To print this article, all you need is to be registered or login on Mondaq.com.
The ongoing effects of the pandemic combined with the current construction boom is causing an increase in price for both labor and materials in domestic building works. Under an HIA contract, there are some ways to account for and respond to price increasers from your builder.
What is a HIA contract?
An HIA NSW Residential Building Contract for New Dwellings is a standard contract created by the Housing Industry Association for building homes. A building contract is a legal agreement which outlines the rights and responsibilities of both parties, the builder, and the client. This will typically be in the form of a fixed price contract, subject to variations (usually because of unforeseen circumstances such as discovering rock when digging) and other price adjustments.
How to reduce the likelihood of price increase in the contract
There are some steps that can be taken and features that can be included in a contract that can help to decrease the likelihood of unforeseen price increases. One method of this could be reducing the time between signing the contract and commencing works to make sure the contract best reflects the cost of the construction. Another would be to enter a fixed price contract, where the builder agrees to bear any cost above the agreed price, not including variations or costs incurred because of circumstances beyond the builder’s control. Another would be to make as many selections as possible before construction, reducing the amount of prime cost or provisional sum price fluctuations.
What can you do if your builder tries to increase the price under a build contract?
Once a fixed price HIA contract has been entered into, there are limited circumstances in which a builder can request a price increase for labor or material costs. These include
These can be allowed to be asked for by the owner, or both the owner and builder. In circumstances where a builder is permitted to request variations, they are allowed to request adjustments to the contract sum to reflect his costs for materials and labor.
- Prime cost or provisional sum items
Some fixed price contracts include a clause allowing price increases because of prime cost or provisional sum items. Prime cost items are items not decided on before entering the contract (fittings or fixtures like taps, tiles, light switches), and provisional sums are works with only an estimated price before the contract was signed (plant hire, landscaping, service connections). In this case, the builder can only increase the price in accordance with the allocated allowance specified in the contract, and where no provision exists, cannot increase the contract because of this.
Builders can also be entitled to some cost increases from circumstances out of their control such as delays resulting from planning and building approvals or surveys, or non-compliance to the contract from the owner, or an increase in tax, charge, or levy after the signing of the contract. Builders can also increase the prices due to unforeseen circumstances such as issues with the soil, discovering rock when digging etc.
If an owner under a HIA new build contract deems any price increase to be excessive or unjustified, or seek further clarification on price breakdowns and calculations, they are encouraged to communicate their concerns directly with their builder. If this doesn’t provide a solution, the owner can also lodge a complaint with NSW Fair Trading or the Master Builders Association and would be recommended to seek independent legal advice.
What are my options if I am unable to pay the increased cost that has been requested by my builder?
If the builder increases the contract price in accordance with the clauses above exceeding 5% of the original sum stipulated in the contract, the owner can terminate the contract. It must be noted that the owner may still be liable for any reasonable costs incurred by the builder up to the date of termination.
One of the trickiest situations facing clients in the current climate, is when they have entered a fixed price contract and the builder still tries to increase the price due to the increase in the cost of materials. Even though strictly not entitled to do so, owners are faced with a dilemma: do they insist on their legal rights, or do they accept the price increase?
Owners would be recommended to get as much clarity as possible on the price increase and the causes for such increase. Following this, as an owner you should discuss and negotiate with the builder (perhaps through your solicitor) to come to a resolution which you are comfortable with and can afford. If a builder is forced into constructing the dwelling for a price which was agreed upon years ago, for many builders this would mean constructing at a loss. As such, you may be left with a builder in liquidation and an unfinished product.