Carbon tax & building contracts

The Australian Government’s carbon tax commenced on 1 July 2012 and will have far-reaching implications for businesses, consumers and the Australian economy.

Some of the key issues surrounding the cost impact of the carbon tax on the industry and increasing the price of your building contracts are summarised below; however, members can also contact Master Builders for advice and assistance.

Cost impact of the tax

The carbon tax will increase the cost of many goods and services including electricity and many building materials. Businesses will need to factor these additional costs into building jobs.

While the cost impact will vary depending on the materials used, the size of the building and the location, a number of economic consultants have modelled the price impact of the carbon tax on the cost of a new home.

For example, The Allen Consulting Group have released a carbon price mechanism report that estimates that the carbon tax will add around $3,821 to its model two storey detached brick veneer 200m² house.

This cost increase is, however, just an estimate and the best way to assess the cost impact of the carbon tax on your business will be to speak to your suppliers about increases to their prices. It is quite likely that the price of bricks, concrete, glass and aluminium will rise as a result of the carbon tax.

Increasing the contract price

If you have estimated the impact of the carbon tax on your cost of construction and you are very confident that the estimate is accurate, you can tell your client that your contract price has increased by that amount from the 1 July because of the new tax. But only if you are very confident in your estimates.

If you only have a rough estimate of the cost impact (for example, if you have relied on one of the many forecasts of the likely cost impact on construction like The Allen Consulting Group study), you can still increase your price by that amount from 1 July, but you must not tell your client that the price rise is due to the carbon tax or you will likely break the law.

Avoid ACCC penalties

This may seem a little surprising, but there are laws dealing with deceptive and misleading behaviour and price gouging. Telling a client that your prices have increased solely because of the carbon tax when in fact they have risen because of a range of factors will potentially break these laws, as you are misleading the client.

Telling a client that your prices have increased by 10% or 20% because of the carbon tax, when in reality the carbon tax as increased your prices by a lesser amount, is likely to be price gouging and this will also potentially be against the law.

The potential penalties for breaking these laws are substantial and the Australian Competition and Consumer Commission (ACCC) is likely to act swiftly if they think that the law has been broken.

Communicating with clients

The safest approach would be to tell your client that your prices have risen at the start of the new financial year and leave it at that. If your client continues to ask why your prices have gone up, you might want to tell them that you are putting your prices up because of a range of factors impacting upon the cost of running your business. The most important thing is that you do not say that your prices have gone up because of the carbon tax.

You cannot just increase the contract price and tell the customer it is to cover the carbon tax. If you do, and you cannot fully substantiate your statement, you will likely break the law and the ACCC may prosecute you. If you are found guilty, the penalties are very substantial.

As a contractor, you obviously want to ensure that you can pass through any additional costs associated with a particular building job through to your client. Although this sounds straightforward, it is a challenging task given that many suppliers, manufacturers and distributors are not yet sure about how the carbon tax will affect their prices.

Contract variations & paperwork

Before you tell your client that the contract price has increased as a result of the carbon tax, you will need to make sure that the contract that you have used actually allows you to issue a variation for additional costs associated with the carbon tax.

If it does, you will also need to be very confident that your claim for additional costs is truthful, accurate and based on reasonable grounds. You must also be able to substantiate your claim as the ACCC may require you to justify the claim and provide supporting evidence.

Keep records

Keep all relevant documents, including invoices and communications with your suppliers and other parties that you have relied on to calculate the cost impact of the tax. If you have any doubts about whether you can satisfy the above requirements, we would strongly recommend that you do not make the claim.

For some of your materials, such as bricks, glazing, concrete or aluminium, you could include them as either a prime cost or provisional sum item and provide the manufacturer’s or supplier’s invoices as proof of cost to your client when requesting payment. In addition, for commercial contracts, you could consider using either a Cost Plus Contract or a Construction Management Contract.

Cost escalation clause 

Master Builders is aware that rising costs in labour and building materials, due to a variety of factors, make it difficult to price building work.

Master Builders ‘cost escalation clause for increased costs of labour or materials’ (price change clause) helps allocate the risk of fluctuating building costs fairly between the builder and the client. It allows the price of the contract to change according to changes in the building expenses (labour or materials), within certain limitations. The price changes are calculated based on price indexes published quarterly by the Australian Bureau of Statistics (ABS).

The price change clause is applicable to the Master Builders Residential Building Contract.

Carbon tax calculators

If you have used a carbon tax calculator to work out the variation to the contract price, you will need to make sure that the calculation actually reflects the input costs of your own business. For example, are the calculator’s cost inputs very general or are they specific to the circumstances of your business? You should be careful to choose a cost calculator that is suitable for building and construction work. If you rely on a calculator which has been designed for calculating the carbon price impact on a supermarket, you may struggle to convince the ACCC that it was reasonable to rely on this information. Again, if you have any doubts about the suitability of the calculator for your circumstances, we would strongly recommend that you do not make the claim.