Price Adjustment Clauses in Fixed Price Contracts

We don’t have to tell you that a perfect storm of events has caused uncertainty in the availability and cost of materials.

To manage the risk, contractors are shortening acceptance periods for quoted prices, repricing at signing to capture material price increases (leading to frantic negotiations between clients and construction funders), including special conditions for the contract price to increase by an arbitrary amount or for the contract to end entirely, if certain events have not occurred by set dates.

While it may be expected that contractors would elect in the circumstances for cost-plus arrangements, we are not seeing that. Likely reasons are the hesitancy of financiers to lend on such arrangements and statements from QBCC like the following (currently on its website) causing pushback from the homeowners—

“Cost plus contracts and construction management contracts are contract models which involve added responsibility and risk for both home owners and contractors. We do not recommend using them.”

Instead, we are seeing an increased use of price adjustment clauses in fixed price contracts, with contractors electing in domestic construction arrangements to treat more components as ‘prime cost’ or ‘provisional sum’ items seeking, protection against unavailability and unknown cost.  Does that work though? The short answer is not to the extent many contractors think it does.

The meaning of ‘prime cost item’ and ‘provisional sum’ are defined in the QBCC Act. The Act defines a ‘prime cost item’, for a domestic building contract, an item, including, a fixture or fitting, for which a reasonable allowance is, or is to be, made in the contract, that—

• “has not been selected”, or

• “the price of which is not known, when the contract is entered into”.

The Act defines a ‘provisional sum’, for a domestic building contract, as an amount that is an estimate of the cost of providing—

• “particular contracted services”, and

• “for which the building contractor, after making all reasonable enquiries, cannot state a definite amount when the contract is entered into”.

So, unless the item or service falls within ones of those definitions, it cannot properly be listed as a ‘prime cost’ or ‘provisional sum’ item. We are seeing instances of contractors listing basic materials like timber and concrete (and even forms like “roof frame”) as prime cost or provisional sum items and they are unlikely to get the protection of the respective prime cost item and/or provisional sum clauses.

Protection against increases in the cost of materials can be provided though, by an appropriately drafted ‘rise and fall’ clause.

When a rise in the price of materials poses an unacceptable risk to projected profits, it can be managed by a ‘rise and fall’ clause. Rise and fall clauses may be cost-based or formula-based and enable increases and decreases in actual cost at the time the cost is incurred to be passed on as an adjustment to the contract price.

A ‘rise and fall’ clause must be carefully drafted though to limit scope for misunderstanding. Building disputes occur when there is misunderstanding, particularly in relation to matters affecting the contract price. A rise and fall clause must be certain in its operation and calculation to avoid dispute or worse, the clause being declared void for uncertainty.

We can assist with advice on and drafting of rise and fall clauses and other contractual mechanisms for managing uncertainty in the availability and cost of materials.

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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.