With the ongoing impacts of Covid on our economy and the reduced ability to import materials into the country many of us have heard the stories of building contract prices being significantly impacted. Some Purchasers are finding themselves faced with the possibility of building price increases that could make their new home now unaffordable.
In this post we want to answer your queries on how your existing build project could be impacted by the increasing costs of building materials and what your options might be if your build price is going to rise significantly.
We will also point out what to look for if you are considering entering into a new build contract and the impacts this situation is having on finance applications for new builds.
We have fielded many queries recently from clients wanting to know if their existing build contracts are going to be impacted by the well-publicised increase in building materials. The short answer to that query is “probably”. However, the extent of the impact will depend largely on the terms of your contract.
There are very few true fixed-price contracts. With many build contracts, it is obvious that the price is not fixed. Certain key components of the build project may be highlighted as Provisional Cost (PC) sums. Those sums are estimates that may increase (or decrease) based on the actual cost of those items. It is common for items such as kitchens, excavating and landscaping to be listed as PC sums. No doubt with the increase in building costs the actual costs to Purchasers for those PC sum items are likely to be higher than estimated.
Even contracts that are marketed as fixed price often have terms in the fine print that allow builders to pass on increased costs and/or to substitute materials. Those terms are included to protect builders from situations exactly like this where materials have unexpectedly increased in cost. Likewise it allows builders to substitute materials where they cannot source those originally specified.
The wording of these price escalation and substitution clauses will be crucial to what happens in your particular build. In some contracts, the builder is obligated to discuss changes with you and present you with options. In that case, you may be able to mitigate any increase in price by opting for cheaper materials. However, some contracts do not require such consultation. The builder has complete discretion on the material substitution and whether to pass on additional costs.
The key in all these situations is the relationship with the builder. Keep those lines of communication open. Be open to options and work together towards a good solution for all involved. In some situations, the new price may be simply too much for the Purchaser to bear. It may be possible for us to negotiate an exit from the contract or potentially you could look at on selling to a third party.
The silver lining for Purchasers is that the property market has more or less continued to rise quickly here in New Zealand. If you signed up for a build contract some months ago you’re the value of your new home is likely to well exceed what you are paying for it on the open market. That may be little consolation for Purchasers that can no longer afford the increased price of the build but they may at least be able to sell the project, recover all their costs and possibly make a little profit to put towards a new deposit.
It is now more important than ever to have your build contract reviewed by a Solicitor before you sign. We can point out the fine print that could impact your build price. We may be able to negotiate the removal of such clauses to make the project have a truly fixed price.
We are seeing more and more often that banks are requiring true fixed-price contracts, particularly for first-time buyers where the deposit for the build is lower. Any substantial change in the build price may mean that a Purchaser no longer has sufficient deposit and their finance approval could become invalid.
If it is not possible to remove these clauses we can at least ensure that the builder has an obligation to discuss and negotiate any price changes with you so you can try and minimise the impact of price changes down the track.
Whether you have an ongoing project or are considering a new build project we can help you navigate the terms of your contract to ensure your build project is a successful one.