How to cope with Trade Material Supply Shortages, Pass on Price Increases and Protect Against Completion Delays
It is hard to ignore the current global supply chain disruptions, caused predominantly due to the COVID-19 pandemic. At the same time, demand for construction has gone through the roof (pardon the pun!). This has impacted the Australian trade industry massively, pushing material costs up and completion dates out. This can cause trade industry business owners to feel anxious about entering into contracts, with fears that surges in material prices or supply shortage delays may leave them out of pocket. The reality is that cost increases and delays are unavoidable and will need to be factored into all trade contracts. If incorporated into your contract, builders can increase and pass on the prices in certain circumstances.
Here are some tips from me, your tradie contracts lawyer:
1. Ensure Completion Dates are Estimates Only
Most completion dates are based on construction programs and you will incur penalties for late completion. These can be in the form of a pre-determined daily fee for each day past the completion date, referred to as liquidated damages, or as a damages claim. You should try and resist these types of penalties at all costs. For most standard contracts, you would need to draft a special condition that the completion date is an estimate only and may vary accordingly. This can prevail over any standard condition and save you from fronting daily delay cost rates.
2. Protect yourself against delays
There are a number of ways to protect yourself from liability for delay. A contract drafted for your business by a contract lawyer should also include clauses such as a ‘force majeure clause’. Put simply, this fancy French named clause simply disclaims your liability for failure to perform your obligations under the contract due to reasons out of your control, such as a global pandemic. Depending on your location and industry, you may be able to add a clause to your contract or your terms and conditions which gives you the right to impose stand down charges and recover additional costs incurred where work is delayed by reason, not in your control, and where you are unable to reasonably reschedule services.
3. Include a Contract Price Adjustment Clause
The massive shortages in materials such as timber and steel are causing a significant increase in costs. With price increases occurring at a rapid rate, you need to ensure that your contract allows for price adjustments and variations. This is factored into some standard contracts, for example, both the Master Builders Commercial Building Contracts and Master Builders Residential Building Contracts contain clauses whereby if the actual cost of a prime cost item or a provisional sum item exceeds the total amount allowed, the excess amount plus the contractor’s margin on that excess is to be added to the contract price. Therefore, you can increase the price for prime cost and provisional sum items by the rise in cost plus your profit margin. This additional cost can be included in the next or any later Progress Claim or the Final Claim.
4. Protect your stock
With supply shortages, it is more important than ever to keep a tight inventory of all your stock. One thing that is starting to be a problem is workers (both employees and contractors) ‘selling’ stock at reduced rates to friends and family. This can go unchecked for years without tight controls and regular stock takes. It could be slipping out from under your nose. If your contractors and employees have access to your stock or are carrying consignment items around with them then adequate clauses need to be included in their employment contracts or subcontractor agreements.
5. Protect your Supply Arrangements
If you have a good, regular, supplier but no written agreement with them, that needs to be addressed. Not only can this have a negative impact on the value of your business if you come to sell your business [see article on getting ready for sale] it can also leave you vulnerable. We always recommend that our clients talk to their suppliers and ask them if they would be willing to enter into a supply agreement to document the agreement between them. There should be some certainty built into this about future price increases and the ability to terminate if price increases are too high. There could also be minimum supply amounts to ensure consistency of supply of materials.
6. Dispute Resolution is the way forward!
You need a legally drafted dispute resolution clause in your contract to prevent your client from commencing court proceedings against you. A well-drafted dispute resolution clause will clearly set out a procedure for both parties to resolve concerns quickly and effectively when a dispute arises. Firstly, this will always include meeting in good faith with the other side to attempt to resolve the issue. Then, if that is not successful the parties can refer the matter to mediation which is much cheaper and faster than court proceedings or arbitration. Regulatory bodies are seeing an increase in disputes, and some are taking steps to assist. The Queensland Building and Construction Commission (QBCC) has recognised this recently occurring problem and introduced the Accelerated Builder / Consumer Dispute Framework as a temporary independent mediation service to help builders and consumers find a way through the current challenges to industry material or labor shortages.
7. Open Communication rocks too!
Don’t underestimate the power of good communication. You need to stay in close contact with your clients, set realistic expectations, and update your client (preferably in writing) as soon as anything changes. This is the best way to keep them happy and avoid an expensive, stressful and timely dispute from happening. The information in this article is general in nature and does not constitute legal advice. For advice on how to minimize your economic risk and limit your liability please get in touch. We can review and amend your current contracts or start from scratch!