed by written notice of the cost of the variation within 10 days

Please note that the MBA ACT Lump Sum Contract provides either party with the option to terminate the Contract if a single variation is equal to or more than 5% of the Contract Sum.

For Existing Contracts, it is recommended to:

1. Communicate early and transparently with clients regarding industry-wide cost increases and warn them to expect resulting variations to the Contract Sum.
2. Issue variation notices strictly in accordance with contractual requirements and as soon as cost increases are known
3. Maintain comprehensive supporting documentation, including supplier notices, subcontractor pricing updates and invoices
4. Review outstanding work and manage the costs of variations, especially if the variation is expected to be equal to or exceed 5% of the Contract Sum.

Early engagement and clear documentation will assist in managing client expectations and reducing the risk of disputes.

Members should also be aware that similar variation provisions are not included in the MBA NSW Residential Building (BC4) Contract, and different considerations will apply.

For New Contracts:

The variation entitlement referred to in Clause 15(b)(v) applies to increases that ‘was not foreseeable’ at the date of the Contract. For new contracts, members should proceed on the basis that ongoing cost increases may be considered foreseeable and may not be entitled to rely on this clause.

It is recommended:

1. ensure contract pricing reflects current market conditions and anticipated increases
2. consider including contingencies or allowances for price volatility
3. incorporate clearly drafted special conditions that allocate the risk of cost increases

Appendix A, Item A22 of the contract provides an opportunity to include special conditions addressing cost escalation, delays, or other risks associated with ongoing price increases.

MBA ACT Cost Plus Residential Building Contract

Under the Master Builders ACT Cost Plus Residential Building Contract, builders are entitled to be paid for the Cost of Works as set out in Clause 7(a), including the cost of subcontractors, goods and materials necessary to carry out the works.

While many costs can be recovered based on actual expenditure supported by invoices, certain costs such as labour and plant or equipment hire must be stipulated in Appendix A, Item A9 of the contract.

Importantly, the contract does not provide a mechanism to retrospectively adjust these agreed rates or include an entitlement to claim for increases to these costs by way of variation.

Accordingly, members should take reasonable care to ensure that these rates adequately account for anticipated increases at the time of contracting.

Where budget reporting applies, members should:

• prepare reports with reasonable care based on current knowledge of market conditions
• proactively inform clients of expected increases in material and trade costs
• regularly update estimates of the total Cost of Works to reflect current pricing

The current volatility in fuel, material and trade costs presents ongoing commercial and contractual challenges for the building and construction industry.

Members should take proactive steps to understand their contractual rights and obligations, ensure strict compliance with notice and variation requirements, and maintain clear and comprehensive records to support any claims.

Should you require assistance with your contract,  please contact the Workplace Relations Team:

📞 (02) 6175 5900
📧 workplace@mba.org.au