Cost escalation caused by COVID-19 – How to manage your building project

The building and construction industry has been affected as a whole by the current disruptions and health concerns brought by the COVID-19 pandemic. It is important to review your current building contracts and consider what rights and obligations you may have in the event of unforeseeable delays which could lead to cost escalations. It is also crucial to consider all future projects through a COVID-19 lens.

Claim pathways under existing Contracts

Under an existing construction contract, a contractor may be able to claim for COVID-19 related delays and potentially costs under the relevant provisions. 

COVID-19 regulations have meant increased labour costs (as a result of social distancing requirements) and increase material cost (due to lack of supply). A builder will want to pass some of these costs on to an owner however under current contracts. The general rule is that these costs cannot be passed onto the owner, particularly in a fixed price contact.

There are some exceptions to this where these costs can be obtained as follows:

  1. Extension of Time (EOT) and delay cost provisions
  2. Variation due to circumstances outside the builder’s control
  3. Cost Plus Contracts
  4. Amendment to existing contract or negotiation a new contract

Delays and Extension of Time Claims

Builders struggling with the effects of COVID-19 may be able to claim an Extension of Time (EOT) request under current contracts. For more information on dealing with extensions of time under COVID-19 read our previous article here. An EOT allows extra time to complete building projects if necessary, if the cause of the need for extension is beyond the builder’s reasonable control. The pandemic qualifies as being beyond control and contracts may allow a time cost to be claims against the owner for a valid EOT.

In order for a successful claim, claimants will need to carefully record disruption of sites impacts of shut-downs and regulatory adjustments caused by COVID-19.

Variations

There are very limited circumstances where a builder could argue that a change in legal requirement beyond their control (e.g. COVID-19 restrictions on labour) may have given rise to a change in the contract scope – entitling them to a variation. It is recommended that legal advice is sought on this issue.

Cost Plus Contract

If the owner has signed a cost plus contract, the builder will be able to pass on any additional cost incurred as result of COVID-19.  It is important to note that not all costs are claimable including overheads – only genuine third-party expenses and labour.

Amendment to existing contracts/negotiate a new Contract

Builders and owners may negotiate an amendment to allow for the adjustment in time and cost caused by COVID-19 or negotiate a new contract. If so, builders can follow the procedure of Section 33 of the Domestic Building Act 1993 (The Act):

A builder must not enter into such a major domestic building contract unless there is a warning that the contract price is subject to change and that warning—

  • is placed next to that price; and
  • is in a form approved by the Director; and
  • specifies the provisions of the contract that allow for the change.

The builder can have the owner acknowledge an amendment and cost escalation – however it is strongly recommended the parties seek legal advice on this issue.

New contracts entered into post COVID-19

New contracts that are being entered into now are at risk of being affected by COVID-19, therefore should appropriately address COVID-19 related risks, delays and issues.

Builders can look at treating certain materials and labour as provisional sum items or prime costs items. Further, special conditions could be drafted to deal with increases in labour and materials caused by social distancing and delay in the supply chain.  The best method would be using cost plus contract in appropriate circumstances as set out here.

Before entering into new contracts, it is imperative that builders carefully consider the effects of COVID-19 and subsequently estimate the time accordingly. It may be necessary for more conservative timelines to be allowed for to ensure a builder’s performance is not impacted by COVID-19.

Now that COVID-19 is widely established, it will be difficult to argue that COVID-19 was not foreseeable and therefore an EOT will not be available unless appropriately estimated.

Our Services

Due to the precarious nature regarding contracts existing prior to COVID-19, we advise that builders seek advice immediately on their rights and obligations under the building contract.

Please speak to Oldham Construction Lawyers before entering into a new contract post COVID-19 as we can draft special conditions and contracts for you.

If you are unsure of your obligations and need assistance, please do not hesitate to call Daniel Oldham on (03) 9640 0002, or via email info@oclawyers.com.au

Leave a Reply

Your email address will not be published. Required fields are marked *