Michelle Cirson
Hi everyone, thanks for tuning in to the Subbies' Toolbox podcast. I'm Michelle Cirson, I'm going live today to talk about the issue of fixed price contracts and material price increases that subcontractors and builders yet again are experiencing in the construction industry. So we had other content planned for our podcast episodes, but this one has resulted in my phone being bombed for the last fortnight with all the issues starting with fuel but now the scope creep on the price increases. Creeping into materials and lots of suppliers are sending out letters now so we're all having a little bit of deja vu and the industry is more than a little bit spooked. It's really disheartening to see this happening again so soon after COVID and it feels like we've just got back into some semblance of normalcy when it comes to contracting after COVID and everyone sort of let their guard down a little bit in terms of these fixed price contracts thinking you know maybe that was the one in 100 flood but now it is absolutely happening again. So rather than wait I wanted to bring you guys some helpful tips in terms of how you might be dealing with these things at the moment. So I've got some notes I'm going to bring them up as I'm talking. Now in terms of the ways in which you can protect yourself. There's sort of two categories. Contracts were already stuck under and contracts we've already signed and then there are future contracts that we're signing and other deals that could yet still be done and how we would protect ourselves with that. But it's not a simple thing to rise and fall into your contract or to be able to just put up the price as we go. And that's because in construction we don't often use fixed price, sorry, cost plus contracts anymore.
And in a big way, that's because industry standard on a cost plus contract is seen to be 10 % in terms of profit. And that really isn't sufficient in this day and age to be able to run a business. And it's not a proportion amount of profit or a viable amount of profit for you to take on the risk of construction contracts in the first place. So there is this urban myth that industry standard for percentage margin should be 10 % and I want to just sort of normalize that in terms of back in the day when we had cost plus contracts those cost plus contracts your overheads were part of the cost plus portion so things like fuel and expenses to be able to show up to work were included in that cost plus portion so you were proportionately compensated and that's how that 10 % busted out to be what you would make on the job. The issue being that lawyers got their mitts on these contracts and have doctored them so that the cost plus portion now includes preliminaries, on and offsite overheads, administration, attendance, sometimes even supervision. And so they've really cut the guts out of what the parties downstream were able to make under a construction contract. The other thing I want to preface this chat with is that we take such big risks in construction. There's a whole lot more risk that we take in construction than we take being a florist, for example. The ongoing liability, defects liability periods, the qualifications needed to have a construction company in the first place. And then the likelihood that you're going to be sued is exponentially more in construction than it is in other industries by and large. It's not as easy to get out of businesses in construction because once you're on the hamster wheel, you sort of caught up in this carousel of having to keep trading forward to be able to pay historical bills in the past and to manage defects liability periods as well where things might, chickens might come back to roost from prior jobs but we need to still be around the doors open to still trade. So don't want to go too much down a rabbit hole about that but I do want to preface this by saying that we're not working in the normal arena of business. It's not as if I've got an Amazon stall and I'm sending pencils to somebody, there are high stakes in construction no matter which way you slice the pie. And it's exponentially amplified by the contracting hierarchy and the way that we try to pass the liability down to the downstream parties. So in terms of what you can do with your current contracts, this is gonna be a case by case basis. You're really gonna have to pull them all out of the drawer and look at every single one of them. It's very unlikely that you're going to be entitled to rise and fall under the contracts. That's something that's incredibly difficult to negotiate into contracts and I should know I've negotiated about 120 contracts every year for the last eight years and it's not something that people are prepared to sign subcontractors or downstream parties up to because they want certainty around what it's going to cost to engage you in the first place.
Rise and fall clauses. Let's park that for the next portion of the chat where I'm going to talk to you about what you can do moving forward. But a lot of you may have signed contracts called standing offer arrangements, umbrella agreements, period contracts, master agreements, master subcontracts. If you're being given work orders rather than a project by project contract, you need to go back to the overarching document and see if you've got the right to decline a work order because the quickest way for you to be able to stop the pain and the bleeding of having to subsidize these jobs now and cover the cost of these price increases is going to be by saying no, saying, I'm sorry, I'm just not going to be taking on that work order. you know, I'm not going to go broke fulfilling that work order for you. Now you need to have the right to decline a work order or a purchase order before you say that to them. And this is why I'm really emphasising you need to be looking at this on a case by case basis and getting advice about it. So if you've got work orders that you can decline, decline those moving forward or decline, decline them unless you can get these new terms put into these contracts because your overarching work orders is a good chance that many of you may have been signed up on breaks that are fixed for the duration of your period contract. So we had that with a subcontractor.
in our toolbox membership last year where they were working on the Sydney Metro Tunnel and they were doing carpentry and they signed up to a schedule of rates contract back in 2019 and then the contractor pulled it out of the drawer back in 2024 and directed them to go back to work on 2019 rates. So those work orders or those very long schedule of rates contracts that you might be fixed and locked into a rate, those are the ones to get a hold on quick smart.
The other thing to look for is what off-ramps you might have under your contract because in crazy times like this, say for example, and guys I don't have any finger on the pulse knowledge that this is going to happen, but let's just hypothesize together. If we were to run out of fuel or if the government was to say that only essential projects or essential services were able to
use fuel and no one else was allowed to do business. Everyone just had to shut down for a period of time until we could resource the country again. If that were to happen, it's quite likely that builders and developers might not actually formally suspend work under the contracts. They would just do nothing and see if the downstream parties could work out what to do. And in your contracts, there's a good chance that there's going to be clauses that talk about your non-exclusive access to the site.
and the period of time that you are able to, that the upstream party is allowed to not give you access to site before you can do anything about it. Now sometimes, and in the old Australian standards, the unamended versions, it used to say that the subcontractor could end the contract after a period of time where they're not given access to site, or it would be a breach of contract after so many days for not having access to the site. Those clauses have also been butchered by lawyers to now say that it won't be a breach of contract, but it might be a qualifying cause of delay. So you can have time, but not cost. If you've got one of the decent contracts that hasn't been butchered too badly, it's possible that you might be able to have an off ramp to get out of the contract using that method. When COVID came along, everybody went looking for force majeure clauses and there's not many force majeure clauses that I've seen. There are now, but they weren't back then, clauses that would squarely deal with the circumstances of a pandemic or a government shutdown resulting from a pandemic and things like that. But force majeure clauses, people are more widely accepting that those are the types of things that we need to be compensated for or at least be able to terminate the contract after a period of time.
So I've seen quite a few contracts recently that have got a force majeure clause, but it'll say that you can't do anything about the force majeure event other than get an extension of time until that event has gone for six months. find those clauses, work out whether or not they apply to your contract. The last little bit about the force majeure to talk about is that the proximity with regard to the causation can't be too far removed. You're trying to claim for force majeure and you're saying I need I don't have fuel because there's a war that's overseas but Australia is not at war but really it's the war that's caused the fuel shortage you see how it's a long there's a bit of a disconnect in terms of the direct cause of the shortage of fuel yes there is economic instability that's resulted in Australia having less fuel but
I'm concerned that it may not be as clear cut in terms of the contract as a direct line of sight to be able to say, because there's war and my force majeure clause lists war, I can get paid for fuel or I can get an extension of time for not having fuel. So you see how case by case basis, you really need to be pulling those contracts out of the drawer and working out whether you've got off ramps, whether you've got the ability to say no.
And on that point too, you need the ability to say no to variations as well. So one of the things we saw happen with COVID with material price increases was big fat variations being directed in the defects liability period. and it was not isolated events that this was occurring. It was quite a common thing where the upstream parties would see an opportunity to get subcontractors to do more work at cheaper rates by directing a variation under the contract.
So in that space, the one thing I do want to say, because I'm mindful this is pretty bleak so far, basically saying there's probably not a great deal you can do about the contracts that currently got signed. The one thing I think we think you might be able to do that you should definitely try and do is look at how the unfair contract terms legislation might apply to your contract. Because if you've signed a fixed price contract, particularly if it's a fixed price contract that doesn't let you decline a variation and the upstream party is able to determine what you get paid to do that variation, it could be the case that the unfair contract terms might apply to your contract and you might be able to find some relief from that. If you're stuck under contract with no access to the site or if the job gets put on ice, if the job has not even kicked off, for eight months and you're only just about to get a start on the site and you signed the contract all that time ago, that also might be something that you could look into with unfair contract terms laws. This one I wanna talk to you about just to give you a caution about what could happen if you try this strategy. So one great thing about COVID is that people are talking about this straight away this time.
We've seen builders run straight to industry associations saying, Hey, here it comes again. We're not doing it again. This time, if you all make us work for free under these fixed price contracts, we will all go broke. We are all still licking our wounds from the last time this happened. We're just not doing it again. Now subcontractors thinking about taking that approach. There is.
the legal consequences of repudiating a contract and a repudiation is where you behave as if that contract is no longer on foot. You're just going to backflip on whatever obligations you had and just say, I'm not coming back. I'm not doing it. And I empathize with people who are stuck under contract who might be thinking, well, if I'm, if you're going to send me broke anyway, I'm not giving you the benefit of the work. And there's this old analogy that you often see in
gangster movies where they will hold a gun to somebody's head and tell them to dig their own grave and I think that's really similar in this circumstance where if you if they're gonna kill you anyway, why would you dig the grave? Just make them dig the grave themselves. So there's there's definitely some common-sense logic around that strategy but the concern is that if you say to the other party I'm just not doing this for you.
I'm just not doing it for you. You need to understand that there will be legal consequences and quite possibly that you could have your contract terminated for breach or if you've repudiated the contract they could terminate, engage somebody else and then sue you for the cost of having somebody else do the work. So there are legal consequences of just refusing to go back. That said, if your decision tree is, I won't survive this anyway, then you may need to make a commercial decision about what the right path is for you. But current contracts case by case basis you need to be getting advice about this. Now, and just one last little thing about current contracts on foot is a word of caution about having good bloke conversations on email or even crying poor on email, making comments in writing about, know, nobody's going to be able to survive this. You need to be very careful about what you put in writing at this time because it could be that you...
Do what's called an anticipatory breach where you tell somebody you're about to breach the contract and they say okay, that's enough That's all I needed. I'm engaging someone else but also you don't want to Trigger what could be construed as an insolvency event under your own contract and then you could be terminated and your retention could be taken as well So definitely get some advice about current contracts on foot now future contracts first things first. Don't rush into signing them stop and think whose urgency is this? If it's not your urgency to sign up to the contract, your job's not starting till August and the builder's hounding you to sign the contract this week, there's a good reason. So sit back, wait, because the likelihood you're going to lose the job is quite slim. Anybody else who's going to price it at today's rates is going to be factoring in this and it'll be a new conversation. And if you choose to hold your price based on a tender that's a few months old at the moment, then you can make that commercial decision. That deal's probably not going to go away for you. But the other thing that really concerns me is if you're signing contracts that are going to go for a long time this month, even in the next eight weeks, just call your jets. See if you can get on as a purchase order to do some early works or have a separable portion where maybe you just do
One tower instead of the second tower as well See if there are ways that you can break up your scope so that you don't get too Committed too far in advance would be the first thing I would say so strategies for writing in the ability to increase Prices under fixed price contracts for for the future One great thing is to have several portions where you have the ability to reprice You want to be putting limits on?
either the value of the variation that you have to do if you're directed to do a variation or the nature and scope of the variation. for example, if you were to do, so there's five buildings in a project and you're only signing up to do the first building, don't, you're not going to properly save yourself from being stuck under contract to do all five buildings. If you don't address the variations clause that allows them to just give you another building as a variation. So you need to have limits on the
Extended variations that you can be directed to do under the contract and then you need to know how you value variations under the contract as well, so The order of precedence for valuing variations will almost always start with the price if agreed and then the rates or prices stated in the contract That's not going to help you if you want to put your prices up while you're under contract So one of the strategies we always try to do is have a schedule of rates in the contract to value variations So that builders can't just pick their own rate that they think is reasonable or look at a 30 year old Rawlinson's and say these are reasonable rates. Instead we would do a comprehensive schedule of rates that could bite you in the bum right now if you've got a comprehensive schedule of rates that's six months old and it really needs to be 30 or 40 percent higher. Build in that off-ramp if the job doesn't start too. So where you are signing a contract today and the job just doesn't start builders will all want
always be the most optimistic in the weeks before you're required on site. And they'll be telling you that the job's running to program, they're going to need you tomorrow to create an urgency around you signing up to their terms. But you need an off ramp if the job doesn't start. So one of the things we used to write in after COVID was if the job does not commence on site within 120 days of signing the contract, the subcontractor can end the contract by giving notice in writing. Now, you might think, that's not real fair. The builder's actually got no certainty. I could just walk away from this job for the next 120 days. What I would say is, has the builder got a termination for convenience clause? Because if they do, they're not offering you anything better. And you're actually the one that is putting your money where the mouth is and locking in your price for that period of time as well. Now the go-to during COVID was provisional sums. And I'm talking about commercial contracts.
So to make that very clear that what I'm about to talk about here came from residential building contracts and the cases that followed COVID mostly were surrounding residential building contracts. the rules for residential building contracts, particularly in Queensland are different and there are special rules about provisional sums. Please know, what I'm about to say does not apply to a residential contract. If you're doing work directly for a homeowner, you need to get separate advice about that. There are special rules for that. What I'm talking about is subcontractors working for commercial builders. If you are signed up to a commercial contract with another business, not a homeowner, then this might be a good option for you is if you have a portion of work that you can put in as a provisional sum because there's a volatile pricing component.
It is completely legitimate to have that in there as a provisional sum. You need to be aware of how your provisional sums margin is allocated because contracts can slice that pie in different ways. So when you first sign up to a contract, normally a provisional sum will include a portion of margin, but many subcontractors just say put in $100,000 allowance for the home automation systems in the penthouses and I'll tell you what it is when we get to it. We'll work out what the scope is actually going to be. So traditionally a provisional sum was used because there was unknowns around what would actually be required to complete that scope of work at the time or where those goods and services were going to be procured from. it could be that we all knew we were going to get home automation, but we didn't know which supply or manufacturer was going to provide those services. So making sure that with your provisional sums you properly understand when you put an allowance into your contract does it have to include margin and then you are going to have to have the conversation with your builder about what is an appropriate percentage margin for you to earn on a provisional sum and when you have that conversation please remember to remind them that they're asking you to warranty these things.
So there is value that you're providing in the defects liability period. Sometimes you might have to buy an extended warranty with a supplier for a provisional sum item. And so if they want the benefit of you warranting that for their protracted defects liability period, and they've got hold of your, your retention, you need to be properly compensated for margin on provisional sums. Cost plus contracts. Why don't we all just use these? Well, nobody wants to disclose their buy prices or their costs.
a very well written cost plus contract and the disclosure required for the transactions that inform a cost plus contract arguably could assist an upstream party in starting their own business in competition with their subcontractors. They could take that commercial and confidence information and effectively engineer themselves a business model to go out and start their own form working company or scaffold company or whatever the case may be.
So cost plus contracts, people get nervous about because you have to benchmark. What is my buy price? What is my cost on some of these things? And the same goes for rise and fall as well. Everybody might be wondering, why don't we just have rise and fall clauses? Well, you have to benchmark what your original allowance was. So if material price increases rise, then you have to prove what was the difference that I'm out of pocket. And likewise, sometimes prices go down. and nobody wants to give that money back. So it's not straightforward. It's something that's been heavily debated over the years. If it was straightforward, we wouldn't have this issue right now. But in terms of getting yourself established, moving forward for making sure your contracts are protecting you from these volatile circumstances, the first rule is don't rush in to signing contracts this week or next week or even in the next eight weeks. And just consider if there are so many unknowns what would be your buffer or your contingency or your backup plan? How much could you actually absorb and run some of those figures? And if it means that an extra dollar in fuel could be a million dollars difference in terms of the project that you're taking on then I would suggest that possibly with the contracts that you've not yet signed you'd be better off going broke on the couch.
and not having the ongoing liability and obligations of these high risk contracts that we're in construction. So this is something our toolbox members have been talking about for the last three weeks in our Q &A. We've had trades from all different contexts asking this question. So form workers saying, hey, I'm buying ply. How would I do rise and fall? How would I get that into my contract versus
Piling subbies who are saying what am going to do about this cubic meters of concrete business when we make an allowance for the depth of the piers or the piles We've got plasterers who are getting price increases from all of the suppliers who like to run on this We've got roofing and cladding subcontractors who likewise are Manufacturers are sending through all of their price increases as well So the strategy that you will need to put in your contract is going to be trade specific because it's gonna really come back to what are the things that are my high risk buy items if it's fuel and that's actually consumable and you can't prove that the tank of fuel that has gone up in price actually went to that project. It's gonna be much more difficult for you to be able to write that in as a provisional sum and in fact probably a waste of everyone's time. But if you're the type of subcontract that actually has a fuel tank on site and you can prove because you're your bulk fuel supplier took a truck to the site and gave you a docket and proved that they delivered that fuel to that site, that might be a really good way for you to handle that. So, look, that wraps it up for today. Hopefully it's been helpful. I am mindful that many of you, if you're watching this, might be thinking that actually leaves me with more questions than answers. Part of the reason I got onto this topic today is because I've been doing up a guide for our Subbies Toolbox members with be paced options for when they do their contract negotiations so they can actually articulate to their builders why they need these things in their contract and the wording that they might need for certain clauses in the contract. So it is something that I would say you're not alone and I've also spoken to some very big builders in the last two weeks who have told me that they are having these conversations up the chain as well. So I think don't want to be too doomsday or Armageddon about this situation but it's too soon after COVID. It does seem a bit like a reset to me and I don't think that builders or upstream parties are going to walk the plank like they did during COVID. The issue that we had during COVID was that everyone was too scared to say anything in case somebody pointed the finger and accused them of going broke. Everybody now seems to be just going yeah well duh that's what's going to happen if no one does this.
So hopefully as an industry we can be a little bit more open about having these conversations. But please don't have them over email. If you put things in writing they can be used against you. Even if you say something orally please always assume that you're being recorded. And you can have candid hypotheticals, conversations about different scenarios and still raise an issue. But if you're going to have a conversation. and go to an upstream party, please do it on a without prejudice basis. And get legal advice before you do so that you don't go in and start your negotiation with a bit of an Achilles heel and put a target on your back. So that concludes today's podcast episode. I will see you back here for another episode, but it has been an absolute pleasure. Hopefully you got something out of today.
