The what and what-not of cost escalation clauses

With much of the building and construction industry still feeling the sting of ever-increasing costs of materials and labour shortages, cost escalation clauses are becoming more common in domestic building contracts as a form of protection for builders.

But not all cost escalation clauses are enforceable. The recent decision of Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99 found the relevant cost escalation clause void and/or unenforceable and highlighted three main avenues where a cost escalation clause may be challenged.

Warning

Section 14 of Schedule 1B of the QBCC Act requires a domestic building contract to warn owners clearly of the circumstances in which the contract price by providing a brief explanation of the clauses that may change the Contract price on the first page of the contract schedule.

In Perera, the relevant warning was contained on the first page only by reference to a special condition amending the warning much later. The warning then, event if read as if it were contained on the first page, contained only a bare reference to the relevant clause. The Court found the QBCC warning was not compliant for two reasons.

1. The warning was not actually contained on the first page, instead it was incorporated into the first page by an amendment in the special conditions, some number of pages after.
2. The warning itself was insufficient, as it did not provide a real indication about how the price change might occur under an applicable clause.

The Court found that the absence of a compliant warning negates the enforceability of the relevant escalation clause, but in this case, not the Contract as a whole.

Certainty

The Owners also contended that the cost escalation clause was void for uncertainty, and the Court agreed. This was because:

1. The cost escalation clause was tied to the base cost of the house advertised by the builder.
2. The Builder could effectively trigger the clause by advertising an increased price at their discretion, and the increase in price did not need to reflect an escalation in cost.
3. This effectively allowed the Builder to change an essential term of the contract, in the price, without any reference to assessable criteria, such as increases in the cost of materials from a supplier.
4. There was no certainty of the price payable, or the method for calculating the price payable, for the construction between the parties as a result.

Unfair Contract Term

Finally, The Owners also asserted that the clause was an unfair contract term under the Australian Consumer Law. The Court agreed, and in doing so considered:

1. That the clause provided the Builder a unilateral right to vary the price, which was an essential term of the Contract;
2. The clause was not transparent, in part because it did not comply with the warning requirements of the QBCC;
3. It caused a significant imbalance between the rights of the parties;
4. Was detrimental to the Owners; and
5. The clause was not reasonably necessary to protect the Builders legitimate interests (as those interest could be protected with a transparent, fairer, more certain clause with reference to criteria for costs increases).

Compliant Clauses

To avoid a cost escalation clause being found to be void, builders must ensure that:

1. They comply with the warning requirements of the QBCC Act, and place a clear and compliant warning on the first page of the schedule of the contract;
2. The cost escalation clause should be fair, and properly balance the interests of the owner and the builder; and
3. The escalation should be calculated with reference to clear criteria, and in circumstances where there is delay or fault which is not caused by the builder, and not at the discretion of the builder.

If you would like to know more, or if you need assistance in a residential or commercial construction matter, please contact us on 4046 1111 today.