cost escalation clause in contract.

mydreamhome · Nov 10, 2008 1:55 pm

Hi Everyone,

I wanted to get some advice.

I am building a custom home and have gotten tenders from a several builders. The latest one (from my preferred builder) says the tender is subject to product / material increase, and if there is an increase in price for any material or product specified the increased amount will be charged, but that there will not be an increase in the builders margin. I called to check if this only applied up until we signed a contract, and was advised, no it applies even after the contract is signed.

They use the HIA NSW contract.

I thought contracts were fixed price contracts, and whilst I'd appreciate that any increases in builders cost prior to signing of the contract would amend the tender, once the contract was signed, it was a fixed price other than if I change something, or spend more than a pc allowance, or hidden site costs for something unforeseen on the site (ie rock) meant more site works.

Correct me please if I am wrong, but I'm not sure what to do and would appreciate any advice you may have.

Garn · Nov 10, 2008 9:42 pm

Hi
It seems what this builder wants is a 'cost plus contract' rather than a 'fixed price' contract.
If a builder signs a legally binding contract to provide a service/product to an agreed standard, in a specific time for an agreed price, then they are bound to abide by that contract, just the same as you are bound to pay agreed amounts at agreed times. If they are not professional enough to be able to factor in expected increases in the price of materials then they should not be in business.
Be careful though as some contracts have 'cost escalation' clauses so that all the risk is transfered to the client and the builder bears virtually no risk at all.

Garn.

mydreamhome · Nov 11, 2008 3:20 pm

Garn,

Thankyou for your reply. The builder is not wanting to use a "cost plus" contract - it is a HIA contract with a total price, but the "cost escalation" clause does sound more like what he is adding in.

I spoke to my solicitor since posting, and he indicated that more builders (not so much the large volume builders who can spread risk across jobs, but the smaller ones) are including this in their contract to protect themselves against sudden unexpected increases in cost. The example that has been sighted alot recently is the overnight increase to steel, where it basically doubled overnight.

I am still not happy with this (and neither is the bank who stated they only wanted fixed price contracts) and am working on avoiding it.

Has anyone else had such a clause placed into their contracts?? If so, what did you do about it.

mrs_smith · Nov 11, 2008 3:33 pm

Can you ask for them to remove the clause? You can change the conditions of a contract before signing it.

Edit: And if they refuse, I'd be tempted to switch companies even if it's more expensive, as if they can't guarantee a price and something more than doubles in price, you'd be out of pocket as it is. And also, their inability to guarantee it would make me doubt their professionalism, and I would more than likely expect an increase without the clause as they are unable to estimate market increases, if that makes sense.