PRICE RISES AND THE LAW
CRISIS FEATURE
PRICE INCREASES HAVE BEEN CITED AS A MAJOR FACTOR IN MANY OF THE RECENT CONSTRUCTION INDUSTRY COLLAPSES. IN ‘NORMAL TIMES’ MATERIAL PRICE RISES HAVE BEEN LARGELY PREDICTABLE SO BUILDERS AND CONTRACTORS WERE HAPPY TO LOCK IN A PRICE AND GET ON WITH JOB. THE CURRENT ECONOMIC CLIMATE HAS SEEN UNPRECEDENTED PRICE INCREASES WHICH HAVE LEFT MANY IN THE INDUSTRY EXPOSED. you will have to think about before you decide to introduce a Rise and Fall clause. The person who is paying you for your work and materials is probably working to a budget. They may not like the uncertainty that a Rise and Fall clause introduces. Additionally, your customer may have borrowed the money (from a bank or similar) to pay you. Banks won’t just dish out more money if the price goes up! They want certainty too. Many contractors are living with price increases and are trying to factor them into their costings without changing their contract wording. They are trying to manage the risk rather than transfer it to their customer. This can be risky, but for many it is preferable to having the rise and fall conversation with their customer.
Locking in a price is now something you have to think very carefully about. You will no doubt be asking yourself these questions: ½
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will future price increases affect this job?; will my profit margin be eroded (or worse still completely soaked up) by price increases?; what can I do to protect my business?
It is legally possible to draft clauses for contracts that pass the risk of price rises on to the customer (often called “Rise and Fall” clauses), but these clauses can be tricky. If you are doing domestic work for a home owner, there are some special
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rules about Rise and Fall clauses. You must make sure that you follow those rules if you want to have the benefit of a Rise and Fall clause in this setting. Provided you follow the rules, properly worded clauses will allow you to charge extra when your cost of materials goes up. For commercial jobs, there are no fancy rules, but you still need to make sure that your Rise and Fall clause will bear up to legal scrutiny and be enforceable. Putting to one side these legal issues, there are commercial aspects that
Price volatility is going to be with us for some time and, for the sake of your business, you should be thinking about who is going to take on the risk and how you might perhaps share it with your customer. Remember once you have locked in the job with a contract or a quote that has been accepted, it is too late to think about rise and fall. To find out more about including a Rise and Fall clause in your contracts, contact your local NECA legal team – NECA ACT/QLD/NSW/TAS . . ... 1300 361 099 NECA SA/NT . . .................................. (08) 8272 2966 NECA VIC ........................................... 1300 632 247 NECA WA ........................................... (08) 6241 6129.
Michael Hutton Lynch Meyer Lawyers mhutton@lynchmeyer.com.au
June 2022
