Supply shortages in the building industry – be prepared

So what happens now – particularly if you are planning on building

In the current climate, many builders will be looking to ensure that any cost increases can be passed on to their clients. The responsibility for cost increases will therefore depend on the terms of your contract. “My builder has offered me a fixed contract price” – I hear you say and my response will be “a fixed contract price is never a fixed price”.

Many contracts used in the construction sector will allow builders to recover any cost increases from the client. The most commonly used contracts used for residential developments are the NZ Certified Builders Association (NZCBA) – Fixed Price Building Contract and the Registered Master Builders Association RBC1-2018 (New Build) contract. Both these contracts contain mechanisms that allow the builder to recover the cost of any increase in materials and/or labour.

NZ Certified Builders Association – Fixed Price+ Building Contract

The NZCBA contract allows the builder to make adjustments to the original fixed price for a number of reasons, one of which is if there is an increase in the cost of subcontractors or materials (clause 5 – Cost Fluctuations). There are a number of provisos to such recovery:

• The increase must not have been reasonably been foreseen by the builder;
• The increase must have eroded the builder’s profit margin;
• Quotations and invoices must be provided as proof of increase.

In the real world at present, builders are facing monthly price increases so homeowners can argue that builders should not be able to recover such cost fluctuations. However, if this approach is taken then homeowners will often find that the builder is then required to factor such increases into its original price. This results in homeowners ultimately bearing this additional cost and rather than negotiating the increase if and when it arises, homeowners have in actual fact crystallised the increase from the outset. There will inevitably be a winner and loser and the approach that a homeowner chooses to take will often depend on each person’s view of the risk and whether they can manage that risk.

Registered Master Builders Association – RBC1-2018 (New Build)

The RBC1 contract also allows the builder to adjust the fixed price (clause 46 – Cost fluctuations). Unlike the NZCBA contract, there is no requirement to provide any evidence of price increases or that the builder’s margin has been eroded. This doesn’t mean that the builder has a carte blanche to inflate those cost increases. There is some degree of protection for homeowners under clause 22, that any adjustments will need to be agreed and if not agreed then the increase will be based on the actual and reasonable cost to the builder plus the builder’s margin.

NZS3902:2004

This form of contract is often used by clients for minor building works or small buildings (such as an extension or garden shed). That is not to say that this contract cannot be used for larger projects. NZS3902 does not include any express right for the builder to recover any increase in the cost of materials although it does contain a right to recover any increase in costs should the builder be unable to procure certain specified materials and uses alternative materials as a substitute. However, homeowners will find that many costs at risk of price increases, will be included as “Allowances”. Allowances are used in a similar manner to provisional sums or prime costs (terms used in both the NZCBA and RBC1 contracts). These are a best guess for work that cannot be priced by the builder at the time of entering into the contract, for example, site works, services connections or not yet designed structural elements (a pergola where the size or materials has not yet been finalised). The actual cost will then be substituted at a later date.

Plan Ahead

Planning ahead may help homeowners to manage cost increases. We can provide advice on the contract to assist homeowners and builders in clearly setting out their respective expectations and responsibilities. However, the build contract will not resolve the supply shortage. In today’s environment, it is always important to have a good line of communication with the builder. Discuss the builder’s supply chain and whether supplies can be ordered early with a view to reducing the risk of cost increases and delays in lead times. If certain materials are in short supply, consider what alternatives you could use (just in case). Always include a buffer in your budget for cost fluctuations. These steps will not be a silver bullet to solving the supply shortage but they may be key to you finishing your project on time and within your expected budget.

If you would like to speak with a construction law expert, please contact Wincy Cheung.