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Build Cost Increases & Material Supply Shortages

1 min read

14 Jan 2022

We first looked at the impacts of building supply shortages last year when worldwide lockdowns diminished the availability of building supplies. In early 2022 the problem is continuing and whilst has been managed to some degree will continue to impact the building industry heavily.

The most severe consequences of this has been a steady increase in the builders going into liquidation, particularly in Queensland. Price rises and staff shortages may continue and builders and land owners should understand what implications there are for their building contracts. Understanding your options will avoid disputes issues arising later.

Without understanding your rights and obligations under building contracts, builders in particular can be at risk of insolvency. This can be devastating for all parties if a builder is to unable to complete a project.

The global pandemic that started in 2020 has been a turbulent time for all business, particularly for those in the building and construction industry that are performing works under fixed price contracts. The Building industry has experienced significant delays and sharp price increases for building materials. There are also now reports of theft of building materials.

Stock shortages and delays in materials being imported from overseas has not abated. Domestic suppliers are still struggling with lack of staff, lack of material availability from their own sources and a variety of other issues. This all results in substantive pricing increases for building works and materials. This trend looks likely to continue into 2022 as the suppliers look for new manufacturers to fill orders.

The delays for Residential builders and landowners currently having their house built will no doubt continue as well.

Fixed Price Contracts

It is common for parties to sign up to a fixed price building contract as they are often a more certain and comfortable way to proceed. However, with the pricing increases, there are now issues where builders’ margins are significantly decreasing and, in some circumstances, it has caused significant solvency issues. Ultimately, this all flows to delays in the finalisation of the project and disgruntled parties on both sides feeling the stress and frustration of the pandemic’s aftermath.

Cost Increases and Variations

When there is sharp increase in building material costs there may also be some scope for the builder to make a variation. The request to increase the price is done by issuing a Variation Notice to the fixed price building contract. Similar to a Notice of Delay, a Variation Notice must be compliant by stating the reasons why the costs have increased and, in some instances, contain copies of quotes.

Most landowners will query the costs or the Variation Notice itself, so if you are a residential builder, it is important that you understand how to craft a Variation Notice to ensure it is compliant. If you are a landowner, you will need to respond to the Variation Notice if you feel the increase is unwarranted or without basis.

If you are unsure whether you are entitled to issue a Variation Notice or how to do so, or if you are unsure how to respond to receiving one and consider whether it is valid or not, you should seek out specific advice from a qualified building lawyer. This is especially important as each contract differs and no two are the same.

It is important to understand your contractual entitlements and obligations, as both the owner and the builder. As always, there are risks if you do not get it right, including the potential of a claim to void those additional costs, liquidation damages or other defences.

Delays in Building

As we are all aware, there were a lot of restrictions during two years of lockdowns. This included restrictions at building sites and limitations to the number of employees, sub-contractors or tradespeople that could be on site. This has caused significant delays being experienced by many builders and associated trades.

Despite the delays, a builder must act reasonably and diligently to undertake the works. If they are unable to complete the works in the required time, they must then make a request for an extension of time under the Contract. That extension should be sought at the time and not retrospectively.

Most residential building contracts allow for delays and provide processes that should be followed. Typically, a landowner must be given a Notice of Extension of Time Request and a Notice of Delay by the builder. These should be served on the landowner within a reasonable time frame, or the landowner may have rights if the noticed are provided out of time.

Legal notices must be correctly prepared to be compliant, enforceable and avoid them being contested. This is no different with the Notice of Extension of Time Request and a Notice of Delay. Among other requirements, for these notices to be effective they must detail the cause for the delay and observe the timeframes for service.

A landowner has the right to answer and reject the Notice of Extension of Time Request and a Notice of Delay. If the notices are not properly prepared, this can cause issues for the builder, including financial loss. Any ill-prepared Notices may also cause confusion as it may be unclear to the landowner. That said, landowners should note they are also restricted by timeframes to respond to these notices whether they are prepared correctly.

Our building lawyers can advise builders and landowners on Notice of Extension of Time Requests and Notice of Delays or a Variation Notices for costs so that they are enforceable. We can prepare or review your notices so that they are comprehensive and compliant.

Landowners also have rights under the building contract and should obtain building contract advice if they have been served with notices, that they are unsure about.

Building Contract Advice

If you are a builder, it may be a good time to review the building contracts that you are using and obtain advice on how you can protect yourself from any further prime cost increases. This will help ensure that you can continue to build projects without bearing the brunt of cost blowouts.

Our building and construction lawyers provide professional legal advice for commercial and residential builders and landowners. We can assist clients resolve their issues quickly and, for more complex building disputes, ensure that you are well advised and represented.

All building contracts are specific to each build so it is important that you received tailored advice for your building dispute specifically. peak to one of our building lawyers today to see how we can help you further.

Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values of PCL Lawyers and belong solely to the author of the content. © PCL Lawyers Pty Ltd.

If you require legal advice specific to your situation please speak to one of our team members today.

About The Author - Emma Restall

Emma is a Partner and leads the Building & Construction team. After completing a Bachelor of Laws and a Bachelor of Business from Griffith University in Queensland, she relocated and was admitted...

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