Due Process a column by Geoff Hardy
How to avoid getting stuck with F
Geoff Hardy has 46 years’ experience as a commercial lawyer and is a partner in the Auckland firm “Martelli McKegg”. He guarantees personal attention to new clients at competitive rates. His phone number is (09) 379 0700 and email geoff@ martellimckegg.co.nz.
This article is not intended to be relied upon as legal advice.
or years we have been lamenting the poor productivity of the New Zealand building industry in comparison to other developed countries, and it’s a documented fact backed up by solid evidence. It’s not that kiwi tradesmen are lazy or incompetent – the causes relate more to geographic and population factors – but it does mean we pay more for building materials and services than we should do. The preferred solutions are greater competition in the building materials sector, greater reliance on prefabrication, and greater standardisation of buildings, but they are tough obstacles to overcome. MBIE are trying to free up prefabrication from red tape and improve the product certification system, but at the same time they are making life tougher for builders, joinery manufacturers and building materials merchants through increased liability. Then add to that mix the impact of the covid-19 pandemic, and we have building prices going through the roof. It’s all due to basic economics – demand exceeding supply. Demand has increased due to the Government pumping borrowed money into the economy and consumers not being able to spend it on overseas holidays. Supply has decreased due to a reduction in domestic timber milling capacity, domestic and overseas manufacturers mistakenly reducing their production in anticipation of a pandemic-induced recession, and the global freight industry doing the same thing.
JOINERS Magazine December 2021 page 78
Given that joiners are sometimes signing up projects that won’t be able to start for six months or more and accepting orders that won’t be able to be delivered for a similar period - when substantial price rises over that period are inevitable - there will be an increased focus on the joinery supplier’s ability to pass on cost increases in the months to come. And that will create tension not only with clients who can’t cope with the inevitable budget blowout, but also with their banks who are increasingly insisting on genuine “fixed price” projects and are seemingly blind to the realities of variations, provisional sums, and cost fluctuations. Because those are the three main reasons why so-called fixed prices are never fixed. How are joiners going to protect themselves against their profitability being eroded by these unprecedented price rises in the aftermath of the pandemic? The best way is by charging on a cost reimbursement basis so that property owners pay the true cost of materials and labour at any given time. However that leaves property owners uncertain about their ability to fund their project, so they naturally want their suppliers to assume the risk of price rises. The suppliers can do that if they build in large contingencies into their fixed prices (at the expense of the property owner) and if they get their own suppliers and subcontractors to commit to fixed prices. But in these days of high demand coupled with
material shortages and long leadtimes, they aren’t going to do that. Alternatively, joiners can stockpile building materials in anticipation of using them on some project later on, but they bear the cost of procurement and storage and they run the risk that many of those materials will turn out to be superfluous. That leaves us with the three standard ways to vary prices in a fixed price contract – variations, provisional sums, and cost fluctuations. You can only charge for a variation if you are required to do something different from what you originally agreed to do, so that won’t help you if the project hasn’t changed, but the cost of it has. Provisional sums are appropriate if there are certain components of a project that simply can’t be priced accurately in advance, but if that applies to the whole of the project and you make the whole of the contract price provisional, then all you are doing is effectively converting a fixed price contract into a cost reimbursement one, and the customers won’t wear it. That leaves you with cost fluctuations, and you will only be able to pass those on if your contract allows you to do so. Cost fluctuation clauses in c o n t r a c t s v a r y w i d e l y, s o what you can do depends on the particular wording in your contract – assuming you have an entitlement to adjust your price for cost fluctuations in the first place. For example that entitlement may
