When engaging a builder for residential construction, it is a common misunderstanding that the price stated in the “fixed price” contract is in fact the final fixed price and will not change during the build.
It is very unusual for a build contract to be truly fixed i.e. not subject to any change between signing the contract and completion of the build.
There are many reasons why the price may increase, and these circumstances are provided for in the majority of residential build contracts in the market. This is why it is important to fully understand the terms of the contract that you are entering into and engage a lawyer to assist you with negotiating these provisions so as to either limit their application or provide you with some control if the relevant circumstance does arise.
Some of the more commonly encountered factors are set out below.
Variations
It is clearly reasonable that if the scope of the build changes, then the price should change. The initially agreed upon price will reflect the scope at that time. Therefore, if that scope is subsequently changed, the price will need to change to reflect the amended scope. This is why it is key that the scope agreed upon signing is as detailed as possible and accurately sets out what you are intending to be built.
Although it can be tempting to get the contract signed as quickly as possible and move into the construction phase of your project, spending some additional time finalising the detail of the scope can be well worth it in terms of reducing the risk of changes being necessary.
Our article on variations in construction contracts goes into further detail about the issues to consider.
Delays
Most contracts allow the contractor to claim additional costs if there is a delay to the build that causes additional cost to be incurred. There are many reasons why a build may be delayed including consent authority delays, adverse weather conditions, delays in procurement of materials and delays caused by other contractors you have engaged to carry out works on the site at the same time.
While it is reasonable that the contractor should be able to claim additional cost in some of these circumstances, this is not the case for all delay events e.g. those delay events which you would expect the contractor to be able to manage. There should also be transparency and consultation in relation to these additional costs and mitigation measures that can be taken. These are discussed in more detail in our article on the cost of delays in construction projects.
Utilities and Unforeseen Site Conditions
Most contracts state that you will be responsible for providing details as to the location of utilities on the site. If the utilities are not in the locations which you have identified, then the contractor can claim additional costs they incur as a result. It is therefore important to ensure that you provide accurate information in this regard or, if the contractor is to be responsible for locating utilities, then the contract needs to be amended to reflect this.
In addition, the contractor is usually able to claim additional costs in the event that the actual physical conditions on site are not those which a reasonable contractor would have expected to encounter. If there are concerns about site conditions, then consideration should be given to obtaining site reports prior to entering into the contract.
Provisional Sums
Provisional sums are used in contracts to provide an estimate the cost of elements of the works where those elements cannot be fully priced at the time of signing. This may be because no final decision has been made as to what precisely will be required for those elements, for example it has not been decided exactly what kitchen fixtures are wanted.
The fewer provisional sum elements there are in a contract then the less scope there is for price increases. As such it should be seen how many of these can be fixed prior to signing and decisions as to fixtures and fittings should be made early on.
Conclusion
There are many reasons why the price of a “fixed price” contract can change. This can cause real issues where you have budgeted for a project and in particular where you have obtained external funding. You may not be able to increase that funding if the price increases. It is therefore important to fully understand the contract that you are entering into and seek legal advice to assist with negotiation of these terms. Contact our construction law team.
Special thanks to Partner Julia Flattery for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
