The costs of materials is rapidly increasing in the construction industry. This is giving rise to various cost and time challenges for construction projects. Construction industry participants need to take immediate action to ensure they are adequately managing (and are otherwise protected) on material cost increases.
This month, the Master Builders Association of NSW reported that the cost of materials has increased by a significant 4.2% during the first quarter of 2022, which puts it at a total of 15.4% higher than it was a year ago.
Some of the factors that significantly impact the building industry include increased fuel prices; the recent bushfires which destroyed large amounts of local timber supplies; global supply chain issues; the lockdowns which impacted building supplies nationwide; and the Government Home Builder Scheme, which created demands for new homes, but a low supply of materials. These factors combined have put a strain on the supply infrastructure in Australia, resulting in the fastest increase in building materials since 1980.
As we are halfway through the year, there are indications that this problem will continue into the near future, which will impact the building industry significantly.
Set out below are some examples of the material cost increases for the first quarter of 2022. 
Credit – Master Building Australia
Contractors can be in a particularly vulnerable position in relation to material cost increases. Especially where the relevant contract adopts a lump sum pricing model (or does not provide for an entitlement to claim any material cost increases).
For existing contracts, contractors should be reviewing their contracts to see if the contract provides for a way for the contractor to claim extra costs as a result of a material price increase. Separately, contractors also need to be reviewing extension of time regimes to determine if there are any permitted extension of time events which relates to material cost increases (e.g. shipping delays, material shortages etc).
For new contracts, it is important to carefully consider the type of contract being used (i.e. lump sum, cost plus etc). Typically, the Australian Standards contracts used for construction projects (e.g. AS4000, AS4902 etc) and the Master Builders contracts for domestic building work do not generally include clauses enabling the contractor to claim additional costs for an increase in material prices. This means that if you are using these contracts, additional clauses will need to be drafted and inserted to address the increase in material costs. Such clauses need to be carefully drafted to ensure they are clear and workable with the rest of the contract. This issue equally applies on extension of time considerations.
Construction industry participants need to carefully consider how material cost increases are to be managed in a contract. A possible approach is the indexing of prices. Any approach needs to be carefully considered and drafted for in the contract.
Head contractors also need to be working closely with their subcontractors on any time and cost issues relating to material cost increases to ensure the project is progressing on time.
Project owners need to be reviewing their current contracts to understand if their contract enables the contractor to make a claim as a result of a material price increase or for extra time as a result of shipping delays or shortages of materials. Similarly, project owners need to be reviewing extension of time regimes so they fully understand any program implications as a result of any delays which stem from cost in materials (e.g. delays which are caused by a shortage in materials).
For new contracts, project owners need to ensure that they are adequately protected from cost and time overruns as a result of material cost increases. Some project owners are looking to adopt guaranteed maximum price (GMP) contracts to ensure there is a “ceiling” on the contract price.
Project owners also need to be keeping an eye out for claims under the contract (either for extra cost or time) as a result of difficulty in obtaining materials or material cost increases. Similarly, project owners should be making sure that all claims made for additional costs as a result of material cost increases are substantiated.
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