http://www.mba.org.au/files/view/?id=594

Carbon Pricing BackgroundThe Federal Government has passed 18 pieces of legislation which comprise the "Securing a Clean Energy Future" legislative package. A core feature of this package is the Clean Energy Act 2011 (Cth), which creates a new carbon emissions trading scheme.

For the purposes of this Practice Note the carbon emissions trading scheme is referred to as the "Carbon Pricing Mechanism" which is also often referred to as the Carbon Tax.

The Carbon Pricing Mechanism will have direct and indirect impacts on various sectors, industries (resulting in a "direct" cost impact) and will seek to pass on some or all of the costs of these carbon credits to other sectors, businesses and consumers (resulting in an "indirect" cost impact).

When will it come in?The Carbon Pricing Mechanism will start on 1 July 2012.

Between 1 July 2012 and 30 June 2013, the cost of purchasing carbon credits will be fixed at $23 per tonne of CO2_e

and then will rise at the rate of 2.5%, in real terms, on each of 1 July 2014 and 1 July 2015. Some carbon equivalent emissions are included in the scheme.

From 1 July 2015, the cost of purchasing carbon credits will become flexible and will be determined by a market-based mechanism under which annual caps on the total amount of emissions will be established. These caps can be adjusted over time to ensure that annual Federal Government targets in relation to reducing emissions are achieved.

It is anticipated that after the introduction of the flexible pricing mechanism on 1 July 2015, the Carbon Pricing Mechanism will have a greater cost impact than the previous fixed-price regime.

How will it affect the building and construction industry?In relation to the construction industry specifically, as it is neither an emissions-intensive nor a trade-exposed industry, it is anticipated that the Carbon Pricing Mechanism will only have an indirect cost impact on industry participants.

carbon pricing mechanismThe Master Builders Association of the ACT have, over the past 18 months, provided information regarding the impact a carbon emissions trading scheme will have on the building and construction industry. This On-Site Insight surmises that information for you.

Ed

ition

4-2012

Master Builders Association of the ACT1 Iron Knob St, Fyshwick ACT 2609PO Box 1211, Fyshwick ACT 2609

Tel: (02) 6247 2099Fax: (02) 6249 8374

Email: canberra@mba.org.auWeb: www.mba.org.au

MAsTEr BuildErs ExECuTivE CounCilPresident – Ross Barrett Treasurer – Simon Butt Chair, Commercial Builders’ Sector Council – Valdis Luks Chair, Suppliers and Subcontractors’ Sector Council – Grace Ferreira Chair, Residential Builders’ Sector Council –Frank Porreca Chair, Civil Contractors’ Sector Council – Andy Crompton Chair, Professional Consultants’ Sector Council – Hans Sommer

MAsTEr BuildErs MAnAgEMEnT TEAMExecutive Director – John MillerDeputy Executive Director – Jerry HowardDirector Industrial Relations – Mike BaldwinSenior Management Accountant – Louise MacCallumSenior Manager - Marketing & Membership Services – David Leitch

MAsTEr BuildErs group TrAining General Manager – Wendy Tengstrom

Budgets come in all shapes and sizes. There are all sorts of opinions about them. “Never spend more than you get,” is an oft cited mantra. Ultimately, that’s how it has to be.

In the case of governments, most particularly, budgets are formed over a number of years and there has been some acceptance of periods of deficit. What we are now seeing in places like Greece, Italy and Spain is the cumulative effect of the continual racking up of debt. At some stage, someone wants you to pay it back. Now the music has stopped for some of those places, the people have been asked to tighten their belts. It would be fair to say that they are cranky and getting crankier at the thought of repatriating some of that debt.

So what does this mean for the ACT? Aside from continued volatility through the markets where everyone is feeling the pinch, governments, businesses and individuals, it is that the Territory put more than a toe in the waters of the debt pool in its most recent budget delivered on 5th June. The Treasurer announced a forecast $318 million deficit for the next financial year on top of an estimated $125.5 million for 2011-12. Add to this a cumulative

deficit underlying net operating balance for 2013-14 and 2014-15 of $296 million, it is obvious the ACT is making a splash.

In spite of the political warfare over whether to spend or not to spend, budget surplus versus budget deficit, it is vital that we don’t get to the point of no return. The ACT still carries a reasonably healthy balance sheet but like any business it doesn’t always take much to tip things over the edge. In the Territory’s case the significant reliance on property transactions and land sales must be considered the shadowy figure lurking that could turn things on their head.

There is no question that there needs to be a significant spike in consumer and investor confidence in order to kick start the property market back close to where it has been in recent years. Interestingly, there are numbers plugged into the 2012-13 Budget that don’t support the indicative land release program in the next financial year but probably do reflect a reduction in activity but for that financial year only. Right now it is hard to see how land revenue will be doubled from the estimated $381.9 million in 2012-13 to $762.1 million 2015-16. Let’s hope this isn’t creative accounting at its worst.

It is fair to say that budgeting is not always easy and it is certainly not an exact science. The ACT has taken a bold step in reforming its taxation arrangements and that needs to be acknowledged. What has to be questioned is some of the assumptions underpinning the Budget that specifically relate to property and land transactions. While things were commercially hot over recent years it’s been easy to forecast conservatively and come up with a good result. Now the cold water is kicking in and the Territory has jumped into that cold water, business will need to be very wary. The first knock on the door when revenue is being sought is usually on High Street and not in the burbs – that’s politically difficult. If Treasury knocks at the door of business it’s a fair chance you’re going to get hammered.

HAMMERTHE

hits the nail on the head

ACT Budget 2012

As the Carbon Pricing Mechanism does not have a one-off impact for industry participants, it is important for them to consider the most effective method of dealing with the increased costs of construction materials which are likely to arise after 1 July 2012 and the period to 1 July 2015.

Can I pass on any increased costs?Perhaps the most effective long term solution is for industry participants to pass on the expected increased costs through the provisions of their building contracts. However, this is not a straightforward process and industry participants will be constrained by the form of building contracts they enter into and the representations they can make to their customers when attributing the increased costs of construction materials to the Carbon Pricing Mechanism.

Importantly, in November 2011 the Australian Competition and Consumer Commission issued the "Carbon Price Claims – Guide for Business" (referred to as the "ACCC Guide" for the purposes of this Practice Note).

The ACCC Guide has been published to inform and educate businesses in Australia about their responsibilities when

making representations in relation to the impact of the Carbon Pricing Mechanism on their pricing practices.

Aim and application of this Practice NoteThe aim of this Practice Note is to provide guidance to industry participants in relation to the impact of the Carbon Pricing Mechanism on:

• building contracts completed before 1 July 2012;

• building contracts entered into after 1 July 2012; and

• building contracts executed after 1 July 2012 which contain standard form provisions.

This Practice Note will also provide industry participants with a general overview of the Australian Consumer Law in relation to the introduction of the Carbon Pricing Mechanism.

Implications of the Carbon Pricing Mechanism on building contracts completed before 1 July 2012.As the Carbon Pricing Mechanism does not come into effect until 1 July 2012, it is unlikely to have any impact on building contracts completed before this time.

There is no scope for industry participants to pre-emptively increase the cost of construction materials on the basis of the potential impact of the Carbon Pricing Mechanism before it has come into effect. Any representations attributing increased costs to carbon price-related increases may be misleading and/or deceptive and offend the provisions of the Australian Consumer Law.

However, even where works under a building contract have been completed before 1 July 2012, industry participants may still be required to undertake defect rectification works after the Carbon Pricing Mechanism has come into effect. Therefore, industry participants carrying out defect rectification works may be faced with a period of increased costs of construction materials due to carbon price increases.

In these circumstances it is unlikely that industry participants will be able to pass on any increased costs for rectification works undertaken after the introduction of the Carbon Pricing Mechanism. This is because most standard form building contracts are fixed price contracts and do not permit industry participants to claim the additional costs associated with rectification works if the price of construction materials has risen.

What Can I Do in Practice?The cost impact of the Carbon Price Mechanism on building materials and products is difficult to assess and will vary greatly depending on numerous factors, including the size of the construction and the materials used. Whilst a builder is able to increase prices in a general sense prior to signing a contract, the fixed price cannot be increased if it is attributable to the Carbon Pricing Mechanism unless the exact amount can be accurately determined and allowed for in the costing.

Cost plus contractOne solution to address the impact of the Carbon Pricing Mechanism is to, where possible, use a cost plus contract. The relevance of a cost plus contract to a particular project will be dependent on specific advice you obtain on its application to that project. A cost plus contract will enable a builder to pass any increases in the cost of building materials and products due any price increases on to the owner. If you are providing an estimated cost then you should take into account the Carbon Pricing Mechanism.

It is critical that industry participants exercise caution when passing on price increases relating to the impact of the Carbon Pricing Mechanism in order to comply with the Australian Consumer Law and the ACCC Guide.

Continued from page 1......

Increase the contract priceIf you are going to use a fixed price contract then, as stated above, the fixed price contract sum cannot be increased if it is attributable to the Carbon Pricing Mechanism unless the exact amount of the increase can be accurately determined and allowed for in the costing. For this reason, it is advisable that you don’t try and anticipate the increase in building materials and products or estimate what cost increases there might be for materials and products supplied after 1 July 2012.

To determine the cost increases as accurately as possible, it will be necessary for you to obtain information from your suppliers regarding their calculation of the impact of the Carbon Pricing Mechanism on the cost of building materials and products. You must not rely on any information from your suppliers unless you consider that the information has been calculated on reasonable grounds and can be substantiated. To this end, we have suggested a special condition for inclusion in supply contracts, which is set out below.

Prime cost and provisional sumsFor a fixed price contract, only where you can accurately identify those building materials and products that may increase due to the Carbon Pricing Mechanism, should you try to include them as a prime cost or provisional sum items. Subject to advice which you should obtain about the specific matter, this could allow you to pass on any identifiable increases to the owner.

Special conditionsSuggested special conditions are set out below that can be used for building contracts and supply contracts signed before 1 July 2012. Each special condition must be modified to suit an individual building and/or supply contract.

Carbon Pricing Special Condition – Building ContractsThe parties acknowledge and agree that the other conditions of this contract must be read subject to the following:

a. The Clean Energy Act 2011 (Cth) commences on 1 July 2012 and introduces a new carbon emissions trading scheme. The scheme imposes a cost for major emitters of some gases (the “Carbon Cost”);

b. The Carbon Cost may increase the cost of building materials and products. The amount of these cost increases cannot be estimated at the time of entering into this Contract;

c. Any increases in building materials or products as a result of the Carbon Cost that become payable by the Builder, either directly or indirectly, must be notified by the Builder and will:

i. be valued as an increase in the Contract Price in accordance with this Special Condition; and

ii. is payable by the Owner in the next progress payment claim from the Builder;

d. A notice to the Owner referred to in subclause c of this Special Condition must contain:

i. the amount of the increase arising as a result of the Carbon Cost, which is to be valued and paid in accordance with subclause c; and

ii. the basis on which the Builder has calculated the impact of the Carbon Cost on the cost of the materials.

Carbon Pricing Special Condition – Supply ContractsThe parties acknowledge and agree that the other conditions of this contract must be read subject to the following:

a. The Clean Energy Act 2011 (Cth) commences on 1 July 2012 and introduces a new carbon emissions trading scheme. The scheme imposes a cost for major emitters of some gases (the “Carbon Cost”);

b. The Carbon Cost may increase the cost of building materials and products;

c. The Supplier must, to the extent reasonably possible, provide the Builder with an accurate calculation of the increase in cost, if any, to building materials and products as a result of the Carbon Cost;

d. The Supplier must provide the Builder with:

i. an accurate calculation of the cost increase referred to in subclause c of this Special Condition; and

ii. all information required to support that cost increase;

e. The Supplier acknowledges that the Builder intends to rely on the calculation provided by the Supplier in accordance with subclause c of this Special Condition.

Implications of the Carbon Pricing Mechanism on building contracts entered into after 1 July 2012For building contracts to be entered into after 1 July 2012, when the Carbon Pricing Mechanism has commenced operation, industry participants will need to take into account the impact of the Carbon Pricing Mechanism on tender prices.

Industry participants may be able to incorporate higher prices into building contracts to accommodate expected increases in the costs of construction materials arising from the impact of the Carbon Pricing Mechanism. However, the ability of industry participants

to incorporate higher prices into building contracts will be subject to the considerations set out below in this Practice Note.

Specifically, industry participants must be very careful to make accurate representations regarding the impact of the Carbon Pricing Mechanism on the tender or contract price.

Industry participants are generally not required to justify or explain why their tender prices may have increased but the ACCC Guide clearly states that if industry participants choose to claim that those tender price increases are due to a particular cause, such as the Carbon Pricing Mechanism, it is essential to ensure the claims:

• are truthful and accurate;

• do not mislead consumers (whether individuals or other businesses);

• are based on reasonable grounds; and

• can be substantiated.

INDuStry PArtICIPANtS SHoulD Not:

• represent that the whole amount of a price increase is due to the impact of the Carbon Pricing Mechanism when, in fact, only a part of the total price increase is attributable to it; or

• overstate the impact of the Carbon Pricing Mechanism.

Accordingly, when tendering for new projects, industry participants seeking to pass on increases in the costs of construction materials attributable to the Carbon Pricing Mechanism to their clients must ensure the tender price accurately represents the impact of the Carbon Pricing Mechanism on that tender price.

The ACCC Guide also states that if required, industry participants must be able to show the link between the increased tender price and the impact of the Carbon Pricing Mechanism.

As there is a lot of uncertainty regarding how much of an impact the Carbon Pricing Mechanism may have on the Australian construction industry and how this will result in the increased cost of construction materials, industry participants are advised to exercise extra caution when adjusting their tender prices for the impact of the Carbon Pricing Mechanism.

A failure to comply with the guidance set out in the ACCC Guide may expose industry participants to a claim for misleading and deceptive conduct under the Australian Consumer Law, which can lead to significant penalties.

Implications of the Carbon Pricing Mechanism on "standard form" building contracts executed after 1 July 2012

Where industry participants enter into "standard form" building contracts after 1 July 2012, the extent that industry participants will be able to recover increased costs attributable to the Carbon Pricing Mechanism will depend on the provisions of the relevant building contract.

Most standard form building contracts contain only limited provisions which will allow industry participants to adjust the agreed contract price to recover increases in the costs of construction materials which arise after the contract has been executed.

Although the variations provisions in most standard form building contracts are expressed broadly, these provisions will not generally allow an Industry Participant to claim a variation for an increase in the price of construction materials arising from the Carbon Pricing Mechanism. This will be the case unless the price increase results from a change in the scope of works or if the client has instructed the Industry Participant to change the character or quality of the materials originally required under the building contract and the cost of the changed materials affects the price of the works.

Another relevant provision found in many standard form building contracts is the “change in law” clause. This clause may be used in limited circumstances where an Industry Participant is required to incur more or less cost as a result of a change in law that:

• came into effect after a specified date, such as the date on which an Industry Participant submitted its tender or the date on which the building contract was executed; and

• the Industry Participant could not have anticipated.

As the introduction of the Carbon Pricing Mechanism has been widely publicised in Australia, a "change in law" clause is unlikely to provide assistance to industry participants seeking to pass on increased costs of construction materials attributable to the Carbon Pricing Mechanism.

ConclusionThe Carbon Pricing Mechanism will commence operation from 1 July 2012 and is likely have an indirect cost impact on industry participants as participants in the Australian building and construction industry.

Industry participants seeking to pass on the increased costs of construction materials arising directly as a result of the Carbon Pricing Mechanism:

• will be constrained by the contractual provisions in standard form building contracts which allow adjustments to the contract price; and

• must ensure that any representations they make in relation to the impact of the Carbon Pricing Mechanism on the cost of the works and services they provide are accurate, based on reasonable grounds and can be substantiated.

As the Carbon Pricing Mechanism is only just in force it is impossible to predict the extent that it will impact industry participants and their businesses. In light of this uncertainty,

it is recommended that industry participants act cautiously and consider the issues covered by this Practice Note when dealing with the impact of the Carbon Pricing Mechanism on their businesses.

This Practice Note is intended to provide industry participants with a general overview of the Carbon Pricing Mechanism and its potential impact on industry participants.

This Practice Note should not be relied on by industry participants to evaluate their rights and obligations in relation to the potential impact of the Carbon Pricing Mechanism on individual building contracts.

Master Builders encourages all industry participants who are considering whether to make provision for the introduction of the Carbon Pricing Mechanism in their tenders and building contracts to review carefully the terms of such tenders and building contracts together with the considerations set out in the ACCC Guide.

Industry participants are further encouraged to seek independent legal advice in respect of the issues dealt with in this Practice Note.

Master Builders does not take any responsibility for the accuracy or currency of the information contained in this Practice Note and will not be liable to any person in respect of the information contained in this Practice Note or that person's reliance on anything contained in this Practice Note.

Copies of relevant materialThis Practice Note should be read in conjunction with the ACCC Guide, a copy of which can be obtained at http://www.accc.gov.au/content/index.phtml/itemId/1017091 and the Australian Government’s climate change plan available at http://www.cleanenergyfuture.gov.au/.

Further Advice and DisclaimerThose entering into building contracts are urged to seek advice from Master Builders or their own lawyer about clauses which can be used to modify standard form contracts which will assist them with taking into account the effects of the Carbon Pricing Mechanism.

This Practice Note is issued by the Master Builders Association of the ACT for general guidance only. No responsibility for its accuracy or currency is accepted by Master Builders, its office-bearers, members or staff or by the author.

Affordable Housing threshold reviewPlease be advised that as of July 1 2012, the current system of affordable thresholds will change to a three tier system, with thresholds based on the size of the dwelling.

This change is intended to provide more incentive and flexibility for developers to build innovative affordable homes, and offer a greater product choice to home buyers. For example a smaller property could be delivered on a medium sized block which would allow for extensions to be added later on. The new affordability thresholds will take effect from 1 July 2012, but will not apply to land already offered for sale by the LDA.

The table below illustrates the proposed three tier threshold based on size only.

In the past, the $337,000 threshold has increased in line with the producer price index (PPI) for housing construction in the ACT. For the first time this index has not increased, and therefore there is no requirement for the threshold to change. However, the Government has decided to increase T2 threshold slightly from $337,000 to $340,000 to adjust for the estimated delivery costs identified in line with the review. In the future, the new thresholds will continue to be indexed using the PPI.

The new system applies to land offered for sale after 1 July 2012. Developers who are already committed to deliver affordable housing will not be affected by this change. Those developers must still produce affordable dwellings in line with the current threshold of $337,000, however will increase to $340,000 from 1 July 2012 and be linked to T2 moving forward.

The Master Builders Association of the ACT has consulted with Government and industry groups on the new system and there is broad support for this new initiative.

Net Living Price Indicative ProductT1 ≤ 80m2 $290,000 1-2 Bedroom units and

smaller townhouses

T2 81-105m2 $340,000 2-3 bedroom units or townhouses; some small detached housing

T3 ≥105m2 $373,000 3+ bedroom units, townhouses or detached houses

Q: How helpful are the MBA ACT representatives?

Q: How would you rate the frequency with which the MBA ACT contacts you?

Q: How would you rate the relevance of the information you receive from the MBA ACT?

Q: How satisfied are you with the MBA ACT Industrial Relations service?

Q: How satisfied are you with the content in MBA ACT member publications?

We recently surveyed some of our members regarding the service and information provided by the Master Builders Association of the ACT. Below is a selection of results.

Survey results

A: 75% of members said that we are ‘very helpful or extremely helpful’.

A: 86% think the amount of contact is ‘about right’.

A: 85% of members think that the information we provide is ‘relevant or very relevant’.

A: 87% of members said they are very satisfied

A: 86% are ‘slightly satisfied, moderately satisfied or extremely satisfied’.

MILLION

// To Insert New Data Goto Object/Graph/Data• Copy and Paste Pivot Table Data into Data

$0

$20

$40

$60

$80

$100

$120

Apr-12Mar-12Feb-12Jan-12Dec-11Nov-11Oct-11Sep-11Aug-11July-11Jun-11May-11

May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12Additions and Alterations (Residential) 4.97 10.00 5.52 0.3 0.6 0.58 0.82 1.00 2.00 5.5 6.28 6.00Commercial Building Work 14.20 12.3 7.91 85 60.9 17 8.19 51.5 19.02 14.3 102 16.5Garages, Pools, Decks and Similar Structures 6.90 6.00 7.0 7.35 10.5 7.1 9.02 7.05 0.64 1.7 3.00 6.1Multi Unit 8.81 66.5 96.0 7.7 24.89 15 13 16.5 1.8 0.13 7.3 1New Housing 7.43 5.00 5.5 1.07 2.8 0.4 1.8 11.4 3.7 40 43 52

The above graph and table below summarise private sector building activity for the various building sectors in the ACT over the past 12 months. The values for each month are depicted in millions of dollars.

ACT PRivATe SeCToR BUilDiNG ACTiviTy

CoMiNG eveNTS foR 2012

BUSINESS IN FOCUS SEMINARS

Date: September 2012 I Where: Master Builders Skills Centre, Fyshwick

The Master Builders Association of the ACT will host two full days of industry focused workshops. Get expert advice from all areas of your industry, and take this opportunity to furher develop your business and industry relationships.

TRAiNiNG DATeS foR 2012

REMOvAl OF BONDED ASBEStOS UNDER 10M2

Date: 14 August (Contact Norma Inglis at ninglis@mba.org.au to book your place) The aim of this course is to provide learners with the knowledge and skills to identify when and where Asbestos may be present and the precautions that need to be taken to safely remove and dispose of the Asbestos.

ACt OHS INDUCtION CARD Date: 16 August (Contact Norma Inglis at ninglis@mba.org.au to book your place) Current legislation requires all persons to complete OHS Induction Card Training before entering a construction site. This course prepares participants for the construction site through understanding of their OHS responsibilities and the skills to identify hazards.

REStRICtED HEIgHt SCAFFOlD

Date: 14 August (Contact Cecilee Miller at cmiller@mba.org.au to book your place)

This course is particularly useful for construction industry personnel with minimal experience in erecting and dismantling scaffolding, who wish to further improve their skills and understanding.

COMMERCIAl 21 AUG 23 OCT - -

CIvIl 7 AUG 13 NOV

RESIDENtIAl 25 JUL 5 SEP 17 OCT 28 NOV

SUB-CONtRACtORS & SUPPlIERS 14 AUG 16 OCT - - -

PROFESSIONAl 15 AUG 17 OCT 12 DEC