When is fixed price not fixed price?

Q: When is fixed price, not fixed price?

A: When you are building a new home.

<RANT>
As some of you would know (especially if you've read the blog) we are building our dream home down Geelong way. Everything is in the planning stages - we are waiting for land to be be released, and we've done the Tender Appointment, Colour Selection, Electrical Appointment, Tile Appointment. So far so good.

Because of the large trees on our block (all of which are coming down), and the fall of the block, we had a nasty surprise at Tender Appointment time when we were presented with site costs of $24k. More than the $15k we had allowed, but the budget to stretch to it - just.

Today was supposed to be the day when we had our Contract Appointment, to sign off on everything.

Yesterday (about 4.30pm) I had a call from someone from the building company, who told me that the engineers had had another look at the house, site survey and soil test, and because of the large trees on site it looks as though screw piles may need to be included in our house design - meaning a huge additional cost.

Imagine my reation! I proceeded to share my feelings with the Building Company representative.

Obviously I asked how the costs can increase. I was told that before the Tender Appointment only $600 has been paid which covers soil tests and "initial engineering". After the larger deposit is paid at Tender Appointment is when engineering go through the thing in detail.

I was furious - when I asked "Why is this the first I'm hearing of this", he didn't have an answer.

Sounds like right load of crap to me, and I'm ropable.

It seems that "in most cases" this doesnt happen because people are building on new blocks in new subdivisions which don't have any trees.

For a building commpany that prides itself on it's excellent customer service - I feel like I'm being screwed (screw piled?) big time!

The way it was left, was that I made sure that the person knew that all the trees were being removed. He promised to call me back before the end of the week after some follow up from the engineers.

What really pisses me off is that customers are led to believe that the Tender Document is a fixed price (it even says "fixed price" on the top).
</RANT>

Thanks for listening. I had to dump my frustrations, as it seems that now our dream home is dead.

Obviously I'll be taking the following actions:
1. Reading the fine print to see if I can get them to stick to their "Fixed Price Tender"
2. Getting a second opinion regarding the need for screw piles.

If anyone has some suggestions, fire away!

Perry

I have no suggestions for you. But absolutely feelin' your frustrations. Anyhoo, I really think it should stay fixed price and they can't increase that price at all. We were told that because the price is fixed they can't increase it NO MATTER what they find.

I certainly wouldn't be putting up with it if I were you.

But good luck!

perry,

A couple of things:

1) How much are they asking for the screw piles?

2) What I would be doing is saying, build the house for the "fixed price" or the deal is off. I'll bet that they will go for the "fixed price", even if they have to wear the cost of screw piles. Why? Because we have the lowest building starts in 23 years (NSW, but Melbourne wouldn't be too different) and work must be drying up.

Let me know how you go, but since you've decided your "dream home is dead", you have nothing to loose. If you go back to the building company and tell them that because of the cost increases you're abandoning the project, they will switch from "extracting more money" mode to "must keep this sale" mode. You have much more negotiating power than you realise.

Cheers and good luck,
Casa

Thanks Casa - I don't know yet how much extra they are going to quote. When the guy mentioned screw piles, I told him that any increase in costs will kill the project.

He did indicate "that we are all on the same side", and he "will see what can be done".

I'll hear from them today or tomorrow.

I'm pretty fired up about this, so someone is going to pay - and it won't be me!

Cheers
Perry

Thats terrible.....dont put up with that one. We were told many times at PD that the site costs as presemted at tender are fixed - if they find anything else from there they will have to wear it!



Feel terrible for you

Thanks Vanderlay. Interesting how everyone here can relate - I too thought that site costs presented at tender are fixed.

I have some thoughts about how to approach this, and there are always options...

1. Walk away
2. Seek legal advice
3. Wear the extra costs
4. get a second opinion on site costs
5. Insist on a face to face meeting with their management
6. etc.

The option I go for will depend on what they come back to me with.

I might be getting all bent out of shape over nothing.

Fancy calling someone the night before the Contract Appointment! Grrrrr

Perry

Like everybody else, don't know what to say other than we are feeling your pain.

This whole fixed price thing was introduced by some marketing graduate i'm sure. Not 100% accurate and designed to get you in! (nothing against marketer's here ... I am involved in marketing myself).

The whole thing is an unusual concept because unlike you Perry, just prior to site start we were given a reduction in site costs due to a second engineers report. In this instance it was in our favour (obviously) but clearly the whole idea of site costs being fixed is ridiculous.

Definitely get a second opinion on the site costs ... hope it goes well. I'm sure you'll keep us up to date

Cheers
Amber
http://www.ourdreamhouse.blogspot.com

perry,

They need your business more than you need them in particualr to build your house. Tell them it's the tender price or no deal (they can eat a little inot their profit if they need the screw piles).

If I was in in your shoes I wouldn't budge an inch! Tender price or no deal.

Cheers,
Casa

Can you believe this:

Our Customer Service Rep phoned me today and said that the re-engineering work was almost completed, and did I want to make a Contract Appointment?



My reply was along the lines of "If there's any increase in the cost of our home, there won't be a need for a contract appointment, because you people will have killed the project."

He said fair enough, said I would get a call tomorrow, and then mumbled something about $40k. I can only assume (based on his slipup) that our site costs will increase from $24k to $40k.

I can assure you all - I did not arrive in the last shower of rain. Tommorrow I'm going to let them know in no uncertain terms that we signed a fixed price Tender Document, and that I expect them to honour their quote.

Should be interesting huh?
Perry

Good luck Perry.

Remember the first rule of negotiation. There's always a reason unknown to you that the other party wants to deal without you giving up anything. If they think it's a deal on your terms or nothing, I think you'll be pleasantly surprised with the results.

Cheers,
Casa

Perry,

Have you done any research into the cost of screw piles??

It might give you some more amunition for the next appointment...

That said though up until now is sh1t.

Matt

Thanks Casa - we are going to stick to our guns, and present it as take it or leave it ("Deal or No Deal").

As far as I'm concerned, every step of the way, the builder puts their mark-up on, and we have worn it with a smile.

I don't think that anyone in their right mind would consider that $40k for site costs on a block which has trees and 1m fall is good value for money.

Matt - I tried to do research into the cost of the screw piles. There's load of info around on the technology, the companies that dot them, etc., but no costings. They tend to focus on the cost savings, compared to other methods.

The principle here is that they don't want to honour their "Fixed Price Tender Quote". Seems pretty black and white to me.

Cheers
Perry

Perry,

From Rawlinsons Construction Cost Guide 2007, we have for Bored Piers (which I assume are the same thing as screw piles), for Melbourne:

Bored piers including 20 Mpa concrete (based on 100m):

300mm dia: $63.00/m
450mm dia: $95.00/m
600mm dia: $155.00/m

Plus, if required, belling to base 450-600mm dia $82.00 each.

Add 50-100% if in water.
Assumes no rock and not exceeding 4.0m in depth.

Hope this helps.

I still agree with you that it's a fixed price contract and it should be deal or no deal.

Cheers,
Casa

Legend! Are we to assume that you are a builder? Work in construction? Know someone who works in construction? A geek who likes to buy technical manuals?



Perry

I'm a geek who buys technical manuals. I could open a library!

No building or construction knowledge. I'm an electrical engineer who spends his days designing electronic circuits and writing software.

Currently designing my new home, which is interesting and demanding.

Hi Perry,

I see you refer to the" fixed price tender quote" - I suspect that his is far from having any legal standing and simply is used to form the basis for a future contract. Even then, the contracts have very large getout clauses.

Personally if the difference is $15 000, I can't see them absorbing it unless they are really desperate. You may get lucky but I suspect you are going to have to either walk away or compromise to some extent (you pay only for the cost to them ie, no extra cut/margin for them so $15K extra may become $10K or $12K).

It is worth remembering that they could just have given you the cheaper option and too bad when your slab cracks later on.

Anyway good luck for today.

3xb

I'm under no illusions. I know they won't be prepared to absorb $15k (if that's what it turns out to be), meaning that we will walk away from the deal.

I have a problem paying $40k for site costs, mainly because of a poor soil test because of some large trees - all of which will be removed. Add that to the fact that this will be the only house in the area with screw piles.

The other thing I object to is the way it's done - give us a "fixed price", take our deposit, we go through all the processes of selection etc (three days off work for me), and then spring this on us the night before we sign the contract.

Not on.

Sorry. I'm fired up again......

Perry

If the contract says "fixed price contract" then it is a fixed price contract. The onus is on the supplier of the contract to make it clear. Customers may only build once in their lifetime, while builders do this all the time. The onus is on them to make things very clear. And, here's the best bit, the courts know that the builders are experienced and provide the contract so if there is any ambiguity the determination goes, and rightly I might add, to the customer.

Builders need to go out of their way to make everything very clear. Again this is backed up with every government department that rules on building disputes. If a builder supplied contract says, "fixed price contract" anywhere, or it is any literature leading up to the contract then it is a fixed price contract!!!

Casa,

What about if they hit rock whilst cutting and filling on a site? Who should pay for that?

or

PCI's (Prime cost items) - means an item that either has not been selected, or whose price is not known at the time of the contract is entered into and for the cost of supply and delivery of which the builder must make a reasonable allowance for in the contract.

ie- you select a Smeg oven and the price increases but $300 because of exchange rates, you will have to pay the extra $300 even if the contract is fixed price.

It is important to have these things agreed to prior to signing a contract or not have them in the PCI section.

Matt

Matt,

Until the government legislates the rate for cutting through rock or I can get someone else to do the job, we have a problem. If the builder is the only person that can do it, where is the price competition?

Actually, I have a better method. Builders should be able to determine how often they hit rock and how much it costs on average. They should then multiply this probability by the average cost and add this amount to all contracts. Then they can say it's a fixed price contract. In the long run builders are no worse (or better) off. Customers can sleep at night. Everyone is happy.

Builders won’t do this since they give you a competitive price on the contract then catch you multiple times along the way to really rake in the profits. Well, at least some do.

With regard to PC items, if the price goes down, how often do builders call you up and say that there is a price reduction, here’s some money back on your fixed price contract. I bet they would just keep quiet. Therefore it must work both ways. Unless there is an independent mechanism for me to check the prices of all PC items then any cost increase must be bourn by the builder. It is the only fair thing to do.

BTW, the Australian dollar is much higher today than it was a year ago. How many builders are calling their customers with a price reduction. My bet is none. We need to play this fair or fixed price. There is no in between or half measures.

If I signed a fixed price contract and the builder told me that there was an increase in cost for an item, I would say here is your money. Now…for all imported items I want a 7% price reduction since that’s how much the Australian dollar has gone up by. Oh, I don’t owe you $300, you owe me $2000. Thanks for bringing it to my attention.

Cheers,
Casa