Builders, legal experts call for ‘rise and fall’ contracts to ease building crisis

Rising costs are threatening to wreak havoc on SA’s building industry – so could we see traditional contracts torn up?

A “perfect storm” of rising material and labour costs, surging inflation and higher interest rates is threatening to wreak havoc on the South Australian building industry, fuelling calls for more flexibility to be added to traditional fixed-price contracts.

A string of commercial and residential builders interstate – including Probuild, Next and several smaller companies – have collapsed in the aftermath of Covid-19, and there are growing fears the wave of failures will soon reach the local industry.

The main sticking point, the industry says, is the fixed-price contracts that leave very little wiggle room for builders when there is an unforeseeable rise in costs.

With the cost of labour and materials – including timber and steel – surging during the pandemic, ongoing inflationary pressures are making it difficult for builders to predict the cost of delivering their projects.

Residence Building managing director David Menner, left, with NDA Law's Joshua Michaels. Picture: Roy VanDerVegt

Building and construction lawyer Joshua Michaels from NDA Law said fixed-price contracts were not suited to the current economic environment, and “rise and fall” clauses would enable risk to be shared by the builders and their customers.

“The increasing cost of labour and goods, as well as supply chain issues, are like nothing we have seen before,” he said.

“Builders simply can’t just absorb that. In some cases, a price quoted today might have nearly doubled in six months which means some companies will be working for very little to no profit at all. That’s not good for the industry as a whole.

“Rise and fall contracts would offset current economic conditions and provide some security by allowing price increases when labour or goods increased by 10 per cent or more. Likewise, if prices fell, savings would be passed back to the client.”

Rise and fall clauses in building contracts enable the builder to increase the contract price if there is an unforeseeable increase in the cost of delivering a project.

Home building costs are through the roof.

It means the homeowner or customer assumes the risk of cost fluctuations rather than the builder.

While the clauses are allowed in South Australia under existing legislation, they are not widely used as banks typically prefer the certainty of a fixed-price contract.

Master Builders SA has been in talks with the state government about introducing rise and fall clauses into government contracts.

The industry body’s chief executive Will Frogley said it would be a good first step towards broader adoption in the private sector.

“What the industry needs now is not just clients understanding there are labour and material shortages and price increases, but a reasonable allocation of risk,” he said.

“A return to rise and fall contracts is something that would really help and that’s something Master Builders SA is in discussions with the Malinauskas government.

“They are open to the idea, which is a refreshing change from the previous government, and we hope to see this become accepted by the private sector too.”

Residence Building managing director David Menner said an ongoing shortage of tradespeople and materials continued to make it difficult to forecast costs, and the pressure on builders was mounting.

“The frustrating thing is that the signed contracts now just don’t align with the marketplace and today’s subcontractor agreements,” he said.

“In turn the banks aren’t interested in moving on from a milestone fixed-price contract so there is no ability to change the way contracts are approached.

“Conditions of building contracts should be updated. While I respect that banks want a fixed-price contract to safeguard their assets, in today’s market it doesn’t work and price increases are happening on a weekly basis depending on the demand for that product.”

Originally published as Builders, legal experts call for ‘rise and fall’ contracts to ease building crisis