May 3, 2022
The Australian construction industry continues to face increasing pressure, as market volatility and supply chain delays present increasingly challenging circumstances. The collapse of major infrastructure companies, such as Probuild and Condev, highlight the complexity and seriousness of the problems currently facing the industry.
Importantly, given the escalating situation across Australia, those within the construction industry must remain aware of:
1. the current and expected risks within the market;
2. the effect this has on the construction industry; and
3. how a party can protect their interests against these risks.
International Supply Chain Delays
The construction industry continues to face supply chain delays as international markets grapple with the fallout of the pandemic, coupled with the ongoing war in the Ukraine.
The global pandemic saw Australian construction material prices soar across 2021, including:
1. timber prices rising between 50% and 100%;
2. steel prices rising between 30% and 60%; and
3. concrete prices rising between 20% and 40%.
The above increases have been compounded in recent times, with the effects of Russia’s war in the Ukraine seeing timber prices rise an estimated 25% in addition to the above.
Rate Rises and Inflation
Further to the above supply chain issues, the effects of inflation, and the potential for interest rates to rise only increase the pressures faced by those in the construction industry.
The practical effects of increases to inflation and interest rates can result in:
1. increased costs to carry out works and complete projects;
2. reduction in operating cash flow, which will be exacerbated in situations where there are extended payment terms and significant periods between payments; and
3. increased costs of loans, making borrowing more difficult and reducing the profitability on the back of any investment.
What Construction Companies Should Do
In light of the above risks, and given the increasing volatility and uncertainty within the industry, parties should ensure they take proactive and preventative steps to avoid issues prior to their eventuation.
A common mechanism which parties may insist upon during contract negotiations is the inclusion of a rise and fall or fluctuation clause. Practically, this means a party will be entitled to claim for the additional costs associated with undertaking a project, if factors outside of their control result in an increase to prices for materials. Parties should ensure such clauses are diligently drafted, with a mechanism for assessing prices increases fairly, such as comparison to a reference price. It may be prudent for the drafting to specifically identify materials which are subject to the rise and fall clause, such as timber, steel, or concrete, to ensure the clause cannot be used for materials not agreed at contract execution.
Notably, Master Builders Australia have recently released a standard form “cost-plus” contract which builders may use to minimise the risk associated with increases to material costs. Such a contract ensures builders are compensated for their costs actually incurred, plus an allowance for their profit and overhead. Practically, this minimises the risks faced by a builder because of increased material prices, by passing such a risk to the owner or principal.
Operating cash flow issues may be addressed through review and negotiation of payment terms and conditions. This would be best facilitated through the inclusion of expedited payment terms. Furthermore, these issues present the greatest risk where a party will incur a cost and then wait for reimbursement, as the sooner a party is paid, the less pressure it will place on their operating cash flow. Similarly, parties should consider when a party will be entitled to submit a payment claim. While many projects will allow for monthly payment claims, where projects are conducted based on milestone payments, parties should consider the most appropriate breakdown of such, and if it is necessary to shorten the period between milestones to minimise cash flow issues. Alternatively, parties may consider the inclusion of principal supplied items to alleviate cash flow issues, as the responsibility and associated risk of procurement, passes to the principal.
Importantly, the above matters should be addressed during contract negotiations. By raising these matters in advance, parties can draft appropriate provisions which minimise risk and ensure projects are delivered effectively and efficiently.
LPC Lawyers
If you are a party who will be entering into a contract in the future, it may be prudent to “future-proof” your next project and consider negotiating the inclusion of risk allocation clauses or favourable payment provisions into the contract.
Please do not hesitate to contact LPC Lawyers for a discussion on how we can assist.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Ryan Bryett
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064