From fixed to flexible: The return of price variation in a volatile market

The current Building Agreement was issued jointly by the Law Society and the Construction Industry Federation in 2001. In recent years, there have been calls from practitioners to modernise and update the Building Agreement.

The Law Society Conveyancing Committee has previously indicated that the current edition of the Building Agreement is under review.

Since its inception, the Building Agreement has been plagued with disagreement over amendments to its standard conditions. This has led to intervention from the Law Society by way of a number of practice directions.

Certain terms that had been used in the Building Agreement were found unfair by the High Court within the meaning of the European Communities (Unfair Terms in Consumer Contracts) (Regulations 1995 (the Unfair Terms Regulations). This came following numerous complaints from purchaser’s solicitor to the Conveyancing Committee.

Despite the decision of the High Court, some solicitors on the builders side continue to include variations of these unfair terms in the Building Agreement. The Law Society has previously issued a practice note stating that any alleged breach of the High Court Order could be deemed to be misconduct.

One of the most frequently negotiated and amended provisions of the Building Agreement is the Price Variation Clause referenced in special condition 6 of the Building Agreement. This clause allows for the adjustment of the contract price, either upwards or downwards, in the event of: (i) fluctuations in the cost of labour, materials, fuel, plant, and other construction-related expenses, and (ii) changes in the applicable rate of VAT.

Historical context: Stability and certainty pre-2020

Prior to the pandemic, the Price Variation Clause was routinely deleted from contracts. Developers and purchasers alike preferred the certainty of a fixed price, which was seen as a key selling point in residential transactions. Even as the property market began to recover and grow post-2013, construction costs remained relatively stable, giving developers the confidence to offer fixed-price contracts, knowing that the risk of significant cost inflation was low.

Global disruptions and the return of price flexibility

The landscape changed dramatically with the onset of the pandemic, followed by the war in Ukraine. These events triggered severe disruptions in global supply chains, leading to volatile fuel and energy prices and a sharp increase in the cost of construction materials. As a result, developers began to reintroduce price variation clauses into their contracts to protect against unpredictable cost surges.

Since then, the inclusion of such clauses has become increasingly common. In some transactions, developers have successfully relied on these provisions to negotiate mid-contract price increases, citing unforeseen cost escalations. This trend reflects a broader shift in the construction industry, where even fixed-price lump sum contracts are evolving to accommodate a growing list of delay and cost-related risks.

The concept of ‘force majeure’, once limited to rare and extreme events, has also expanded. Today, standard definitions often include pandemics, geopolitical conflicts, and trade tariffs. Recent examples include the US tariffs and the conflict in Gaza, both of which have had ripple effects on global material availability and pricing.

Developer dilemma: Risk mitigation vs market perception

While developers are understandably cautious about increasing prices – fearing negative public relations and impacts on future sales – the price variation clause serves as a critical risk mitigation tool. It provides a contractual mechanism to maintain project viability in the face of rising costs, safeguarding the developer’s financial stability and the overall success of the development.

Lender perspectives: Conflicting priorities

The inclusion of a price variation clause often becomes a point of negotiation, not just between the developer and purchaser, but also between their respective lenders. The developer’s lenders typically favour the inclusion of such clauses, as they help ensure the profitability of the project and the repayment of loans and interest. The purchaser’s lenders, require certainty regarding the acquisition cost to accurately assess loan-to-value ratios and affordability.

This tension can lead to protracted negotiations, especially in residential sales, where affordability and transparency are paramount.

Exceptions: Part V agreements and fixed pricing

In some cases, the price variation clause must be entirely excluded. A notable example is where a property is sold under a part V agreement entered into with the Local Authority, where the price is calculated using a formula, and any variation would undermine the legal and financial framework of the agreement.

Conclusion

The re-emergence of the price variation clause highlights the realities of today’s unpredictable construction sector. As the housing market evolves, balancing price certainty with commercial viability remains a key challenge.

The challenges surrounding this clause point to a broader issue: the outdated nature of the current Building Agreement. The legal, economic, and practical landscape of the construction industry has changed dramatically since its introduction. The housing crisis and rising costs of materials and labour underscore the urgent need for a comprehensive review.

There is growing consensus among stakeholders that reform is overdue. The general conditions must be updated to reflect modern challenges – offering greater flexibility, clearer risk allocation, and alignment with consumer protection standards. The Agreement must also meet the expectations of lenders, regulators, and purchasers through increased transparency and balance.

It is time for the Law Society and the Construction Industry Federation to collaborate once more – this time to deliver a revised Building Agreement that meets the demands of today’s construction environment. Such reform would enhance certainty, and support and accelerate the delivery of sustainable housing.

Joanna Bannon – Director
T: 01 828 0684
E: joanna.bannon@fieldfisher.com
W: www.fieldfisher.com/en-ie/locations/ireland

Aisling Kiernan – Associate
T: 01 828 0910
E: aisling.kiernan@fieldfisher.com
W: www.fieldfisher.com/en-ie/locations/ireland