In times of volatile building costs, builders will look at ways of reducing the risk of signing “fixed price” contracts with clients, contracts which leave the builders bearing the total burden of fluctuating costs over the construction period. In the last boom, massive increases and fluctuations in the price of roof tiles, steel and copper piping and a myriad of other materials generally were solely borne by builders who were unable to pass these largely unforeseeable changes on to their customers. Builders’ profits suffered as a result.
A rise and fall clause in the building contract is a way in which the risk of fluctuating building costs can be shared with a client, rather than be borne solely by the builder.
Such a clause provides that, after the contract has been signed, the builder can pass on to the client, increases and reductions in the cost of performing work. Changes in the price of labour, materials or any other nominated factor can be adjusted and passed on to the home buyer according to an agreed formula even though the contract has an explicitly stated contract sum.
This is different to common industry practice of fixed price contracts where any changes in building costs cannot be passed on to the home buyer. However, it should be noted that under S13(1) of the Home Building Contracts Act, rise and fall clauses are outlawed for contracts valued at less than a set amount (currently $500,000) and a builder who enters a contract containing such a clause is liable to a maximum $10,000 fine. For contracts over the threshold, rise and fall clauses can be used.
A rise and fall clause can be beneficial to home buyers. Using an agreement that clearly defines how building cost increases and decreases are to be treated reduces the builder’s risk factor and ultimately may lead to the client paying a lower price. Rather than the builder perhaps having to factor in an excessive amount in its quotation to cover unknown contingencies such as cost escalation, the client may well end up with a lower price since the risk factor now is excluded from the builder’s calculations.