By the time you can finally make ends meet, they move the ends.
We are not at the point – yet – where we will need a wheelbarrow of cash to buy a loaf of bread, but contractors may feel that way when it comes to purchasing materials.
We hear every day how retailers are receiving regular price notifications from manufacturers, importers, and wholesalers. This is attributed to low interest rates, albeit increasing, as well as a significant injection of funding to government and council projects since the onset of the pandemic.
Now the primary risk in the construction industry is overheating – and inflating – and even hyperinflating.
Everyone in the supply chain is raising prices and by and large, consumers are casting caution to the wind and accepting them. That doesn’t mean it’s all good news for contractors – far from it. If you are proactive, you will likely order materials well in advance and agree your pricing, only then to find that costs have changed significantly once the order actually comes through.
If you are concerned about significant cost increases, then here are a couple of ways that you can de-risk the increase in the cost of materials:
- Many residential builders are now only doing, particularly with regards to renovation works, work on a charge-up basis. This is ideal, but don’t be fooled – doing work on a charge-up basis comes with a lot more administration and tensions can quickly escalate with an owner if they think that they are paying more than they should be. You need to be disciplined about record-keeping for the hours that your staff are working, recording meal breaks, identifying broadly what they were doing, and keep records of every subcontractor/supplier invoice;
- Alternatively, you can ensure that you have a cost fluctuation clause that enables you to claim costs of any significant increases. Again, this requires good record-keeping so the owner can see what the original price/quote was and the amount of the revised quote. Or you can include a tag in your quote on the basis that materials will be charged on an open book basis.
It is common for the standard form of contracts, both residential and commercial, to allow for cost fluctuations. But they are often deleted. It wasn’t so long ago that most contractors wouldn't have cared on the basis that their margin allowed for some headroom for price changes.
If you are a subcontractor, then it is almost always the case that the head contractor will try and delete or remove any ability for you to rely on a cost fluctuations clause or any tag to similar effect. In the current economic circumstances, we are increasingly seeing savvy subcontractors carefully checking their subcontracts and negotiating the right to claim a variation for cost fluctuations in the pre-let meeting.
Cost fluctuation clauses vary in length and complexity, but the basic premise is that they allow for the price to be adjusted for any increase (and sometimes for decreases) in the cost of subcontractors or materials that were not reasonably foreseeable.
If you are involved in large projects, then you may be asked to tender based on current prices and the contract should make provisions for you to be reimbursed for price changes to specified items.
On smaller projects, the contractor is typically expected to take inflation into account when calculating their price.
At present, times are good for contractors. But the risk of inflation, particularly on materials, could lead to an extinction-level event. No one wants to have to absorb the price difference, and on high-end residential commercial projects, price increases can mean the difference between making a profit or going backwards. Think about it and proceed with caution.
If you'd like further help with your construction contracts, Finn Collins and our Construction team would love to help you out. Reach out for some advice: finn.collins@gibsonsheat.com or phone 04 916 6428.
Disclaimer: The information contained here is of a general nature and should be used as a guide only. Any reference to law is to New Zealand law and legislation. We recommend before acting on it, you consult your accountant or tax adviser.
