Risks of unilateral cost variations in fixed-price home building contract

By Dalitso Banda

29 June 2023

WA builders are operating in a difficult environment. Governments responded to the pandemic with stimulus, fuelling the residential building sector and contributing to inflation amid unprecedented demand for materials and labour.

Some WA builders who had signed up customers on fixed-price contracts responded to this environment by prioritising more profitable contracts, leaving some customers facing long delays. Others have sought to increase contract prices, causing tension between builders and their customers confronted with price increases.

A recent decision of the Supreme Court of Western Australia in Kulowall Construction Pty Ltd v Chellem [2023] WASC 140 which illustrates the legal risks associated with builders’ seeking to increase prices. The Supreme Court upheld a decision from the State Administrative Tribunal (SAT) in Chellem and Kulowall Construction Pty Ltd [2022] WASAT 95: the SAT had held that a builder could not under a Home Building Work Contract unilaterally increase the price of the contract on account of the builders exposure to increased costs of materials.

The Kulowall decision

The builder entered into a lump-sum contract to construct a two-storey house for a contract sum of $273,000. After the slab was laid, the builder met with one of the owners on site and informed the owner that the price of bricks had increased, and the builder would not start laying the bricks until the owners contributed to the increased cost. The builder indicated the increase would be around $1 – $2 per brick. The owner refused to pay “a penny”.

Following a further delay of around 170 days, the owners made a complaint to the Building Commission on grounds including that the builder had refused to start work due to labour costs, and seeking to increase the contract price. The builder responded to the complaint by seeking an increase to the contract sum of around $50,000 due to the due to labour and material shortages resulting from the pandemic.

The builder lost in the SAT and in the Supreme Court of Western Australia. The Supreme Court of Western Australia upheld the SAT’s conclusion that:

1. the builder was not entitled to increase the contract sum;
2. the attempt to increase the contract sum had not been valid because the Builder had not complied with the necessary contractual process;
3. as a result of [1] and [2], the owner was entitled to compensation for losses arising out of the builder’s suspension of the work under the Contract.

Unilateral price increases to home building work contracts in Western Australia

Under the Home Building Contracts Act 1991 (WA) (Act), a builder is not entitled to increase the contract sum for a fixed-price home building work contract without the owner’s agreement in writing if the price increase is due to an increase in the cost of labour and materials alone – even if the increased cost of labour and materials is the result of unforeseen circumstances.

There is one limited exception to this rule. Under the Act, a home building work contract is conditional on certain events (such the grant of a building permit) occurring within 45 days of the date of the contract. If those events do not occur within the 45-day time frame there is a limited power to increase the contract sum, provided the builder has done all things reasonably necessary to ensure the events occur. There is no limit to the amount of the increase, but if the increase is 5% or more of the original contract sum the owner is entitled to decline to pay it and terminate the contract, or make a complaint to the Building Commission.

Kulowall provides some key lessons for builders and home owners in an inflationary environment. From the builders’ side, to avoid the risks associated with fixed-price contracts amid rising costs, it is worth considering other types of agreements—including, for example, a cost-plus contract.

If you would like more information, or you are seeking advice in relation to a specific contract, Bennett – Litigation and Commercial Law’s knowledgeable and approachable team is able to assist.

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.