A fixed price build contract purports to show the costs of the entire build upfront, then breaking it down to smaller amounts payable as each step of the build is complete. Because of the certainty, the fixed price build contracts are very appealing to first home buyers. However, the current building boom and supply chain shortages have led to difficulty obtaining materials and skilled labour which is jeopardising the financing and availability of fixed price contracts.
The fine print on fixed price build contracts
The issue of these contracts lies within the fine print. The nature of the contracts is a bit of a misnomer in the sense that the ‘fixed price’ is often subject to the price of materials. Therefore, in the instance the price of the contracted materials changes, the builder is entitled to pass this onto the consumer and their ‘fixed price’ is no longer as agreed.
There are several reasons why this may cause significant issues.
Fixed price build contracts are popular with first home buyers, who often have their finances stretched to the limit. An increase in cost is likely not feasible for these buyers as banks are unwilling to approve this increase in costs.
In Christchurch, a first-home buyer is eligible for a home start grant of up to $20,000 towards the build. However, this is capped at a build cost valued up to $550,000, at which point the consumer of the first home purchase is no longer eligible for the grant, losing a significant amount of funds.
Unfortunately, there are no easy solutions to this issue, as either way, the additional costs must be covered by one of the parties. If the consumer does not wear the costs, the increase in price lands on the builder.
Solutions for fixed price build contracts
From a consumer perspective I would recommend,
Having a full and frank discussion with your builder in terms of expectations and limits for potential price increases. You should have a good understanding of the ballpark figure for costs above the ‘fixed price’.
Your builder should be well-aware of your upper limits in terms of price, to ensure more transparency throughout the build.
Looking into discussing the possibility to use cheaper materials or make changes to the design, such as turning a four-bedroom house into a three bedroom and study house.
I believe this this is a tough issue for people in Christchurch because new houses were an excellent way of avoiding the purchase of houses damaged by the Christchurch earthquakes. We have heard many stories of poorly completed repairs or unscoped repairs that can lead to huge, unexpected costs for purchasers. With the practical issues that lie within fixed price contracts, it is hard to recommend that especially first home buyers should be buying new, but can you blame them when the alternative is poorly repaired earthquake damages houses.
If you have any questions about your new build or fixed price contract, contact the conveyancing team at Godfreys Law to learn about your rights and obligations.