Recently NS Legal has received several requests for help in succession. Clients signed building contracts 1–2 years ago, but their builders are now demanding price increases — and the amounts are substantial. They purchased a Package, but due to reasons such as land not being approved on time, construction started right in the middle of today’s surge in building costs, and the builder is now saying prices must go up.

We all know prices are rising — fuel, electricity, everything is climbing — but compared with price hikes on a building contract, those really are “small change”. One client was hit with an increase of nearly $100,000, and their question was: “Can I only accept it or walk away? Or is there room to negotiate?”

Before signing the contract

Read the price adjustment clauses carefully

This largely comes down to what your building contract says, so the most important point first: you must carefully read the price adjustment clauses in the contract. In this contract, this is not only something you need to know — it is a key matter you need to truly understand, and in the current inflationary environment, it is more critical than ever.

If you need help, you can contact NS Legal.

Even with a price adjustment clause, does the builder get to set whatever price they want?

First, if you receive a notice from the builder saying they need to raise the price for reasons A, B, C, D, E, F and so on, the very first thing to do is confirm whether your building contract contains a clause that permits price adjustments.

Second, if there is one, you need to look at what type of adjustable clause it is.

The two most common adjustable clauses are Provisional Sum Items, which can be understood as reserved-budget items, and Prime Cost Items, which can be understood as items allowing adjustment of major cost components.

Provisional Sum Items

Although building a house is an overall project that requires upfront measurement, surveying and planning, there are always some costs that the builder cannot estimate far in advance — or at least cannot provide a reasonably accurate figure for at the time the contract is signed. A common example is site works, which is why provisional sums exist.

Prime Cost Items

A building contract will specify that certain goods — item one, item two, item three, and so on — need to be purchased, usually fixtures, fittings or similar. But at the time of signing, because the specific items have not yet been chosen, or the exact prices are not known, the builder cannot give a precise quote, so they will provide a rough budget estimate in the contract together with a permitted adjustment range.

For example, say I want tiles for the kitchen, but at the time of signing, the specific brand and style of tiles have not yet been decided.

The tiles would then be included under prime cost items in the contract, and the builder will note a rough estimate of the cost together with an adjustment range — perhaps a few percent or somewhere in the teens.

The risk is that many builders will initially quote a very attractive price range that makes things look cheap and good value, but once work begins, the client finds that budget range cannot buy the high-quality goods — such as premium tiles — they actually want. Meeting their expectations puts the price in a whole different league.

So avoiding unnecessary trouble down the line — knowing how to sign and negotiate the contract from the outset — is itself a discipline. If you would like advice, please contact our legal team.

Relatively less common, but what if I have a fixed-price contract and the builder still wants to raise the price later?

If you signed a fixed-price contract with no price adjustment clauses at all, that means you have no obligation to pay any additional building costs.

However, in many situations, taking into account various considerations about the house and its quality, when the builder proposes a price adjustment you may willingly accept the increase.

For example, the increase the builder puts forward may seem reasonable or affordable to you; or sticking to the original price might mean the quality of the house and the way it is built will fall short of what you expected, or it could even result in very long delays

or, worse, the house failing to be delivered at all. At that point, you need to weigh things up for yourself.

Finally: NS Legal’s advice

Whether or not the contract allows adjustments, any time a builder proposes a cost increase they must prove and explain it, with documents such as invoices. You may also run into situations where you think a price increase is reasonable in principle but the size and scope are not, and this may be a back-and-forth negotiation.

When even the price of lettuce and broccoli has doubled, and on top of that the labour shortage and rising labour costs are among the biggest problems the Australian economy faces, these are things builders neither want nor are able to control. If a builder completes the project at the original price, they lose money too — and even if they finish, you may be more worried about quality issues.

So in this kind of situation, communication and negotiation are extremely important. If you feel that having reasoned, evidence-based, legally supported positions would help you communicate and negotiate more effectively with the builder, feel free to contact NS Legal to see how we can help.

In the worst case, the two sides fail to reach agreement and end up in court — whether the house can be delivered at all becomes a mystery, and other financial losses may be involved. Most people just want a home of their own where they can live with peace of mind.