The fuel price dilemma for suppliers and contactors

Introduction

Fuel prices have been volatile and they could continue that way, with the Federal Government’s temporary halving of the fuel excise set to expire on 30 June 2026. With the government confirming that the excise will revert to its full rate, pump prices are expected to rise once again.

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.

Dilemma 1

I have a fixed price contract signed and locked in before the closure of the Strait of Hormuz. I am now paying more for fuel. Can I change the contract price?

Unfortunately, the answer is ‘no’. Once the Contract Price is agreed and the contract is signed, the Contractor bears the risk of market-driven cost increases, including increases in fuel prices.

If the work falls under the Domestic Building Contracts Act 1995 (Vic) (the Act), suppliers cannot alter the contract price because of changes in the commercial environment.

Dilemma 2

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

There are options for suppliers who anticipate that the price of materials may increase or become harder to procure whilst the project is underway. However, these options must be discussed before the contract is signed and included in the contract agreement.

The materials or specific work must be listed in the contract as Prime Cost Items or Provisional Sum Items, respectively. Doing so will allow the Contract Price to be adjusted to reflect the actual cost at the time of purchase, rather than locking in a price in advance that is later overtaken by movements in the market.

A note of caution

• Prime Cost and Provisional Sum Items cannot be used as a mechanism to avoid fixed pricing — they are intended for genuinely uncertain items.
• The allowances for price increases or delays must be reasonable estimates calculated with reasonable care and skill
• You should provide copies the invoice, receipt, or other document showing the actual cost as soon as practicable

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Dilemma 3

Can I include a cost escalation clause to cover increases in fuel prices?

Cost escalation clauses are forbidden in domestic building contracts.

Dilemma 4

How can I include safeguards in my contracts as protection for potential price changes?

Build adequate contingency into the Contract Price

Consider both current conditions and the market outlook for all materials necessary to complete the project. While this may result in a higher quoted price, it avoids the legal and commercial risks of trying to increase the price after signing.

Shorten the contract period or split the stages of work

 The longer the period between signing and completion, the greater the exposure to price fluctuations.

Separating the project into stages will enable you to review each phrase and set a price closure to the commencement of that phase of the project.

Include Special Conditions

Special Conditions clause allows for suppliers to propose changes to the materials used, for example, to substitute expensive materials with lower priced items. However, there can be no diminution in the quality of the materials, and any changes must be approved by the receiver.

Dilemma 5

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

If an increase in the price of fuel leads to delays in the delivery of equipment or materials and therefore delays the start of a project, suppliers may be able to request an extension of time. However, the reason for extending the project’s schedule must be directly related to the delay caused by the fuel price.

Dilemma 6

What happens if I try to negotiate a price increase, but it is rejected?

If your existing contract does not include reference to price increases – for fuel or materials – and how this would be dealt with, then you are bound by the cost schedule detailed in the signed contract.

If you really believe that you cannot honour the contract, given the circumstances, seek legal advice at the earliest opportunity. Depending on the status of the project, there may be options available to you.

How Sharrock Pitman Legal can assist?

If your business contracts are putting you at a disadvantage due to the uncertainty of the current trading environment, there may be optionsavailable 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.

If we can assist you, please do not hesitate to contact us on 1300 205 506 or email sp@sharrockpitman.com.au.

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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.

Liability limited by a scheme approved under Professional Standards Legislation.‍