Can a Builder Increase a Fixed Price Contract Due to Rising Material Costs?

As a result of recent global matters construction costs have risen sharply. Many builders are locked into fixed‑price contracts that no longer reflect the real cost of materials or labour. This puts pressure on margins and increases the risk of disputes.

As a result we have seen an increase in  clients  seeking advice on whether they can pass on increased costs, or whether a rise and fall clause will protect them. The answer is: sometimes. These clauses can help manage cost volatility, but only if they are drafted clearly and used in the right circumstances.

This article explains what rise and fall clauses are, the risks if they are not enforceable, and the practical steps builders can take to avoid loss.

Rise and Fall Clauses

To manage cost volatility in relation to a fixed price contract, a rise and fall clause can be used to adjust the contract price if material or labour costs change. A rise and fall clause is a contract term that adjusts the price if costs go up or down.

It can be linked to:

• industry cost indexes
• specific materials
• supplier invoices
• labour award increases

In Perera v Bold Properties (Qld) Pty Ltd [2023] QDC 99 a rise and fall clause was found to be unenforceable due to its uncertainty and unfairness.

The facts

Mr and Mrs Perera signed a fixed‑price home building contract with Bold Properties for $645,730. A few months later, before construction began, the builder claimed costs had risen due to inflation, labour shortages, and COVID‑related pressures. The builder attempted to increase the contract price by $51,432 under a “Special Condition 7.”

What the clause said

Special Condition 7 allowed the builder, at its sole discretion, to increase the price to its “current base price” if work had not started by the anticipated start date. The clause did not include:

• a formula
• an index
• a method for calculating the increase
• any objective criteria

The Court’s decision

The Court held that:

• The clause was void for uncertainty because it lacked any objective method for calculating the new price,
• It failed to meet statutory warning requirements, and
• It was an unfair contract term because it allowed the builder to increase the price without transparency or limits.

As a result, the builder could not increase the contract price. The contract remained on foot at the original fixed price.

As shown in the Perera case, parties wishing to transfer the risk of price escalation from contractors to principals by adopting price variation provisions should ensure the mechanisms are clear and objective, and rely on accessible data sources.

1. Price adjustments must follow a pre-determined formula

Rise and fall clauses must include a formula that is to be applied to calculate the price variance.

Materials: typically indexed in accordance with price indices published by institutions such as the Australian Bureau of Statistics (ABS). The predominant price indices tracking cost fluctuations of building materials are the Producer Price Indexes (PPI) published quarterly by ABS. One such index is the “Input to the House construction industry”, which specifies overall trends in prices for various types of building materials in each of the capital cities. At present there is no index for commercial construction in Australia.

Labour: With respect to labour input portions of, reference to national award rates may be used.

Alternate Index: An important safeguard is to specify an alternative index if a particular index ceases to be published. In Leighton Contractors Pty Ltd v Public Transport Authority of Western Australia (No 6) [2008] WASC 193, a dispute arose where the index referred to in the rise and fall clause ceased to exist. The contract provided the following:

If an index is discontinued or the basis on which an index is calculated is altered there must be substituted the nearest index consistent with the intention of this annexure G so as to give effect to it.

Overall, the rise and fall clause was upheld and the nearest index was determined by the court.

If an index is not used, the clause must relate to the price per unit of a material or labour at the date of the contract.

2. Relate to specific materials or labour

Usually rise and fall clauses will apply to specific materials or labour as opposed to the entire contract sum. Each item will fluctuate separately in accordance with the formula included in the clause.

The clause should reference:

• the labour or materials which will be impacted, and
• the price of the labour or materials at the time the contract is signed.

3. Indicate the percentage of price fluctuation that is to be passed on

To limit the application of rise and fall clauses, it can include a threshold before any adjustment can be made. For example, the contract may only allow a rise and fall claim if there is a change in a relevant category of cost of at least [x]% and/or a change to the overall cost that may be the subject of rise and fall claims of at least [y]%.

If this second type of threshold is used, the rise and fall clause should specify whether the adjustment calculation is intended to apply to the entire cost, or just the amount that exceeds the threshold.

Where a threshold is used, it is normally low e.g. 1%.

4. Include a reference date

The clause should state the date when the rise and fall of prices is to be calculated (known as “the reference date”). This should include the date on which costs are measured from, such as the “date of contract” and the date(s) when the adjustments are made such as when the materials are purchased.

Rising construction costs are a major challenge at the moment for builders working under fixed‑price contracts. Rise and fall clauses can help, but only if they are drafted clearly and used correctly. Builders who fail to manage cost escalation risk being locked into loss‑making contracts, unable to recover increased costs, and exposed to disputes.

By understanding the risks and using the right contract strategies, builders can protect their business. Specialist legal advice ensures your contracts are clear, enforceable, and tailored to volatile market conditions.