Managing materials price volatility in your building contracts

Every builder who has tendered a job in the last few years has watched a supplier quote expire before the contract was even signed. Materials price volatility is not a market condition you can wait out; it is a risk that has to be allocated somewhere in the contract, and the default allocation under a fixed price is you.

The mechanics matter more than the causes. When you sign a fixed price contract, you are agreeing to deliver the works for a stated sum. If the price of timber, steel, or imported fittings moves before you buy them, the difference comes out of your margin unless the contract says otherwise. The owner’s position is equally simple: they budgeted a number and they want certainty. Both positions are reasonable, which is why the negotiation has to happen before signing, not after a supplier sends a revised quote.

The NSW Government’s guidance on contracts for home building work sets out what a compliant contract must contain and directs both parties to understand their obligations before work starts. It is not a price risk document, but it establishes the framework in which any price adjustment mechanism has to operate. This article deals with the practical tactics: what to put in the contract, how to sequence procurement, and how to manage the conversation when prices move.

Why a fixed price contract transfers price risk to the builder

A fixed price contract is a lump sum agreement. The builder agrees to complete the works for a stated amount, and the owner agrees to pay that amount. The contract may allow variations for changes in scope, but a change in the cost of materials within the agreed scope is not a variation unless the contract says it is.

That is the whole mechanism. The owner has bought certainty; the builder has sold it. The price you pay for selling that certainty is the risk that your cost estimate is wrong, and materials price movement is one of the ways it can be wrong. The builder who prices the job at today’s supplier quote and signs a contract that starts in three months has taken on the movement in between.

This is not a flaw in fixed price contracting. It is the point of it. Owners choose fixed price because they need to know their total commitment, often because their lender requires it. Builders choose it because it is what the market expects and because it is simpler to administer than an open-book arrangement. The problem arises when the builder prices the risk at zero because the market has been stable for a while, or because a competitor is doing the same thing.

If you want to understand how the alternative works, the PointCPD article on cost plus versus fixed price contracts in NSW sets out the trade-offs. The short version is that cost plus shifts the price risk to the owner but introduces a different set of risks around cost control and documentation. Most residential work in NSW is done on a fixed price basis, so the practical question is how to manage volatility within that structure.

What a rise and fall clause needs to contain to be usable

A rise and fall clause allows the contract price to be adjusted if the cost of specified materials moves beyond a defined threshold. It is sometimes called a cost adjustment clause or a price adjustment clause. The name matters less than the content.

A clause that says “the price may be adjusted to reflect increases in the cost of materials” is not usable. It does not say which materials, what evidence is required, when the adjustment is calculated, or how the parties resolve a dispute about it. When prices move, the owner will read it narrowly and the builder will read it broadly, and the argument will cost more than the adjustment.

A workable clause defines four things. First, the base date — the date against which movement is measured. This is usually the date of the contract or the date of the tender. Second, the index or evidence — either a published index or supplier invoices showing the actual cost. Third, the threshold — the movement that must occur before an adjustment is triggered, which is often expressed as a percentage but can also be a fixed amount. Fourth, the claims process — when the builder must notify the owner, what documents must be provided, and how the adjustment is calculated and paid.

The clause also needs to deal with decreases. A rise and fall clause that only works in one direction is harder to sell to an owner and may be challenged. If the clause operates both ways, the owner shares the benefit of a falling market, which makes the mechanism fairer and easier to explain.

Procurement tactics that remove exposure before the contract is signed

The most effective way to manage materials price risk is to not carry it in the first place. That means buying before you commit to a price, or at least before you commit to a price that assumes today’s cost.

Start by identifying the items where price or availability can move materially over the programme. In residential work, that typically includes structural timber, steel reinforcement, imported fittings, and anything with a long lead time. The list will vary by job and by market conditions, but the exercise is the same: rank the materials by the size of the exposure and the likelihood of movement.

For each of those items, get a written supplier quote that states how long the price is held and on what conditions. A quote that is valid for a stated period gives you a known cost for that period. If the period covers the time between tender and purchase, you have removed the exposure for that item. If it does not, you know exactly where the residual risk sits.

Where the programme allows, convert quotes to orders or supply agreements before the head contract is signed. This is the strongest position: you have a fixed cost from the supplier and a fixed price from the owner, and the margin between them is protected. The risk is that you commit to supply before you have the job, so this only works where you are confident of winning the tender or where the supplier agreement is conditional.

For items you cannot lock in, consider whether the contract can be structured to share the risk. A rise and fall clause on those items only, with a defined threshold, is often easier for an owner to accept than a blanket adjustment on the whole contract.

Alternatives when the owner will not accept a rise and fall clause

Many owners, particularly those with a fixed-price lender approval, will not accept a rise and fall clause. That does not mean you have to absorb the risk. It means you have to price it or transfer it in another way.

The first alternative is a contingency in the tender. This is not a line item the owner sees; it is an amount built into the price to cover expected movement. The problem is that it makes you less competitive, and if the market is stable, you have given away margin for nothing. The advantage is that it is simple and it does not require the owner to understand a price adjustment mechanism.

The second alternative is a shorter validity period on your tender. If your tender is valid for a stated period and the contract is not signed within that period, you can withdraw or reprice. This is standard commercial practice, but it only works if you enforce it. Builders who let a tender sit for months and then sign at the original price have given the owner a free option on the market.

The third alternative is to define the scope so that volatile materials are excluded or specified by the owner. If the owner nominates a particular product and the price of that product moves, the argument that the owner carries the risk is stronger. This is not a complete solution, but it narrows the exposure.

The fourth alternative is a provisional sum. A provisional sum is an allowance for work that cannot be priced precisely at the time of contracting. If the contract allows the actual cost of a volatile item to be adjusted against a provisional sum, the owner carries the movement. The risk is that provisional sums are often poorly drafted and become a source of dispute. If you use them, define what is included and how the actual cost will be evidenced.

Documenting a price adjustment when it happens

Even a well-drafted clause will fail if the documentation is poor. When a price adjustment event occurs, the builder needs to be able to show what the original cost was, what the new cost is, and how the difference is calculated under the clause.

The original cost is usually evidenced by the tender or the supplier quote at the base date. The new cost is evidenced by the supplier invoice or a revised quote. The calculation is set out in the clause. If the clause refers to an index, the builder needs to show the index values at the base date and the adjustment date. If it refers to actual cost, the builder needs to show the invoices.

The timing matters. Most clauses require the builder to notify the owner within a stated period of becoming aware of the movement. If the builder waits until the end of the job to claim the adjustment, the owner may argue that the claim is out of time. The period will be in the contract, and it should be diarised.

The adjustment should be processed as a variation to the contract price, with the same paperwork you would use for a scope variation. That means a written variation document, signed by both parties, that states the amount and the basis for it. If the owner disputes the adjustment, the dispute resolution clause in the contract applies.

If you are working with subcontractors, the same discipline applies. A subcontractor who is carrying price risk on a fixed price subcontract will look for ways to recover it, often through variations or claims. The PointCPD article on managing subcontractors on site in NSW covers the practical controls, but the principle here is that price risk should be allocated deliberately at every tier of the contract chain.

Worked example: a builder in western Sydney

A builder in western Sydney tenders for a two-storey dwelling. The tender is based on a supplier quote for structural timber that is valid for a stated period. The contract is a fixed price contract with no rise and fall clause.

The tender is accepted, but the contract is not signed until after the quote expires. By the time the builder is ready to order the timber, the supplier has revised the price upward. The builder has not locked in the supply, and the contract does not allow a price adjustment. The difference comes out of the builder’s margin.

What could have been done differently? First, the builder could have asked for a longer validity period on the quote, or a quote that was conditional on the order being placed within a stated period. Second, the builder could have included a rise and fall clause in the tender, limited to structural timber, with a defined threshold. Third, the builder could have priced a contingency into the tender to cover the period between tender and order. Fourth, the builder could have made the tender valid only for the period of the supplier quote, so that if the contract was not signed within that period, the price could be revisited.

None of these options is free. A longer validity period may come at a higher price. A rise and fall clause may make the tender less attractive. A contingency may make it uncompetitive. A shorter tender validity period may lose the job. The point is that the builder chooses which cost to bear, rather than having the choice made by default.

The same logic applies at the subcontract level. If the builder let a fixed price subcontract for the timber supply and installation, the subcontractor would face the same problem and would likely claim a variation. If the subcontract included a rise and fall clause, the risk would be passed up the chain. If it did not, the subcontractor might absorb it, dispute it, or walk away from the job.

What to check in your own contracts

If you are reviewing your standard contract or a one-off contract for a project, the following checklist will help you identify where the price risk sits.

• Does the contract state a fixed price, and does it define what is included?
• Is there a rise and fall or cost adjustment clause, and if so, what does it cover?
• If there is a clause, does it define the base date, the index or evidence, the threshold, and the claims process?
• Does the clause operate both ways, or only in favour of the builder?
• Are there provisional sums, and are they drafted clearly enough to be adjusted?
• Does the contract allow variations for changes in the cost of materials, or only for changes in scope?
• What is the tender validity period, and is it being enforced?
• Are long-lead and volatile materials identified, and is there a procurement plan for them?

If the contract is silent on price adjustment, the builder carries the risk. That is the default position, and it is the position many builders find themselves in because they used a standard form or copied a contract from a previous job without reviewing it.

The NSW Government’s guidance on contracts for home building work is a useful starting point for understanding what a compliant contract must contain. It does not tell you how to allocate price risk, because that is a commercial negotiation, but it sets the boundaries within which that negotiation happens.

Where this fits in your CPD

Contract law and risk management are core topics for licensed builders in NSW. The requirements for continuing professional development are set by the regulator, and the PointCPD guide to how NSW builder CPD works explains the categories and the record-keeping obligations. If you are looking for courses that cover contracts, variations, and risk allocation, the PointCPD course catalogue lists the available options.

The commercial reality is that price volatility is not going away. Markets move, supply chains adjust, and the builder who has a deliberate approach to allocating the risk will be the one who keeps their margin. The builder who assumes the market will be stable because it was stable last year is the one who funds the difference.

None of the tactics in this article require legal advice to understand, but they do require you to read your contract before you sign it. If you are not sure whether a clause works, get advice. The cost of a contract review is small compared to the cost of a margin lost to a price movement you did not see coming.

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Published 22 July 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.