Carefully written contracts can help builders to mitigate the effects of unforeseen time and cost blowouts, a leader in commercial litigation says.

As builders around Australia face mounting time and cost pressure, Ben Twomey, Legal Practitioner Director at commercial litigation firm Twomey Dispute Lawyers, has urged them to consider strategies to mitigate rising prices and supply chain delays.

Where possible, Twomey says builders should avoid fixed price contracts and ensure that prices are able to ‘float’ and be adjusted in response to cost fluctuations.

This is done through a provisional sum contract – a monetary allowance for works which are unable to be priced exactly at the time of contract signing.

When making such contracts, Twomey says builders need to provide clients with estimates that are both reasonable and made on a sound and proper basis. This will avoid any concerns that their conduct could be construed as misleading or deceptive.

In addition, contracts should contain mechanisms that enable the date of practical completion to be adjusted in response to unavoidable events such as severe weather or supply chain issues.

On both matters, Twomey cautions that contracts need to be correctly worded.

Ben Twoomey, Director, Twomey Dispute Lawyers (image supplied)

Twomey’s comments come as builders around Australia have been impacted by labour and material shortages as record volumes of work in detached housing have coincided with COVID related disruptions to material supply.

In its latest Producer Price Index report, the Australian Bureau of Statistic indicates that prices for materials such as reinforcing steel, structural timber, steel beams, plastic piping, copper piping and fittings, plywood and board and timber windows have all increased by between 17 percent and 43 percent over the year to December (refer separate article).

Meanwhile, the most recent HIA Trades report (covering the September quarter) indicates that prices of trades such as bricklaying, other trades, general building, landscaping and carpentry have shown year on year increases of between nine and sixteen percent.

For builders on fixed price contracts, this has led to severe pressure as many have needed to absorb the full amount of the increase.

Meanwhile, greater lead times for materials and trades has led to pressures on project completion times.

Speaking about the fixed price issue, Twomey says this can create problems for builders.

“Builders might have priced the job, factored in margins and even included a contingency in their contract,” he said.

“But if prices go through the roof, they are contractually required to perform at that rate, and this can blow out the budget to a point where it ends up costing the builder.”

Twomey Dispute Lawyers office (image supplied)

Whilst aforementioned challenges are causing headaches for builders, Twomey warns that property owners are not unaffected.

Indeed, many owners face dilemmas about whether to show flexibility or to hold their builder to an enforceable contract and risk the builder not being able to complete the job.

“You could be a homeowner and have contracted someone to build your house when prices increase astronomically and they can no longer afford to complete the job, despite the fact you have an enforceable contract,” Twomey says.

“Should you be diplomatic and accept that if you hold this person to this deal, they are going to lose money and might not be able to finish the build?

“The odds here are that the homeowner is going to be left with an unfinished house, wondering whether they can make an insurance claim and what that will look like.”