How to Protect Your Business From Rising Construction Costs Australia: 8-Step Action Plan

Before you make any decisions, you need one number: the total dollar value of your cost increase across all active projects. Most contractors underestimate this because they calculate fuel in isolation. When Shannon Drew runs the full analysis across all six inputs, the combined number is consistently two to three times higher than the diesel figure the business came in with.

For a contractor delivering a project priced in 2023 or 2024, the relevant number is the cumulative movement from then to now, across all inputs. The calculation must be based on actual purchase orders, fuel receipts, supplier invoices, and finance statements. If you are preparing for a formal claim, the principal's quantity surveyor will go through your documentation in detail. If the documentation is not there, the claim is not there.

The six cost categories to calculate across every active project:

A contractor who knows they are carrying $380,000 in unrecovered costs across two projects is in a fundamentally different position to one who estimates they are losing money but does not know by how much. That difference matters for every conversation and decision that follows.

Read Shannon's full financial analysis of what rising costs are doing to project margins

Review the full contract document including all schedules, annexures, and special conditions. Search specifically for: rise and fall, price adjustment, cost adjustment, escalation, fluctuation, CPI adjustment, index adjustment.

Check the Special Conditions carefully. Rise and fall mechanisms are frequently added by special condition rather than appearing in the General Conditions. A contractor who reads only the General Conditions and concludes there is no protection may be wrong.

• AS 4000: Clause 40 governs rise and fall. Check all special conditions for any cost adjustment mechanism added to the project-specific version.
• AS 2124: Clause 40 is the equivalent provision. The same approach applies.
• NEC4: check whether Option X1 (price adjustment for inflation) is listed in the Contract Data as a selected option.
• GC21: check Schedule 7 and the Contract Particulars. Schedule 7 deals with cost adjustment and is frequently overlooked.
• ABIC: check Clause H and all annexures.
• Bespoke head contracts and subcontracts: read every clause in the pricing and payment sections and all schedules.

The right to vary the contract price for cost movements must be expressly stated in the contract. It is not implied by law and it is not available simply because costs have risen beyond any reasonable expectation.

The back-to-back point: if you have a right to claim cost increases from your principal, your subcontractors may have the same right to claim from you. Subcontracts need to be reviewed alongside the head contract.

Read more about rise and fall clauses in Australian construction contracts

Once you know what your contract says, you need to make a clear decision about which path you are taking. That decision shapes everything that follows.

• Rise and fall clause: if your contract has one, review the mechanism carefully. Most clauses specify which indices apply, how frequently adjustments are made, and what documentation is required. A rise and fall clause that is not properly activated does not pay out automatically.
• Variation clause: cost increases resulting from a direction by the Superintendent or Principal may qualify as a variation, even on a fixed-price contract. The variation must be linked to a specific instruction.
• Force majeure: in most cases, fuel and materials price increases do not qualify as force majeure events under Australian construction contracts. Courts distinguish between performance becoming impossible and performance becoming more expensive. Assess this with legal advice before relying on it.
• Commercial variation: even where there is no strict legal entitlement, a principal may agree to a commercial variation. This is a negotiated outcome and it requires a specific approach to the conversation.

The realistic option on most fixed-price contracts without a rise and fall clause is either a commercial negotiation or, where a Superintendent has issued directions that affected costs, a variation claim. Knowing which applies to your contract before you approach your principal is essential.

Read more about your options on a fixed-price contract without a rise and fall clause

If your contract has a rise and fall clause or a variation clause, serving the correct notice is not optional. It is a prerequisite. Most construction contracts impose strict timeframes. Some provide that failure to serve a notice within the required time extinguishes the entitlement entirely. These are time-bar clauses and they are enforced strictly.

The notice must be in the correct form. Check whether the contract requires written notice, whether it specifies the information the notice must contain, and whether it specifies who must receive it. A notice served to the wrong person, or missing required information, may not be a valid notice.

• AS 4000 and AS 2124: notice must be given to the Superintendent, not the principal directly, unless the contract specifies otherwise.
• NEC4: the contract imposes compensation event notification obligations with specific timeframes. Late notification has consequences.
• GC21: notice obligations are set out in the Contract Particulars and the General Conditions. Check both.
• Bespoke contracts: notice provisions vary widely. Read the entire contract before deciding what to serve and when.

If there is any doubt about whether a notice is required, treat the position as requiring one. A protective notice served in time costs nothing. A missed deadline can extinguish a significant entitlement.

Read more about contractual notice requirements for cost escalation claims

Once you have decided to make a claim, whether contractual or commercial, the next step is preparing the documentation to support it. A formal cost recovery claim is a documented package that sets out the entitlement, the calculation, and the evidence. A principal who receives a structured, sourced, and specific package can assess it and take it to their board or financier for approval. A principal who receives an unsupported request has every reason to reject it.

Your claim documentation should include:

• A cover letter identifying the specific contractual entitlement being relied on, with clause and schedule references
• A cost summary setting out the additional cost claimed by category, with the calculation methodology clearly explained
• Supporting evidence: actual purchase invoices, fuel receipts, supplier quotes comparing tender-time pricing with current pricing, payroll records showing the wages and super variance, and finance statements where finance costs are claimed
• A project-by-project breakdown where the claim covers multiple projects
• A copy of any notices already served, with proof of delivery

If you are pursuing a rise and fall clause adjustment, the calculation methodology must match the clause and use the index specified in it. The claim needs to follow the mechanism in the contract.

The principal is not making a purely legal decision about your cost recovery claim. They are making a commercial decision about the project, their relationship with you, and their own obligations to their board, financier, or government agency.

Request a meeting before sending a formal claim letter. Come prepared with a one-page summary of your cost position broken down by input category, the specific clause or commercial variation proposal you are relying on, and a specific dollar figure.

Frame the conversation around what matters to them: the risk that the project does not complete, the risk that you cannot deliver to programme, and the commercial benefit of a completed project over an insolvent contractor and a stalled site. A principal who understands that you are carrying $380,000 in unrecovered costs on a project with $2.1 million of remaining scope is in a position to make a commercially rational decision.

A claim framed as a specific entitlement under a specific clause, or as a formal commercial variation, is easier for the principal to approve to their own stakeholders than a claim framed as contractor hardship. Do not have this conversation without knowing your contractual position first.

Read more about what your principal is thinking when they receive your cost claim

A verbal agreement with a principal is not a variation to the contract. A letter of intent is not a variation to the contract. An email exchange is not a variation to the contract. If you reach an agreement with your principal on a cost recovery payment or a mechanism for sharing the impact of ongoing price rises, it needs to be formalised as a deed of amendment to the contract before you proceed.

The deed needs to:

• Clearly identify the contract being amended
• Describe the cost recovery payment or mechanism agreed
• State the payment amount and timing, or the mechanism for calculating future adjustments
• Confirm any adjustment to the contract price or payment schedule
• Address what the payment covers and what it does not
• Be executed by both parties with appropriate authority

If a principal offers you a payment without a formal deed, ask for the deed before accepting. A payment without a properly executed amendment does not create a contractual entitlement to future payments or adjust the contract price for the remaining scope.

Steps 1 through 7 address what is happening on your current projects. Step 8 addresses what happens next. A business that recovers costs on one project but prices future projects the same way will be in the same position in six months.

• Pricing: every tender submitted from this point needs to include a rise and fall mechanism or an explicit cost escalation provision. We can draft the clause. If the principal will not accept it, the risk is known and can be priced accordingly.
• QBCC Minimum Financial Requirements: if current projects have compressed margin, the MFR position may be affected. The reporting obligations require attention. Trading while non-compliant with MFR creates a separate exposure.
• Business structure: if the cost crisis has raised questions about the structure of the business, now is the time to address them properly, not under pressure.
• Contract administration systems: the businesses that handle the next cost event better are those with systems for tracking cost movements, generating notices, and maintaining claim documentation as a matter of course.
• Forward exposure: review the pipeline. If tenders have been submitted in the last six months that are still live, assess whether the pricing is still viable at current costs before accepting any award.