A guide for civil infrastructure and mining services projects
Key takeaways
Risk sits where the contract places it, meaning contractors will usually bear increased costs unless there is a clear mechanism shifting that risk.
Relief mechanisms such as escalation clauses, variations and extensions of time can assist, but they are limited in scope and rarely address the full commercial impact.
Early action is critical, with strict compliance with notice requirements and clear documentation often making the difference in whether a claim succeeds.
Seven weeks into the Iran conflict, elevated diesel prices, freight disruption and supply chain uncertainty are no longer a forecast, they are a daily operating reality for construction and mining services companies across Australia.
For anyone who worked through the disruption of COVID-19 in the construction and resources sector, the pattern is familiar. Oil price volatility disrupts shipping and freight, disrupted freight inflates the cost of materials, and somewhere in the chain, a contractor is staring at a contract priced on assumptions that no longer hold. The lessons of COVID-19 were clear, but now the critical question is whether those lessons have been embedded in current contracts, or whether we are seeing the same risk allocation issues re-emerge.
When costs rise and supply chains tighten, the contract is tested in three ways: who pays, whether time relief is available, and in extreme cases, whether the contract can be brought to an end.
1. Who pays for the increased costs?
Civil construction and infrastructure projects still largely operate on fixed price contracts, which is a position that has not materially changed despite COVID-19. Mining services contracts more commonly include an element of cost reimbursable pricing (e.g. dayworks, schedule of rates, rates per tonne or per movement), but even those arrangements typically retain fixed pricing components.
The common feature across all three pricing models is that revenue is relatively fixed, while input costs (particularly fuel and energy) are not. Whether the arrangement is a lump sum, a schedule of rates or a fixed-rate services agreement, the practical effect is that contractors and services companies carry the risk unless the contract provides a mechanism to shift or share it.
Two clauses are most commonly turned to for that purpose, however both have significant limitations in the current environment.
Price escalation clauses
The most direct mechanism for recovery is a price escalation or rise-and-fall clause. These clauses adjust the contract price by reference to a specified index when costs move beyond an agreed threshold. They are the most useful tool available, but they are also rare. They do not appear in standard AS contracts (AS 2124, AS 4000, AS 4902) and must be specifically negotiated.
Where one exists, three questions will determine whether it actually helps:
- Does the index capture the actual cost exposure (CPI and general materials indices often do not track diesel or freight movements)?
- Does the clause operate automatically or require a formal claim with notice and substantiation?
- Has the threshold trigger been met?
Even where they apply, escalation clauses are designed to track index movements. They do not make a contractor whole against the full range of cost pressures.
Variations claims
The other avenue commonly pursued is a variation claim. However, the disruption of COVID-19 showed the difficulties of relying on variation claims to recover increased input costs. For example, the WA State Administrative Tribunal rejected a number of claims from builders seeking mid-works price increases caused by COVID-related cost escalation, finding the agreed price binding regardless of market movements: e.g. in Chellem v Kulowall Construction Pty Ltd [2022] WASAT 95; Ghetia and Beyond Builders Pty Ltd [2024] WASAT 17. This is because variation clauses typically respond to changes in the scope, quality or character of the work and not simply when there is a change to the cost to perform the same work.
Where a variation claim can succeed is where the principal issues a direction in response to the disruption, such as requiring alternative materials, resequencing works, or changing the work methodology. Here, the direction creates the entitlement - the market conditions alone do not. Any such instruction should be documented immediately and treated as a potential variation.
2. Can the time for performance be extended?
Even where cost recovery is unavailable, a contractor may be entitled to an extension of time for supply-related delays. Time relief without cost relief does not solve the financial problem. It means longer on site absorbing the same losses, but it matters significantly for liquidated damages exposure and programme management.
Force majeure
Although force majeure is often the first clause reached for in a global disruption event, relief is not always automatic. There is no general doctrine of force majeure in Australian law and standard AS contracts do not include it.
Where a force majeure clause exists, it will only respond if the event that falls within the contractual definition is beyond reasonable control, and could not have been avoided by reasonable mitigation. Even where the event falls within the contractual definition, the contractor must still demonstrate that it actually caused delay to the works. In Acciona Industrial Pty Ltd v Kwinana WTE Project Co Pty Ltd [2022] WASC 380, the Court rejected a force majeure claim arising from COVID-19 because the contractor could not show that the event had rendered it unable to perform.
Disruption alone is not enough. The causal chain from the triggering event to actual project delay must be established link by link.
Extensions of time
Standard form contracts generally include extension of time provisions that may respond to supply disruption, depending on how qualifying causes of delay are defined. The analysis is the same as with force majeure: does the event fall within the clause, is causation established through to the critical path, and has notice been given correctly? In practice, notice is often decisive and the most common reason, otherwise meritorious claims fail. Contracts typically require notice to be given as soon as a qualifying event occurs, not once the claim is fully quantified.
While extensions of time protect against liquidated damages, they do not address increased fuel, freight or material costs. They give more time to deliver the same loss-making work.
3. Can you exit the contract?
Where cost recovery is unavailable and time relief does not close the gap, attention sometimes turns to whether the contract can be brought to an end. The short answer is almost certainly not, unless the contract itself provides a pathway.
Contractual termination rights
The most direct route is a contractual termination right. Some force majeure clauses provide a right to terminate if the force majeure event continues beyond a defined period. Where that right exists and the conditions are met, it provides the clearest basis for exit.
Many contracts also include a termination for convenience clause, but these are typically drafted for the principal’s benefit, not the contractor’s. Contractors should not assume the right operates both ways.
Termination by 'frustration'
Where no contractual termination right exists, some contractors facing genuinely unviable projects look to the law for an answer. That doctrine is frustration. It applies where a supervening event renders performance radically different from what was originally contemplated, not merely more expensive or more difficult, as seen in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24.
If that threshold is met, the contract comes to an end at law, however, the bar is high, as was demonstrated throughout the pandemic. In Cao v ISPT Pty Ltd [2024] NSWCA 188 and Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6, Australian courts declined to find contracts were frustrated despite serious commercial disruption caused by COVID-19, confirming that adverse consequences for profitability alone do not discharge the parties from their bargain.
Higher diesel costs, extended lead times and reduced margins will not meet that standard. The only scenario that may approach frustration is a complete and sustained inability to obtain essential materials or fuel such that performance is physically impossible.
The real danger is the consequence of getting it wrong. A party that asserts frustration incorrectly and abandons work will likely have repudiated the contract. The other party can accept that repudiation, terminate, and claim damages. Frustration is not an exit strategy and should not be asserted without clear legal advice.
What to do now: Current contracts
| Principals | Contractors / Mining Services Companies |
|---|---|
| Maintain active oversight of cost pressures, supply chain exposure and programme impacts. | Audit your contract immediately: do you have an escalation clause, and does it actually capture diesel and freight movements? |
| Identify supply chain fragility, including reliance on critical suppliers or long lead-time components. | Strictly comply with notice requirements for any potential claims. Failure to give timely notice is one of the most common reasons claims fail. |
| Engage early with contractors and mining services companies on emerging cost pressures — financial distress is a project risk, not just a contractor issue. | Where the principal has directed a change in response to supply disruption (alternative materials, resequencing and methodology) treat it as a variation and give notice immediately. |
| Consider commercial responses where appropriate to avoid escalation into disputes or contractor failure. | Document all mitigation steps taken. Courts and arbitrators expect evidence of active effort to reduce the impact. |
Future contracts: Lessons to apply
| Principals | Contractors / Mining Services Companies |
|---|---|
| Reassess whether lump sum is the right model for volatile market conditions. Consider whether targeted escalation clauses for diesel and freight would better reflect actual risk allocation. | Avoid accepting risks that cannot be controlled or absorbed. Where exposure cannot be quantified, seek a cap, qualify the price, or offer an alternative pricing structure. |
| Expressly allocate who bears insurance premium increases that arise during the project. This gap is present in most current contracts. | Ensure pricing assumptions align with actual supply chain conditions. Check tender validity periods — price assumptions held open for 90 days carry materially different risk in a volatile market. |
Implications
The market is no longer reacting to uncertainty within the Iran conflict, it is operating within it. For construction and mining services companies, this environment is exposing in real time whether contracts genuinely reflect the commercial realities they are meant to govern. The consistent theme is clear, where risk has not been expressly addressed it has not disappeared, it has simply defaulted to the contractor.
The practical takeaway is not that contracts can solve volatility, but that they must confront it directly. Clear allocation of cost risk, disciplined contract administration, and early, informed decision-making are now critical. Those who understand their contractual position and act on it early will be far better placed to manage the impact, whereas those who do not risk finding themselves locked into obligations that no longer align with commercial reality.