Cost can change, even in a fixed price building contract

Why the cost can change, even in a fixed-price building contract

By Jo Chivers
Thursday, 31 May 2012

There can often be some misunderstanding around a fixed-price contract.  If you don’t know a builder, then there can also be a little mistrust as you look over the tender. Am I being overcharged?  Is everything included?  Will there be many variations?

Today I opened an email that made me smile and really feel grateful for such a wonderful builder we are working with on our development projects.

The email came from the office of my builder. It related to a three-villa project under construction. It had two variations attached to it; one for the site preparation and the other for slab piering.  I’d been overseeing the works with the site manager so I was expecting the variations but weren’t sure on the exact cost they’d come in at.

“Variations are changes to the original contracted work, which involve either an addition or reduction in the scope or value of work,” so the Master Builders Assoc describes.

So you’ll always find some items marked as provisional in your builder’s contract, because you can’t always plan the entire “scope or value of work” required when developing.

In this builder’s contract this clause was clearly included:  “Provisional sum is the estimate cost of labour and materials; it includes an amount for the builder’s margin. If the cost is more than the allowance, the difference including builder’s margin will be added to the contract price. “

Back to our three-villa project variations.  The first one covering the site preparation was for tree removal.  The builder’s tender covered vegetation clearing but from the time Property Bloom located the site, ran our analysis, designed the project, lodged the development approval and construction certificate and the client had her construction loan finalised and we could start to build, the vegetation had grown to a rather large tree.  We did get a quote from a tree lopper to clear it, but we decided that it would be cheaper for the builder’s excavator to push it over and clear it as part of the site preparation. So we did expect a little increase to this provisional cost but wouldn’t know until the excavator submitted his invoice to the builder. It ended up being a little over $1,000 for this work.

The other variation was for under slab piering.  Once work was completed, we knew that we hadn’t needed to use the entire provisional allowance in the builder’s tender.  When on site with the concreter, I could see that the depths he was drilling to were not as deep as expected and so there were less lineal meters of piering required.  For this work our client was receiving a credit as the provisional allowance was over-estimated.

I needed to let my client know that there had been some variation to the build cost.  After all, she had signed a fixed-price contract a few weeks earlier, but I had made a point to explain the items marked provisional in her contract.  Usually provisional items are:

  • Disposal of stormwater – even with an engineer’s plan, this may vary during construction
  • Retaining walls – the square meters of retaining often can’t be totally confirmed until the site is cut
  • Piering to under the slab – dependant on how deep they may need to drill to hit solid support
  • Site preparation – excavation – cut and fill.  There can be more fill required to bring in or take away

The conversation I had with my client was easy. She was coming out in front with the credit on the piering more than covering the variation on the site clearing.  This is the kind of outcome we strive for, but it doesn’t always work that way.

In property developing or home building, there can often be a degree of disappointment once under construction as issues arise.  Mostly this comes down to the developer or home owner’s expectation that the costs won’t change.

The more developments or home builds you manage, the more issues you become aware of. But if you can go into it knowing there is a degree of risk that you must take, then you won’t be disappointed if an issue does come up.

No one can really know what will happen once you start work, but as project managers, it’s our job to manage the issues in the most effective way so that we minimise costs and the valuable time in may take to sort out the issue.  And when it goes the other way and a credit is issued, then that’s a wonderful feeling.

Jo Chivers is director of Property Bloom, which manages property development.


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About gillanddebello

L J Gilland Real Estate is a prestigious boutique agency specializing in Property Investment Management Services and the Sales of Investment Properties with tenants in place. Comprised of a top performing group of handpicked specialists, our Agents proudly serve Property Investors in Queensland. Since 1996 our Agency has demonstrated a genuine enjoyment of working with people, developing long-term relationships and delivering on the promise of great service. Carlos and Linda Debello offer property investor's the confidence to sell and lease in any market. We provide comprehensive market appraisals, exclusive multimedia marketing campaigns, and knowledgeable, highly personalized counsel on all aspects of real estate. Our Property Management Team is equally considerate, offering investors with in-depth advise, well-researched rental valuations, and highly professional rental management services. Carlos’ direct mobiles are 0400 833 800 & 0413560808. Linda’s mobiles are 0409995578 & 0414978700 (prefer email contact for Linda). Office 07 3263 6085.
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