Rise of the 'rise-and-fall' clause

Q: I am negotiating with my builder about the terms of my residential building contract. I have heard about a “rise and fall clause” in a building contract. What is a “rise and fall clause”?

A: The Perth residential construction industry has experienced unprecedented increases in costs of labour and materials. We have experienced massive increases in the prices of steel, bricks and copper piping. Unless these higher costs can be passed onto the homeowner, the costs must be borne entirely by the builder, eating into the builder’s profit margin. A rise-and-fall clause in the building contract is a way in which the risk of escalating building costs can be shared with a homeowner, rather than be borne solely by the builder. This clause entitles a builder to pass on to the homeowner increases (or reductions) in the cost of carrying out work after the building contract is signed. Changes in the price of labour and materials can be passed on to the homeowner according to an agreed formula, even though the contract has an expressly stated contract sum. This is different to common industry practice of a “lump sum building contract”, where any additional building costs cannot be passed onto the homeowner. It is important to note that under section 13(1) Home Building Contracts Act, rise and fall clauses are prohibited for home building work contracts where the contract price is less than $500,000, and a builder who enters into a contract containing a “rise and fall clause” is liable to a maximum $10,000 fine. Section 13(4)(c) of the Home Building Contracts Act provides that a clause in building contract is not a “rise and fall clause” where the clause allows a builder to increase the contract price by reason of a delay in the builder commencing the works under the contract due to a delay caused solely by the owner failing to comply with a condition imposed on the owner under the contract, including as to title or finance approval or where the builder is without fault for the delay. In that circumstance the builder may give the homeowner a notice of a price increase, subject to the provisions of the Home Building Contracts Act. There is a short and strict time limit on the time to commence a dispute procedure about a price increase given under a home building works contract. If you have received from your builder a notice of an increase to the contract price and are not sure what to do, you should quickly obtain legal advice from an experienced construction lawyer.