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Kevin Smith: Fixed price contracts

Kevin Smith: Fixed-price contracts
A lot has been said of late about construction companies and questioning their ability to produce a Fixed Price Contract. In order to understand whether there is any truth in the matter, we need to first understand what a Fixed-Price Contract is and how it is compiled. The fact of the matter is that Fixed Price Contracts are becoming a rarity among building companies.

A lot has been said of late about construction companies and questioning their ability to produce a Fixed Price Contract. In order to understand whether there is any truth in the matter, we need to first understand what a Fixed-Price Contract is and how it is compiled. The fact of the matter is that Fixed Price Contracts are becoming a rarity among building companies.

When lending money from a financial institution to build a new home, one of the main requirements is to provide a Fixed Price Contract from a reputable building company. The lender needs to know that should a default occur, for whatever reason, the project can be completed and sold to recoup the funds. This risk taken by the institute to lend you the funds is greatly reduced using a Fixed Price Contract designed to protect the customer, the lender and the building company.

Most building companies who produce a Fixed Price Contract, do so on the building itself from its foundations up. This enables them to “clause out” anything below ground level, as this is often the great unknown. This gives them comfort over what they can control – the actual build. The site works will be given an allowance in the contract on what is expected, and some of the banks are happy with this depending on your personal financial situation and lending requirements. At Keith Hay Homes, we go a step further and produce a Fixed-Price Contract on everything covered in the contract, including any site works required.

The reason why a Fixed-Price Contract is considered preferential to banks, builders and customers alike, is that this gains the most amount of clarity on the true cost of the project. This provides protection for all parties involved.

So, what can impact a Fixed Price Contract? There are a number of considerations that a building company needs to take into account when producing a Fixed Price Contract. The greatest influence on this is time. That is why all Fixed Price Contracts have (increasingly so) strict dates stipulated that the contract needs to be unconditional by etc. In this ever-changing market that we currently are in, this is more important than ever. A building company usually prices up a job based on the cost of materials that their supplier gives them. This will be a fixed quote on the materials for a fixed amount of time.

To understand how we determine our contract price, we need to understand where those costs are coming from, and the range of different parties involved. A Fixed Price Contract is broken down into material and site service costs, but also includes clauses to protect the building company. Because Keith Hay Homes offer standard plans, available with minor changes to suit your site, most of the architectural, draughting and quantity surveying work has already been completed. We know exactly the type and quantity of materials needed for each plan and because the company has been around for over 80 years, our long-standing relationships with our manufacturers and suppliers allow us to prepare early for any future price increases or building supply shortages. Our central distribution warehouse is able to store and supply materials to all eight of our branches nationwide and accurate sales forecasting allows us to pre-purchase and store materials rather than ordering materials only once a build contract is signed. With supplier pricing continually changing due to the current environment, we can be confident that our pricing can stay consistent, avoiding the need for provisional sums or cost variations. Our website indicates the current standard plan pricing (referred to as ex-yard pricing) and unlike projects that require a design that specifically suits a particular site (referred to as design-and-build), one would only know the final price once the architectural and quantity surveying has been commissioned and paid for. At each one of our branches, Keith Hay Homes also have ready-built stock houses available to view, indicating the exact price, which is the lowest risk option available in the current market.

There are very few ways that builders safeguard themselves against price fluctuations. One could be to negotiate the supplier to hold their price for longer (this is extremely difficult in this rapidly moving market where building companies are in competition), or to have the ability to hold a large number of materials. The latter carries a huge risk and cost to the building company but is the situation that Keith Hay Homes is in. We are fortunate enough to own our own merchant, and therefore can secure supply and therefore secure the pricing. Of course, we are still susceptible to the same challenges in the market as any other building company, but this gives us an extra level of comfort when issuing a Fixed Price Contract.

With every project, no matter the building company, you will find clauses in the contract relating to the unknown costs and are specifically mentioned under ‘exclusions’ or ‘no allowances’. It’s extremely important for the customer to know and understand what has and has not been included in the scope of the contract as the lender will often not know what was discussed between yourself and the building company. Examples of costs not included in the contract would be municipal council fees because most of the time council will only provide estimated figures and invoice the customer directly once the building consent has been approved or once the actual build is nearing completion. These fees can form a large part of the total project cost, but most lenders are aware that these fees will be due. It’s vital that you have a good relationship with your building company and these types of costs have been explained to you and are expected once the invoices are received.

When partnering with a building company, customers should be aware that Fixed Price Contracts exist to protect all parties. If any dispute arises, the contract and clauses within the contract will dictate the resolution. Contracts should include very specific information as to what has and has not been included rather than vague explanations assuming everything has been covered.

Because of the continuing uncertainty around material supply, having a Fixed-Price Contract is more important than ever. The demand for materials is only going to increase which generally leads to increased cost. If you’re currently deciding on whether to start a project, think about how the increased cost will affect your return in 6 – 12 months’ time and how that would affect the financial viability of your project.

We’re always available to provide an accurate estimate giving you a clear understanding of the costs involved, what is and isn’t possible on your property with estimated timeframes to completion. This is a service provided by Keith Hay Homes before any financial commitment is made by you the customer so, please don’t hesitate to get in touch to discuss your project further.


Kevin Smith

Kevin is a Home Consultant with Keith Hay Homes and has extensive experience working with property investors. 

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