The building and construction industry has been affected as a whole by world-wide timber shortages as well as COVID-19. It is important to review your current building contracts and consider what rights and obligations you may have regarding supply shortages which may lead to cost escalations and delays.
Claim pathways under existing Contracts
Both increased labour costs and material costs have been brought on by timber shortages and COVID-19 regulations.
The general rule is that costs cannot be passed onto the owner, particularly in a fixed price contact.
There are some exceptions to this where these costs can be passed on as follows:
- Extension of Time (EOT) and delay cost provisions
- Variation due to circumstances outside the builder’s control
- Cost Plus Contracts or Provisional Sum Allowances
- Amendment to existing contract or negotiation of a new contract
It is important to note that unless builders have a Cost Plus Contract or Provisional Sum Allowance, they can’t automatically pass some of these costs on to an owner.
Can I obtain an EOT claim or suspend works?
Builders struggling with the effects of material shortages and 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. Material shortages and the pandemic qualifies as being beyond control and contracts may allow a time cost to be claimed 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 supply issues and COVID-19. If the delay continues, a suspension may be appropriate. Legal advice should be sought before this step.
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 & Provisional Sum Allowance
If the owner has signed a cost plus contract, the builder will be able to pass on any additional cost incurred as result of supply issues and COVID-19. It is important to note that not all costs are claimable including overheads – only genuine third-party expenses and labour. If the claimant has timber as a provisional sum item the excess costs can be passed on.
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 material shortages and COVID-19 or negotiate a new contract. If so, builders can follow the procedure of Section 33 of the Domestic Building Contracts Act 1995 (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.
Entering new contracts
New contracts that are being entered into now are at risk of being affected by timber shortages and COVID-19, therefore these risks, delays and issues should be carefully considered.
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 in our blog here.
Before entering into new contracts it is imperative that builders carefully consider the effects of timber shortages and COVID-19 and subsequently estimate time and costs accordingly.
Due to the precarious nature regarding contracts existing prior to timber shortages and covid restrictions, 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 and 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 email@example.com