The costs of materials is rapidly increasing in the construction industry. This is giving rise to various cost and time challenges for construction projects. Construction industry participants need to take immediate action to ensure they are adequately managing (and are otherwise protected) on material cost increases.
What you need to know
- The costs of materials in construction is rapidly increasing. This is placing construction projects under pressure.
- Material cost increases should be proactively managed to minimise the risk of the project budget and program being compromised.
- If you are a project owner, you need to ensure that your contract has appropriate protections on material cost increases (both time and cost considerations). Any future contracts need to have appropriate protections on material cost increases.
- If you are a contractor, you need to ensure that your contract provides you with clear entitlements in relation to time and cost to account for any material cost increases.
Increase in construction costs
This month, the Master Builders Association of NSW reported that the cost of materials has increased by a significant 4.2% during the first quarter of 2022, which puts it at a total of 15.4% higher than it was a year ago.
Some of the factors that significantly impact the building industry include increased fuel prices; the recent bushfires which destroyed large amounts of local timber supplies; global supply chain issues; the lockdowns which impacted building supplies nationwide; and the Government Home Builder Scheme, which created demands for new homes, but a low supply of materials. These factors combined have put a strain on the supply infrastructure in Australia, resulting in the fastest increase in building materials since 1980.
As we are halfway through the year, there are indications that this problem will continue into the near future, which will impact the building industry significantly.
Set out below are some examples of the material cost increases for the first quarter of 2022.
Credit - Master Building Australia
Contractors can be in a particularly vulnerable position in relation to material cost increases. Especially where the relevant contract adopts a lump sum pricing model (or does not provide for an entitlement to claim any material cost increases).
For existing contracts, contractors should be reviewing their contracts to see if the contract provides for a way for the contractor to claim extra costs as a result of a material price increase. Separately, contractors also need to be reviewing extension of time regimes to determine if there are any permitted extension of time events which relates to material cost increases (e.g. shipping delays, material shortages etc).
For new contracts, it is important to carefully consider the type of contract being used (i.e. lump sum, cost plus etc). Typically, the Australian Standards contracts used for construction projects (e.g. AS4000, AS4902 etc) and the Master Builders contracts for domestic building work do not generally include clauses enabling the contractor to claim additional costs for an increase in material prices. This means that if you are using these contracts, additional clauses will need to be drafted and inserted to address the increase in material costs. Such clauses need to be carefully drafted to ensure they are clear and workable with the rest of the contract. This issue equally applies on extension of time considerations.
Construction industry participants need to carefully consider how material cost increases are to be managed in a contract. A possible approach is the indexing of prices. Any approach needs to be carefully considered and drafted for in the contract.
Head contractors also need to be working closely with their subcontractors on any time and cost issues relating to material cost increases to ensure the project is progressing on time.
Project owners need to be reviewing their current contracts to understand if their contract enables the contractor to make a claim as a result of a material price increase or for extra time as a result of shipping delays or shortages of materials. Similarly, project owners need to be reviewing extension of time regimes so they fully understand any program implications as a result of any delays which stem from cost in materials (e.g. delays which are caused by a shortage in materials).
For new contracts, project owners need to ensure that they are adequately protected from cost and time overruns as a result of material cost increases. Some project owners are looking to adopt guaranteed maximum price (GMP) contracts to ensure there is a “ceiling” on the contract price.
Project owners also need to be keeping an eye out for claims under the contract (either for extra cost or time) as a result of difficulty in obtaining materials or material cost increases. Similarly, project owners should be making sure that all claims made for additional costs as a result of material cost increases are substantiated.
What do I do next?
Construction industry participants should undertake the following next steps:
- Closely monitor the market for material cost increases.
- If you are a contractor, review your contract on your ability to increase the contract price to reflect any material cost increases. For any new contracts, contractors will need to ensure that the contract allows for the contract price to increase for any material cost increases. This equally applies to time issues.
- Contractors will need to lodge any variations and notices in accordance with the contract to the extent the contract provides an entitlement to recover any material cost increases. Contractors need to be on the lookout for any time bars in the contract.
- If you are a project owner, you will need to review your contract to confirm your obligations and exposure on material cost increases (both time and cost). For any future contracts, project owners will need to ensure that they are sufficiently protected on material cost increases.
- Project owners will need to be on the lookout for any variation or other notices under the contract in relation to material cost increases.
We are here to help
If you require further information or support, please contact Goran Gelic and Kailee Shurmer of our Dispute Resolution team.
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