The fuel price dilemma for suppliers and contractors

Introduction

Fuel prices have been volatile and they could continue that way, with the Federal Government’s announcement that it is temporarily extending the fuel excise until 2 August 2026 - albeit a reduction of 16 cents per litre instead of the original reduction of 32 cents

Business like certainty and when it comes to the supplying goods or undertaking projects. This is especially the case for projects that, by their nature, will take time to complete. It is usual that such contracts are agreed months in advance and, sometimes, even years.

While the contract may include allowances for a change in market conditions, it is rare for contracts to account for international conflicts or prolonged wars and the consequent effect of such events on trade markets, transport routes and exchange rates.

If you are working under a domestic building contract in Victoria, you cannot simply pass these increases on to your customer. The Domestic Building Contracts Act 1995 (Vic) (the Act) tightly restricts when and how the price of a domestic building contract can change after it is signed. This article explains where you stand on contracts already on foot, and how to structure future contracts to better manage fuel and supply price risk.

Can I change the price on a fixed-price contract that has already been signed?

Generally, no. Most domestic building contracts are fixed-price contracts. Once the price is agreed and the contract is signed, the builder generally bears the risk of market-driven cost increases, including increases in fuel prices.

The Act reinforces this. It restricts the circumstances in which a contract price can change after signing, and a builder cannot simply issue a notice to the owner demanding a higher price because fuel or material costs have risen.

The main mechanisms that may legitimately result in a change to the contract price are:

• Agreed variations: A variation must involve a genuine change to the description, scope, or specifications of the works and not merely a price adjustment for the same work. Variations must usually be agreed inwriting before the work is carried out, supported by a written notice setting out the description, reason, cost, and any delay impact. A variation may also be triggered by a change in the law.
• Prime Cost and Provisional Sum adjustments: Where the contract already includes reasonable allowances for Prime Cost Items or Provisional Sum Items, the price can be adjusted to reflect the actual cost of procuring those items (plus any agreed margin). If the actual cost exceeds the allowance, the difference is added; if it is less, the difference is deducted.

What about a cost escalation (rise and fall) clause?

A cost escalation clause, sometimes called a "rise and fall" clause, can allow a builder to adjust the contract price to reflect increased costs of labour, fuel or materials etc. These clauses are the most relevant tool for a sustained input-cost shock, and they are common in larger commercial contracts.

However, section 15 of the Act heavily restricts the inclusion of such clauses for domestic building work. A builder must not include a cost escalation clause in a domestic building contract unless:

• the contract price is more than $500,000; and
• the clause is in a form approved by the Director of Consumer Affairs Victoria and complies with the relevant regulatory requirements. Importantly, the Director has not approved such a form, and it is likely that such cost escalation clauses will remain unenforceable until a prescribed form is approved.

The practical takeaway: for the vast majority of domestic building jobs, a cost escalation clause is not a reliable way to recover rising fuel costs.

Can I terminate existing contracts using a force majeure (act of God) clause?

The answer to this question will be heavily dependent on the terms of your Contract. Generally, economic hardship, such as higher fuel costs etc, does not entitle a party to trigger a force majeure clause. For a valid termination under a force majeure clause, the event would need to specifically fall under the definition of the force majeure clause and cause the non-performance. For further information, see our article on Force Majeure clauses and you should always seek specific legal advice before exercising a right to terminate under such provisions.

Can I claim an extension of time for fuel-related delays?

Once again, this would depend on the terms of your Contract. Rising fuel costs alone do not usually cause delay, however, if a fuel crisis causes actual delays to the supply of materials to site (for example, because suppliers cannot deliver or transport is disrupted), you may be entitled to a reasonable extension of time, depending on the provisions in your contract.

An extension of time does not, by itself, increase the contract price, but it can relieve you of liability for liquidated damages and protect you where genuine delay occurs.

How can I structure future contracts to allow for price fluctuations?

For contracts not yet signed, you have far more flexibility to manage fuel and supply price risk. Practical strategies include:

• Build adequate contingency into the price: Factor current market conditions and foreseeable price movements into your quote. A higher quoted price avoids the legal and commercial risks of trying to increase the price after signing.
• Shorten the contract period or split the work into stages: The longer the gap between signing and completion, the greater your exposure to price movements. Where possible, negotiate realistic but shorter timeframes, or split the work into stages with quotes for later stages finalised closer to the time the work is carried out.
• Include appropriate special condition: Well-drafted special condition can give you greater flexibility to manage costs. For example, a special condition can allow you to propose substitute materials of equivalent quality if specified materials become unavailable or prohibitively expensive. This is not a price-increase mechanism, but it gives you the required flexibility to manage costs.

How can I use Prime Cost Items or Provisional Sums to manage fuel price risk?

For contracts not yet entered, where you anticipate that the cost of certain materials may fluctuate because of fuel prices or supply chain issues, you may be able to:

• list those materials as Prime Cost Items (only where the specific product has not yet been selected, or its supply price is unknown); or
• list the relevant work as a Provisional Sum Item (where you cannot give a definite price after reasonable enquiry).

However, there are important limitations that you should be aware of:

• These items should not be used as a blanket mechanism to avoid fixed pricing - they are intended for genuinely uncertain items.
• The allowances must be reasonable estimates, calculated with reasonable care and skill (sections 20–22 of the Act).
• You must provide the building owner with a copy of the invoice, receipt, or other document showing the actual cost as soon as practicable.

How Sharrock Pitman Legal can help

The end of the fuel excise cut is a timely reminder that the way your contracts allocate cost risk matters. If your contracts are putting you at a disadvantage due to the uncertainty of the current trading environment, there may be options available to you to minimise the risk of breach of contract or financial liability.

Our Accredited Specialist Commercial Law team provides businesses with contract advice and strategies to ensure your business is well-placed to withstand commercial uncertainty.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. For advice tailored to your specific circumstances, please consult one of our qualified lawyers.

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