August 30, 2008

Builders in New Zealand resorting to price escalation clauses

The Dominion Post reported that builders in New Zealand have decided to take recourse to escalation clauses in contracts to recoup the cost of skyrocketing steel prices.

The report cited Mr Richard Michael CEO of New Zealand Contractors' Federation said that it is imperative for such clauses to be added to long term contracts at a time when commodity price pressures are so volatile.

He said that "For larger organizations used to dealing with multi year contracts, they are pretty familiar with some kind of escalation process and while they do not like them, they can accept a need for them. There's always a lot of pressure from the client not to do that because they want a fixed price contract, so how that clause sits in a contract remains to be seen, but it is becoming harder and harder to offset rising commodity prices.”

He said that "And good risk management says the risk must be shared by both parties."

Mr Michael added that "It's not just steel either. Other commodities need to be factored in, fuel and concrete for example. The problem for the industry is quoting prices for the jobs."

A move toward steel price adjustment resolutions in contracts comes as global demand pushes the price of scrap metal close to USD700 a tonne and coking coal jumped beyond USD 300 a tonne. New Zealand Steel and Pacific Steel Group have both announced price rises across their product ranges of up to 25%.

Fletcher Building chief executive Jonathan Ling says it is impossible to factor the additional costs into contracts because volatile market prices maker