The recent increase in global demand for building materials has inevitably led to price rises and unpredictable market fluctuations. For building subcontractors, whose profit margins rely on providing a quote that accurately covers the cost of materials, such unpredictability has made trading at a profit progressively more challenging. Providing a fixed quote has, in essence, become a gamble for subcontractors.
Subcontractors can mitigate the risk of a reduced profit margin, however, by rethinking the way in which they quote.
Rethinking how to construct a quote – the ‘rise and fall’ clause
A quote typically contains the terms of service and intended charges or costs. If a builder accepts a quote from the subcontractor, it becomes a legally binding contract, and the parties will be bound by its terms. The terms relating to cost do not necessarily need to be fixed and can be adjusted to be more flexible. Including a ‘rise and fall’ clause within the terms is one such way flexibility can be achieved, and risk reduced.
Generally, a ‘rise and fall’ clause is a mechanism by which a contract price can be adjusted as a result of a variation in costs. These types of clauses are normally found in domestic building work contracts and are governed by legislation. The inclusion of the rise and fall clause in a domestic building work contract means that the homeowner assumes the risk of cost fluctuations rather than the builder. While such a clause provides for both rises and falls in costs, the adjustment is almost invariably upwards, the rationale being the need to protect builders against spiralling costs between tender and completion of the work.
Subcontractors may also use this mechanism to protect themselves against the risk of a reduced profit margin when dealing with builders, and as the relationship between builder and subcontractor is not defined as ‘domestic’, it is not governed or restricted by legislation in the same way as it applies to domestic work building contracts. The simplest way of including such terms in the quote is for the subcontractor to name their intended building materials supplier, and state that the quote will be adjusted in consequence of any variation in cost imposed by that supplier. This not only ensures profits remain unaffected but provides the builder with a level of comfort knowing the identity of the intended supplier.
If you need help with rise and fall clauses or reviewing your terms generally, contact Joshua Davies on 7111 2996 or [email protected].