Frequently asked questions about the impact on rising fuel and supply costs from the Middle East conflict and increasing pressure on builders’ contracts.

 

EXISTING CONTRACTS

1. I already have an existing residential building contract, and my prices have increased due to the rising cost of fuel. How do I pass on these costs to the owners?

This depends on your contract. If you have entered into the MBA NSW Cost Plus (Residential) building contract, price increases will naturally be incorporated into your progress claims as part of your direct costs.

Unfortunately, if you are already a party to an MBA NSW BC4 building (or any other standard form lump sum contract) you are bound by that contract, even if it suddenly becomes more expensive to carry out work under it. The BC4 is a fixed price contract and, subject to any agreed or permissible adjustments pursuant to the terms of the contract, the price cannot be increased. 

A builder may be able to pass on price increases under the BC4 if:

• The builder has included provisional sum or prime cost item allowances for part(s) of the scope of works which are directly affected by increasing supplier and/or subcontractor costs (clause 15); or
• The builder is unable to obtain material required by the specifications, or can only obtain that material with an unreasonable period of delay, and seeks instructions from the owner concerning substitutes to be used, which then results in a variation for the price difference (clause 9(c)); or
• The owner requests a change or addition to the scope of works, and the parties agree to an owner-requested variation incorporating additional costs (clause 14); or
• The parties negotiate in good faith and agree to, for example, split additional costs evenly. This is subject to the cooperative of your client; or
• There is a delay referred to in clause 11(f) of the contract, which is essentially a client or Council-caused delay (see below for further information).

The other MBA contracts contain similar provisions; however specific advice should be obtained in relation to these and how they affect you.

 

2. How do I ensure that my client has capacity to pay?

An ability to claim extra under a contract may be hampered if the owner doesn’t have the capacity to pay it. Your entitlement to request evidence of capacity to pay will depend on the terms of the contract. The BC4 contract (clause 2(b)), the Cost Plus (Residential) contract (clause 2(b)), the MBA NSW Small Renovations & Additions contract (clause 1(d)), the MBA NSW BC3 lump sum commercial contract (clause 3(b)), and the MBA NSW Cost Plus (Commercial) (clause 2(b)) all allow the builder to request from the owner at any time during the contract evidence of capacity to pay the balance of the contract price or estimate.

If you have concerns that your client may be running out of money you should request such evidence as a matter of urgency. If the owner cannot provide such evidence, you may consider suspending the works to avoid further outlay while the owner’s financial position remains uncertain. Under the BC4 and Cost Plus MBA contracts suspension entitles the builder to delay costs (see clause 11(f) in both contracts).

 

3. We want to stop works until there is more certainty around fuel costs and associated supply issues. Is this possible?

Again, whether you can suspend the works without the owner’s agreement will depend on the terms of your contract and whether there are valid grounds for suspending.

The MBA contracts allow for suspension generally where the owner cannot provide evidence of capacity to pay (see above) or where the owner doesn’t pay a progress claim which is due under the contract, and on various other grounds.

The parties can always agree to place the works on hold by agreement; however you should consider:

·        Potential further increases in costs for materials and trades as time goes on, given that once prices are increased some suppliers and trades may not reduce their prices even after the global situation has stabilised.

 

·        The effect that suspension may have on the state of the works having regard to potential deterioration from weather and exposure to the elements.

 

·        If you have other projects to continue on with during the period of suspension.

 

·        If the suspension by agreement continues for more than three months, under the BC4 and Cost Plus (Residential) contracts the builder can terminate after 10 business days’ notice (certain contractual notices must be issued in relation to this course of action).

 

4. How do I deal with shortages in supply for existing contracts?

You may be able to procure substituted materials or products (such as under clause 9(c) of the BC4). Note that instructions from the owner must be sought regarding substitution, otherwise you run the risk of being in breach of the contract and of the specific statutory warranty in Home Building Act 1989 (NSW) which requires works to be done in accordance with the plans and specifications in the contract.

If you cannot obtain different materials to prevent the works from being delayed, then you should claim an extension of time under the relevant clause in your contract. 

The BC4 contract contains a “saving grace” clause 11(a)(xii) which allows the builder to claim an extension of time for “any other cause, thing or matter beyond the reasonable control of the builder, such as (but not limited to) shortages or delays in procuring trades or materials, or from delays caused by trade contractors which affect the builder’s ability to do the work”. If you don’t have such a clause, you can negotiate with the owner in good faith to achieve an outcome which works for everyone.

If you cannot substitute material and seek a variation, you will still be required to obtain the original material and may have to wear the additional cost if you are under a fixed price contract and the supply is not the subject of a prime cost or provisional sum allowance. However, you will be able to protect yourself against liquidated damages claims by the owner by submitting extension of time claims.

 

5. Can we terminate the contract if there is a “Force Majeure” clause?

Force majeure clauses allow for delay claims and in some cases termination where there is an “act of God” beyond the control of one or both of the parties. Price increases are unlikely to constitute a force majeure event however you should seek legal advice in relation to this option if you have a force majeure clause in your contract.

MBA contracts do not contain reference to “force majeure”.

 

6. How do MBA NSW contracts deal with delay?

MBA NSW BC4 fixed price residential building contract
Pursuant to clause 11 the Builder is entitled to an extension of time if the progress of the works is delayed by a whole range of reasons including but not limited to:

• variations; or
• suspension of the works; or
• any act, default, delay or omission on the part of the owner in doing a thing necessary to allow the works to proceed (including obtaining finance); or
• an instruction by the Owner to stop the works; or
• any other cause, thing or matter beyond the reasonable control of the builder, such as (but not limited to) shortages or delays in procuring trades or materials, or from delays caused by trade contractors which affect the builder’s ability to do the work.

MBA NSW Cost Plus (Residential) contract
Under clause 11 the builder is entitled to an extension of time if the progress of the works is delayed by any of various causes of delay, the same as those in the BC4.

MBA NSW Small Renovations & Additions fixed price contract
Under clause 6, the builder is entitled to an extension of time for variations or other event or matters reasonably beyond the builder’s control (including inability to obtain materials or trades people).

MBA NSW Minor Works fixed price contract

Under clause 4 the contractor is entitled to a reasonable extension of time when the work or the ability to work is affected by events or matters beyond the contractor’s control (including the inability or delay in getting material or trades).

MBA NSW BC3 fixed price commercial contract

Under clause 6, the builder is entitled to an extension of time for delays caused by similar grounds to those allowed for under the BC4 and Cost Plus (Residential) contracts.

MBA NSW Cost Plus (Commercial) contract

Under clause 10 the builder is entitled to an extension of time for delays caused by similar grounds to those allowed for under the other larger MBA contracts, including for “any other cause, thing or matter beyond the reasonable control of the builder, such as industry wide trade shortages which affect the Builder’s ability to do the work”.

 

 

NEW CONTRACTS

 

1. How do I protect myself against potential increases in labour and materials costs for a contract I am about to sign?

For fixed price contracts that are not yet signed, the builder has the option of assessing which areas of the scope of works are likely to attract price increases in materials and/or labour, and include these “volatile” items as a provisional sum or prime cost allowance (see Schedule 10 item 11 and clause 15 of the BC4). Builders should consult their suppliers and subcontractors in relation to anticipated price increases prior to preparing the contract.

As was the case during the Covid-19 era, the best way to deal with potential increases is to enter into a cost-plus contract with the owner. The usual issues with lenders tending to shy away from cost plus contracts may restrict the scope of this option. Otherwise, if the builder intends on entering into a fixed price contract, and is limited in the number of provisional sum or prime cost allowances it is able to include, the contract price should be quoted with plenty of "fat" in the margin component to allow for the likely cost increases. 

 

2. How do I ensure that my client has capacity to pay?

Your entitlement to request evidence of capacity to pay will depend on the terms of the contract. The BC4 contract (clause 2(a)(ii)), the Cost Plus (Residential) contract (clause 2(a)(ii)), the MBA NSW BC3 lump sum commercial contract (clause 3(a)(iii)), and the MBA NSW Cost Plus (Commercial) (clause 2(a)(ii)) all allow the builder to request from the owner prior to the commencement of work evidence of capacity to pay the balance of the contract price or estimate.

These contracts also make the provision of such evidence a pre-condition for commencement of work.

 

3. How do I deal with potential delay caused by shortages in supply for a contract I am about to sign?

Before signing any contract, you should become familiar with the extension of time claim provisions in the contract. MBA contracts mostly do not require extension of time claims to be submitted within a certain timeframe (except for the BC3 which requires the notification within fifteen (15) business days. However, we strongly recommend that extension of time claims are made at the time the delay is occurring or ending, so that the events are fresh in your mind and any relevant evidence is easily at hand.

You should also ensure there is plenty of room to move with the construction period.

 

4. Can I include a rise and fall clause in the contract?

Rise and fall clauses are complex and run the risk of being unenforceable under consumer protection legislation and rejected by lenders. Such clauses may be considered; however, they must be drafted on an individual basis as there is no “one size fits all” rise and fall clause which is free from risk. An owner may potentially honour such a clause, but if the parties fall into dispute and the clause is examined by a Court or Tribunal it may be found to be in contravention of consumer legislation. MBA NSW does not endorse rise and fall clauses given the risk factors involved.

 

5. What should I consider when signing a new contract?

You might consider delaying signing a new contract until the current climate has settled, and the direction of potential cost increases is better known.

Push for a cost-plus contract as this is safest in the current situation.

If you can’t sign a cost-plus contract, include as many allowances as possible, as prime cost items or provisional sums for volatile materials or scopes work.  Be wary of including so many prime cost items and provisional sums that your contract may not satisfy the requirements of a lump sum contract by the lender.

Load up the contract price as much as the market will allow to provide a protective contingency buffer.

Allow for plenty of time in the construction period, noting that you should still always claim for extensions of time under the relevant term of the contract.

Consider personal guarantees – Builders entering into contract where the owner is a company might consider requesting a personal guarantee from a director, guaranteeing the payment of moneys by the owner under the contract.

 

6. From here:

Even modest fuel price increases are now placing pressure on residential and commercial construction, making contract selection and drafting essential for both builders and owners to ensure transparency and fair risk allocation across projects.

You should:

• Examine current or future contract terms in relation to allowances, variations, availability of materials and extension of time claims. Be keenly aware of notice requirements under those contracts terms.
• Seek legal advice from the Legal Department MBA NSW on (02) 8586 3517 or legal@mbansw.asn.au if you require advice in relation to existing or future contracts. It is best to obtain advice early so you can make decisions from an informed standpoint. Specific legal advice should be sought for individual circumstances.