Managing cost increases

Quotes must say they are fixed price, an estimate, conditional, or available for a limited time. Clear conditions on your quotes will reduce the opportunity for disputes later.

We recommend including words like “errors and omissions are excepted” in a quote.  While not covering everything missed in a quote, it may help negotiate when something is missed from the quote.

Once a contract is signed it will supersede an earlier quote.

To allow price changes, a contract can include:

• ‘cost escalation’ or ‘rise and fall’ clauses setting out:
  • what is a cost increase; and
    
  • how to claim a cost increase;
    
• ‘prime cost items’ where:
  • an item is not selected, or its price unknown; and
    
  • a reasonable allowance for its cost is made; and
    
• ‘provisional sums’ for services where a definite amount cannot be stated after reasonable enquiries.
  

Clauses allowing price changes must be carefully explained to the client. Take care so clauses are not ruled unenforceable as ‘unfair contract terms’.

Price changes are restricted in regulated domestic building contracts. For example, a contractor warrants allowances for prime cost items and provisional sums are calculated with reasonable care and skill based on reasonably available information. Breaching this warranty can mean the contractor cannot claim price increases. Also, prime cost or provisional sum allowances cannot be used if the scope of work and prices could be determined with reasonable enquiries.

While ‘cost escalation’ and ‘rise and fall’ clauses are not expressly prohibited by Schedule 1B of the Queensland Building and Construction Commission Act 1991, they need to be carefully drafted to be legally enforceable in domestic building contracts.

Another option is to consider a Cost-Plus Contract. These contracts have their own challenges and risks, and you should seek legal advice before entering into one.

The client can agree to deal directly with suppliers and subcontractors.  This can be done where:

• the client supplies some materials and trades; or
  

• a construction management arrangement, where:
  • a contractor manages and supervises the work; and
    
  • the client directly contracts with suppliers and trades.
    

However, a client will need an owner builder permit to engage multiple trades.

If the contract has agreed prices or agreed rates, and does not allow changes, you can only be paid the agreed price or rates.  You cannot claim more money for cost increases.

Any changes to prices must be agreed by all parties in writing.

You are more likely to get agreed price changes if you can show:

• your efforts to price the works before contracting;
• your efforts to lock in prices of materials and trades; and
• provide evidence that these were cost increases that could not be foreseen.

Please note, you will breach the contract if you try to enforce payments you are not entitled to under the contract.  Under the Home Warranty Insurance Scheme, a contractor is at greater risk if the client terminates the contract because of the contractor’s breach, because the client could claim for incomplete work under the Scheme, and the QBCC can recover any amounts paid from the contractor and its directors.

Contracts can allow extensions of time for delays caused by shortages in materials and trades.

There are some restrictions for regulated domestic building contracts.  You can only claim an extension of time if the delay was beyond your reasonable contract and not reasonably foreseeable at the time of entering the contract. You will also need to make your claim in writing and give it to the client within 10 business days of becoming aware, or ought to have become reasonably aware, of the cause and extent of the delay.

To claim an extension of time you will need evidence of:

• the delay caused; and
• the efforts to avoid unreasonable delays.

It is important to discuss the potential impact of shortages in materials and trades with clients as soon as possible.

Yes. If the contract has agreed prices or agreed rates, and does not allow changes, you can only claim the agreed price or rates.  You cannot claim more money for cost increases.

However, the legislated restrictions for regulated domestic building contracts do not apply contracts for non-domestic building work and subcontracts on any project. Those contracts can allow changes to prices for increases in costs, and extensions of time for delays with suppliers and subcontractors.

You can also agree to share the risk of additional costs and delays with agreed percentages, limits on price increases, or caps on extensions of time.

To include a ‘cost escalation’ or ‘rise and fall’ clause in the contract you should clearly set out when a party can claim increases in costs or delays. What is agreed must be clearly set out to minimise disputes.

For more guidance on cost adjustment in commercial contracts see our Cost Adjustment Provisions Guidance.

Before taking any action, contractors carefully review the contract to identify whether it allows:

• cost escalation or “rise and fall” adjustments;
  
• variations to the contract price;
  
• adjustments to prime cost items or provisional sums;
  
• extensions of time for supply shortages or delays.
  

If the contract does not include a mechanism allowing price increases or time delays, the contractor will generally bear the risk of increased costs and delays.

Contractors should obtain evidence of the increase from suppliers or subcontractors, such as:

• updated supplier quotations;
  
• written notices of price increases;
  
• correspondence explaining supply shortages; or
  
• revised subcontractor pricing.
  

Keep records of all communications.

If the price increase is linked to supply shortages or delays, consider whether the contract allows a claim for an extension of time.

For regulated domestic building contracts under the Queensland Building and Construction Commission Act 1991, an extension of time requires that the delay:

• is beyond the contractor’s reasonable control; and
  
• was not reasonably foreseeable when the contract was entered into.
  

Inform the client as soon as possible if:

• there is a significant increase in the cost of materials or trades; or
  
• supply delays may affect the construction schedule.
  

Early communication may assist in reaching a practical solution.

If seeking agreement to a price adjustment or variation, provide clear supporting information, such as:

• the original supplier quote;
  
• the revised price;
  
• an explanation of the increase; and
  
• the additional cost to the project.
  

Transparency will assist in maintaining the client's trust.

If the contract does not automatically allow the cost increase to be claimed, obtain the client’s written agreement before proceeding with additional costs.

Any change to the contract price should be clearly documented.

Contractors should maintain records of:

• supplier and subcontractor agreements and communications;
  
• price increases;
  
• notices issued to the client;
  
• any agreed variations; and
  
• steps taken to avoid or minimise delays.
  

These records will be important if a dispute arises.

Do not demand payment for amounts not permitted under the contract.

Attempting to enforce payment outside the contract will expose the contractor to claims for breach of contract, or worse.

If the contract does not clearly deal with price increases, or if a dispute arises, contractors should obtain legal advice before taking further action.