10/06/2022
Are you entering into a “cost plus” Building Contract?
Recent escalations in the cost of building materials and supplies presents a risk that can be managed.
A traditional lump sum building contract in the present economic climate, for all kinds of reasons, is risky business. It’s risky for the builder unless it builds in potentially excessive expectations for rise and fall, and it is risky for the principal should the builder find it is unable to complete the work for the contract sum.
So, what do you do?
There’s a sensible contractual outcome, in my opinion, that allocates a risk to the party most capable of controlling it. In terms of rise and fall, the risk falls to the party who stands to obtain the benefit of the bargain, that is, the value of the work performed, quantum meruit. In other words, the recipient is ,outside of an unfair contract, obliged to provide fair compensation for the materials and workmanship performed by the builder to the extent of the benefit obtained.
How do you make a contract fair, where dramatic rise and fall is likely?
There was a time where Rise and Fall of material costs were dealt with by an adjustment of the contract sum. In the absence of a rise and fall term, there are other common and useful mechanisms that can be engaged in lump sum contracts to distribute the risk of rise and fall fairly.
For instance, a Provisional Sum. This is simply an amount of money, or a supply rate, allocated against a particular quantity of installations, goods, materials, or indeed, an entire subcontract.
If the owner obtained the benefit of the supply of concrete from a particular supplier, and the rate rises, then, if the item is a provisional rate, the Principal would have the opportunity to accept the current rate, or obtain an alternative supplier. For a better rate. The balance of the Contract would then be adjusted to take account of the savings (excluding profit and overhead already allowed in the contract) or the increase plus profit and overhead. Obviously, it is critical that the Principal and the builder, resolve an agreed supply rate prior to exchange of contract. By this method, the risk is shared, as it should be.
A Provisional Sum, or a provisional rate can be used for any item of the construction contract. An entire kitchen, the cost of lifts, the supply of tiles, bricks, concrete, for example.
Therefore Builders are encouraged to itemise the matters likely to be subject to rise and fall, and discuss these with Proprietors so that the risk is shared. A “Cost Plus” agreement, on the other hand, puts all of the risk of rise and fall upon the Principal from the outset, and potentially, there is little incentive for the Builder to seek any savings or reduce cost, or time.
