Why is the cost of my fixed price building contract not fixed?

Fixed price contracts aren’t always fixed price, which can lead to confusion and potential souring in builder-client relationships. In this article, Duncan Cotterill Partner Julia Flattery discusses why a fixed price contract may not always be fixed 

When clients engage a builder for residential construction, it is a common misunderstanding that the price stated in the ’fixed price’ contract is, in fact, the final fixed price and will not change during the build. 

It is very unusual for a build contract to be truly fixed; ie, not subject to any change between signing the contract and completion of the build. 

There are many reasons why the price may increase; these circumstances are provided for in the majority of residential build contracts in the market. This is why it is important for builders to fully understand the terms of the contract they are providing to customers and to engage a lawyer to assist with negotiating these provisions.

Some of the more commonly encountered factors are set out below. 

Variations 

It is clearly reasonable that if the scope of the build changes, then the price should change. The initially agreed upon price will reflect the scope at that time. Therefore, if that scope is subsequently changed, the price will need to change to reflect the amended scope. This is why it is key that the scope agreed upon signing is as detailed as possible and accurately sets out what you are intending to build.  

Although it can be tempting to get the contract signed as quickly as possible and move into construction, spending some additional time finalising the detail of the scope can be well worth it in terms of reducing the risk of changes being necessary. 

Delays

Most contracts allow the builder to claim additional costs, if there is a delay to the build that causes additional cost to be incurred. There are many reasons why a build may be delayed, including consent authority delays, adverse weather conditions, delays in procurement of materials and delays caused by other contractors working on the site at the same time. 

While it is reasonable that the builder should be able to claim additional cost in some of these circumstances, this is not the case for all delay events; eg, those delay events which you would be expected to manage as the main/head contractor. There should also be transparency and consultation in relation to these additional costs and mitigation measures that can be taken.  

Utilities and unforeseen site conditions 

Most contracts state that clients will be responsible for providing details as to the location of utilities on the site. If the utilities are not in the locations identified, then you as the builder can claim additional costs incurred as a result. It is therefore important to ensure that clients provide accurate information in this regard or, if you are to be responsible for locating utilities, then the contract needs to be amended to reflect this. 

Builders can usually claim additional costs in the event the physical site conditions are not those which a reasonable builder would have expected to encounter.  If there are concerns about site conditions, then give a recommendation to your client to obtain site reports prior to entering in to the contract.

Provisional sums 

Provisional sums are used in contracts to provide an estimate of the cost of elements of the works, where those elements cannot be fully priced at the time of signing. This may be because no final decision has been made as to what precisely will be required for those elements; eg, it has not been decided exactly what kitchen fixtures are wanted.  

The fewer provisional sum elements there are in a contract, the less scope there is for price increases. As such, it should be seen how many of these can be fixed prior to signing and decisions as to fixtures and fittings should be made early on. 

Conclusion 

There are many reasons why the price of a ‘fixed price’ contract can change. This can cause real issues for builders and clients, as clients may struggle to obtain additional funding if costs increase and builders get left with an unpaid invoice. It is therefore important to fully understand the contract that both parties are entering into and seek legal advice to assist with negotiation of these terms. Contact our construction law team for more!

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This article is provided by Duncan Cotterill, a full-service law firm with offices in Auckland, Wellington, Nelson, Queenstown and Christchurch. If you have any questions relating to this article, please contact your local Duncan Cotterill advisor duncancotterill.com 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.