Builders: Preparing Variation Claims in Fixed-Price Building Contracts

It's important that home builders understand how to properly prepare variations because the profitability of their businesses depends on it. The cost of getting variations wrong is that, where builders don’t comply with the contractual requirements for preparing variations, the variation might later be challenged by the owner and then set aside in litigation. 

This article gives a broad overview of the different scenarios in which building contracts can be varied, and common mistakes that builders make when issuing variations.

There are two different types of variations discussed in this article: Variations imposed by a builder (Price Increases) and variations requested by an owner (Owner Initiated Variations).

Builder initiated price increases generally

The Housing Industry Association (HIA) and the Master Builders Association of Western Australia (MBA) have standard form lump sum building contracts which are used by most builders.

Clause 12(b) of most HIA contracts and clause 16(d) of most MBA contracts deal with Price Increases.

Both the HIA contract and the MBA contract allow builders to vary any or all of the works or contract documents made necessary by:

• any written direction lawfully given by a building surveyor or other person acting under a written law; or
• circumstances that could not have been foreseen by the Builder at the time when the contract was entered into.

The common denominator between both the HIA and MBA contracts is that builders are entitled to raise a Price Increase because of circumstances that could not have been reasonably foreseen by a builder when entering into a contract. 

For example, a builder might encounter bedrock or highly reactive clay not previously identified during the soil sampling and site survey process, which dramatically alters the engineering requirements for the slab and footings.

In that example, it could be argued that the substrate conditions were not reasonably foreseen by the builder at the time of entry into the contract. 

Both the HIA contract and the MBA contract also provide that builders:

• cannot increase the contract price solely because of an increase in the cost of labour and materials (clause 12(b), HIA contract, and clause 16(f), MBA contract);
• must provide the owner with a written statement setting out the reason for and the cost of the variation, together with any written direction (as the case may be) (clause 12(c), HIA contract and clause 16(e), MBA contract).

Importantly, builders are not entitled to disguise the rising cost of labour and materials in the form of a Price Increase. We argue that this preserves the fundamental objective of the fixed-price contract system.

A common mistake that builders make when raising price increases in fixed price contracts is that builders don’t properly explain what the variation is for, or don’t provide a proper “written statement”. Too often, builders conflate their variations into a progress claim invoice without any breakdown or explanation and hence, without any “written statement”. 

The “written statement” contemplated in both the MBA and HIA contracts has set out the reason for, and the cost to be incurred on account of the variation, otherwise, the Price Increase is invalid. If you conflate multiple different costs into one line item without identifying the actual work being done, or if you don’t clearly articulate the reason for the price increase, the Price Increase is invalid. 

The above means that the written statement needs to be clear and itemised, and builders should always keep source documents relating to the Price Increase so as to ensure that the Price Increase is defensible, if disputed by the owner.

Delay in Commencement of the Works

Clauses 6(b) and 22(d) of most HIA contracts deal with “delay in commencement” price increases. This is a different type of “builder initiated” price increase. If you use the HIA contract, you may be able to impose a price increase if the owner caused a delay in the commencement of the works.

Clause 6 (b) of the HIA contract relevantly provides:

If there is a delay in the commencement of the Works beyond the period of 45-working days after the date of this Contract being a delay: 

• that is caused solely by the failure of the Owner to comply with a condition imposed on the Owner by this Contract, including the provisions of Clause 3(c) and (d); or, 
• that occurs without failure on the part of either the Owner or the Builder to comply with his or her obligations under this Contract; 

then the consequences to, and the rights and remedies of, the parties are set out in Clause 22(d) and (e).

Clause 22(d) of the Building Contract provides:

Where Clause 22(b) or (c) or Clause 6(b) applies:

• the Builder may by notice in writing to the Owner:
• increase the Contract Price by an amount set out in the notice; and, 
• specify when any increased amount is payable, which must be either:
• not later than TEN (10) working days after the notice is given; or 
• at the time of next progress payment. 
• if the amount of an increase exceeds FIVE (5)% of the Contract Price, the Owner may terminate this Contract in accordance with Clause 17 within TEN (10) working days after receipt of a notice under paragraph (i) of this sub-clause; and, 
• if the Owner so terminates this Contract, the Owner is liable to compensate the Builder for reasonable costs inclusive of supervision, overhead and margin incurred by the Builder up to the date of termination. 

Circumstances under which the Builder may be entitled to enforce a unilateral price increase are outlined in clause 3 of most HIA contract. Such circumstances would arise from a delay attributable to the fault of an owner, including:

• a lack of title or entitlement by the owner to construct on the site; 
• restrictions due to encumbrances, covenants, or easements on the land; 
• no access to the site by the owner; 
• inadequate demarcation of the site boundaries; 
• a physical obstruction to the land preventing the site from supporting the works; 
• the absence of power or water on the site; 
• no authorisation given to the builder to apply for Home Indemnity Insurance; or,
• a failure by the owner to obtain finance approval.

The above provisions are not expressly included in the MBA contract, but in theory, builders using the MBA contract may nevertheless also be able to impose price increases if the builder is delayed in commencing the works by reason of the owner’s conduct, if it was not reasonably foreseeable at the time of entry into the contract. 

Common mistakes that builders make when imposing these types of “delay in commencement” variations is that the price increase is too often an arbitrary figure which does not properly reflect the true increase in the contract price. The above gives rise to an argument by an owner that the price increase was not given in exchange for any consideration. “Consideration” is a legal term used to describe the value that is exchanged when the parties make and receive payment under a contract. “Consideration” is one of the essential elements of a binding contract. If a contract is entered into without any value being exchanged, then there is no “consideration”.

Can a builder increase the contract price after work has started?

Builders can, in some cases, issue a price increase after the works have started.

Clause 6(b) of the HIA contract provides that if there’s a delay in the commencement of the works of more than 45 working days after the date of the contract, and the delay is caused solely by the owner, then the builder can increase the contract price. 

There is an argument to the effect that, “yes, the builder can increase the contract price after commencement of the works”.

The above entitlement arises from clause 22(d), which provides the builder with the right to impose the Price Increase unilaterally. It is unlike an owner-initiated variation (discussed below) which needs to be signed by both parties pursuant to clause 12(a) of the HIA contract and section 7 of the HBC Act.

In Vadakkumkaraputhaveedu v Kulowall Construction Pty Ltd [2023] WASAT 29 (Kulowall) at [22] the State Administrative Tribunal (SAT) held that the builder should’ve raised the price increase before starting the works, as the contract in question was a fixed price contract. The Tribunal’s reason was that the owner was entitled to know exactly what the contract is going to cost before a shovel hits the ground. 

In Chellem v Kulowall Construction Pty Ltd [2022] WASAT 95 (Chellem) at [106] and [107], the Tribunal went a step further and said that if the builder commences works before imposing a price increase, the owner would be put in a precarious position of having to respond to a price increase request by a builder with the uncertainty of what to do with a partly finished build if he or she did not agree to the price increase.

With respect, we argue that both of the Kulowall and Chellem decisions are partly wrong. The HIA contract doesn’t say that the builder has to issue a Price Increase notice before commencing the works. Clauses 6(b) and 22(d) contemplate that the Builder may notify the Owner in writing of the price increase when there is a qualifying delay (in this case, where the Owner failed to ensure that the Site supported the Works by removing the Obstruction). Clause 6(b), properly interpreted, allows a builder to still increase the contract price after the work has commenced, provided the increase is no more than 5% of the contract price.

Importantly, a price increase notice is a unilateral act by a builder to increase the contract price. A price increase notice is distinct from a variation, the latter requiring mutual agreement.

On a proper interpretation of the HIA contract, builders are entitled to issue a price increase notice after the works have commenced, provided the increase is at or below 5% of the contract price. This is because the builder’s commencement and continuation of the works does not affect the right for the owner to seek review.

The result is that clauses 6(b) and 22(d) create a contractual entitlement which is enforceable as a payment claim (rather than as a “request” or “variation” requiring the owner to agree), either due within 10 (ten) days or added to the next progress claim.

The right to terminate under clause 22(d) therefore only arises when the price increase notice exceeds 5% of the contract price.

The commencement of works would only compromise an owner’s right to object to a price increase and terminate the contract if the increased amount exceeds 5%.  Where the price increase does not exceed 5% of the contract price, the owner’s right to seek a review remains, but the owner has no right to terminate the contract.

An owner is unlikely to terminate the contract where the works are significantly advanced, and the builder issues a price increase exceeding 5% of the contract price.

The commencement of works would not compromise an owner’s right to seek a review a price increase, provided that the application for review is lodged within 10 working days of the date of the price increase notice.  In those circumstances, it becomes immaterial that works have commenced.

There is no contractual right for the builder to suspend the works simply because a price increase notice is issued. The builder must proceed with the works while the owner exercises their right to review within 10 (ten) days.

Owner-initiated variations

Probably the most common type of variation is where an owner instructs a builder to add to or subtract from the scope of the work or amend the contract documents, resulting in the price either increasing or decreasing.

Both the HIA contract and the MBA contract provide owners with the entitlement to request a variation to the contract documents. 

Section 7 of the Home Building Contracts Act 1991 (WA) (HBC Act) says that a variation:

• must be in writing;
• must set out all the terms and costs;
• and must be signed by both the builder and the owner.

The above signature requirement doesn’t apply to unilateral variations, so we would argue section 7 doesn’t apply to builder-initiated Price Increases of the kind described above. However, the signature requirement does apply to owner initiated variations.

The above means that if an owner-initiated variation isn’t signed by both parties, it may be invalid.

An unsigned owner-initiated variation may be binding (notwithstanding non-compliance with the HBC Act or the Contract) if the variation is verbal, and if it satisfies the requirements of a valid contract, that is, there is an offer, acceptance of the offer, consideration, and the parties had intention to create legal relations (see Vitte v Studio 8 Builders & Designers Pty Ltd [2013] WASAT 43 at [85]; see also Suri v Beyond Builders Pty Ltd [2024] WASAT 20 at [89]).

However, builders should be aware that even though an unsigned owner-initiated variation may still be valid, builders are exposed to a potential fine of up to $500 for non-compliance with the writing and signature requirement in section 7 of the HBC Act.

For the above reason, information variations which are agreed upon over text message or over the telephone are strongly discouraged. 

The risk of a builder trying to claim payment for a variation that’s not in writing is that the owner may deny ever requesting it. A dispute will inevitably arise in the circumstances. Additionally, builders must be aware that if they attempt to impose a price increase on an owner without complying with the contract, that conduct might amount to repudiation. Repudiation is a serious matter which should not be taken lightly. An aggrieved homeowner whose contract is repudiated by a builder can terminate the contract and sue the builder for their loss or damage. 

Tips for Builders

Some helpful tips for builders who wish to impose variations include the following:

• Keep contemporaneous records of any building cost increases.
• Make sure owner-imposed price increases are signed.
• Don’t discuss variations informally, such as over text message or over the phone. Always formalise the variation in writing.
• Cost your contracts before you provide them to the owner for signature.
• Avoid square meter rate estimates. Do a proper costing based on actual quantities of materials and labour.

If you fall into a dispute with an owner, get legal advice from a competent lawyer who specialises in building and construction law. Vogt Legal offers free initial 15-minute consultations to clients with new matters. We can help you prepare your variation or resolve a dispute you may be involved in concerning a variation. 

Properly prepared variation claims help you comply with the contract and avoid disputes. Prevention is better than cure.