This recent Queensland District Court decision concerns the Contractor’s failed attempt to rely upon a price escalation special condition.

The result of the determination was that the Contractor had no ability to increase the Contract Price due to industry price increases and was left with a binding fixed price Building Contract.

Section 14 of Schedule 1B of the Queensland Building and Construction Commission Act 1991 requires a prominent warning to be displayed on the first page of the Building Contract Schedule.

The ramifications of this decision are that cost escalation clauses need to be carefully considered and drafted for inclusion in a Building Contract. Consideration must also be given to the appropriate wording of the warning statement included in the Building Contract.

Summary

The Owner contracted with the Contractor for the construction of a new home pursuant to a New Home Contract dated 11 August 2022. The fixed price of the Building Contract was the sum of $645,370.

The Building Contract contained relevant Special Conditions as follows:

7.         In the event that commencement has not taken place by the anticipated start date (as noted in item 14) the builder reserves the right, at the builders sole discretion, to increase the contract price to the current base price of the house type, which is the subject of this contract and identified in the Contract Tender, to the builder’s current base price for that house type.

11.        The paragraph under the word “Warning” in Item 2 of Schedule 1 is amended to read “The contract price is subject to change. The clauses that allow for changes to the contract price are clauses 9, 10, 11, 13, 15, 16, 19, 20, 21, 23 the Special Conditions and the Tender Conditions attached to this contract.

On 13 October 2022, the Contractor sought to increase the Contract Price by the sum of $51,342 on account of purported increases in construction costs pursuant to Special Condition 7.

The District Court found that Special Condition 7 was void for uncertainty because:

• of the ability of the Contractor to change its price without any express criteria by which a price increase may be determined (and may be checked by the Owner);
• the Contractor’s entitlement to change the Contract Price at its “sole discretion”; and
• the Contractor having originally under-priced the Contract.

The District Court further found that the warning notice required by Section 14 of schedule 1B of the Queensland Building and Construction Commission Act 1991 was insufficient because:

• mere indirect mentioning the provisions in the relevant contract and noting that they may allow for changes in price;
• the warning must be entirely on the first page of the Building Contract Schedule; and
• fundamentally, “[t]he explanation that the relevant clauses allow for “changes to the contract price” fails to describe properly the effect of those clauses – it does not warn [the Owner] that the price may be increased, nor does it explain how each clause may lead to a change in the contract price.”

The District Court provided the following example of what warning might include:

“The contract price is subject to change, either increasing or decreasing. The clauses that allow for changes and their effect are the following:

Clause 20: where a written variation is made to the works or to the manner of carrying out the works (see definition of “variation” in clause 38.1) the contract price may increase or decrease.

Special condition 7: if commencement begins after the anticipated start date, the builder may increase the base price component of the contract price to the builder’s then current base price for the same house type and increase the contract price by the same amount.”

Alarmingly, the Queensland Building and Construction Commission’s template for a Level 2, New Home Construction does not include such a detailed explanation. The explanation afforded by the Queensland Building and Construction Commission own contract is a mere:

The Contract Price may increase due to Condition 20, decrease due to Condition 24, and increase or decrease dues to Conditions 19 & 21.

Conclusion

Clauses which adjust the Contract Price for a fixed price Building Contract ought to be carefully considered both when they are being prepared and when they are sought to be relied upon.

Should those clauses be void, they will be struck out but the balance fixed price Building Contract will be forced to proceed potentially causing significant loss to Contractors.

September 2023 Update: Since the date of this article, the Queensland Building and Construction Commission has updated their warning notice to reflect a direct explanation of clauses 20, 24 and 19 & 21.