A civil contractor wins a place on a council’s three-year civil maintenance panel. The rates are good, the work is steady, and the arrangement is exactly what a business that size wants — predictable volume without tendering every job.
By month twenty-eight, the same rates that produced a comfortable margin in year one are producing almost none. Nothing went wrong. Bitumen moved, aggregate moved, the award moved twice, and the rates did not move at all — because nobody asked whether they could.
Fixed rates over a long term are a position on input prices. Most contractors take that position by default rather than by decision.
The bet nobody notices they are making
The exposure scales with two things: the duration of the contract, and the proportion of your cost that sits in volatile inputs. Those inputs are bought under their own agreements, and how they are priced and secured is covered in our guide to materials supply agreements.
Civil work is unusually exposed on both counts. Bitumen, cement, steel, aggregate, fuel and quarry products are all materially more volatile than general inflation, and they are a large share of a civil contractor’s cost base. A road maintenance panel and a domestic fit-out contract of the same length do not carry the same escalation risk, and pricing them with the same instinct is a mistake. The exposure is sharpest on term maintenance contracts, where the rates are set once and then worked for years.
| Contract shape | Escalation exposure | What to do |
|---|---|---|
| Six-week job, materials ordered at award | Minimal | Nothing — lock supply pricing and move on |
| Nine-month job, staged material delivery | Moderate | Fix supply pricing where you can; check for a clause |
| Two-year construction contract | Significant | Seek a rise and fall clause; price the residual if refused |
| Three-year rate-based panel | High | An escalation mechanism should be a condition of participating |
| Five-year standing offer | Very high | Fixed rates over five years is not a commercial position, it is a wager |
The good news is that escalation is the most manageable of the major civil risks, because it is measurable, it is publicly indexed, and there is a standard contractual mechanism designed for it that principals understand and frequently accept.
What a rise and fall clause does
A rise and fall clause allows the price of a fixed-price or lump sum construction contract to increase — or potentially decrease — in accordance with fluctuations in supply prices and wages growth, for specific materials and labour, in the geographical region where construction occurs.[1]
Three features of that definition are worth drawing out.
It works both ways. The “fall” is not decorative. If indices go down, the contract price goes down. That symmetry is precisely why principals accept these clauses — it is a shared-risk mechanism rather than a one-way transfer, and framing it that way in a tender clarification is far more persuasive than asking for protection.
It is specific, not general. A clause covering “costs” is a drafting problem. Good clauses name the materials and labour categories they apply to and target specific trade packages or types of materials — steel, timber, and in civil work bitumen, cement, aggregate and fuel.[2]
It is regional. Input prices move differently in Perth and Brisbane. Where an index has a capital-city or state breakdown, use the one matching where the work is.
Why most council contracts are fixed price
Understanding the principal’s position makes the conversation easier.
A council or agency has an approved budget, usually tied to a funding allocation or a grant with fixed limits, and often to a council resolution with a stated figure. A contract that can increase is a contract that can breach that allocation, which is an administrative problem well before it is a financial one. Procurement officers are also assessed on price certainty, and a fixed price is the simplest thing to defend.
None of that means the answer is always no. Two arguments land well:
- Comparability. Without a clause, tenderers price escalation risk differently and invisibly — one carries 8%, another carries nothing and hopes. That makes tenders less comparable and rewards the tenderer who understood the risk least, which is a poor value-for-money outcome. A clause removes the guesswork for everyone.
- Contractor solvency. A contractor who absorbs unmanageable escalation on a long contract is a contractor at risk of not finishing it, and a failed contractor is far more expensive to a council than an indexed rate.
Both arguments are about the principal’s interests rather than yours, which is why they work. The value-for-money framing that underpins them is covered in our guide to pricing strategies for government tenders.
The indices Australian contracts use
The predominant price indices tracking cost fluctuations of building materials in Australia are the Producer Price Indexes (PPI) published quarterly by the Australian Bureau of Statistics.[1] They are also the indices most commonly used in rise and fall clauses.[2]
| Index family | What it tracks | Civil relevance |
|---|---|---|
| PPI — Input to the House construction industry | Overall trends in prices for building materials, by capital city[1] | Widely used and widely available, but oriented to residential building — a poor proxy for a road job |
| PPI — Output of the Construction industries | Output prices across construction industries | Used for infrastructure contracts[1]. Generally the better fit for civil work |
| PPI — selected industry input indexes | Producer price indexes are published for selected manufacturing, construction, mining and service industries[3] | Where a specific input dominates — bitumen, cement, steel — a targeted series is far better than a composite |
| Wage Price Index | Wage movements | For the labour component. Note the ABS caution that seasonally adjusted and trend WPI series can be revised as extra terms are added[3] |
| National award rates | Award wage movements directly | Reference to national award rates may be used to track changes in labour input costs accurately[1] |
| CPI | General consumer prices | A poor match for construction inputs, but useful as a fallback index if the primary series is discontinued[2] |
The choice matters more than contractors expect. The ABS is explicit that the index or indexes selected will affect the price change recorded and should be chosen carefully.[3] A residential building input index applied to a bitumen-heavy resurfacing panel will under-compensate you in exactly the period you most need compensating.
Where a principal proposes an index, it is entirely reasonable to propose a better-matched alternative and to explain why. That conversation is usually technical rather than adversarial, and it is one of the few tender-period negotiations where being specific demonstrably improves your position.
How the adjustment is calculated
Price adjustments under a rise and fall clause must follow a pre-determined formula, typically referencing price indices published by institutions such as the ABS.[1] The ABS recommends that a contract define the adjustment formula explicitly, with a worked example included.[3]
The standard structure works like this. The contract sum is divided into components — a fixed portion that does not adjust, plus one or more adjustable portions each tied to a nominated index. Each adjustable portion is multiplied by the ratio of the current index value to the base index value.
| Element | What it means | What to settle in the contract |
|---|---|---|
| Base index value | The index reading the adjustment measures from | Which quarter. This is the single biggest drafting trap — see below |
| Current index value | The reading at the adjustment date | Which quarter, and what happens if it is not yet published |
| Adjustable proportion | The share of the price the clause applies to | Should reflect your actual cost structure, not a round number |
| Non-adjustable proportion | The share that stays fixed | Typically overhead and margin |
| Adjustment frequency | Monthly, quarterly, annually, or once | Quarterly suits quarterly indices. Different frequencies produce significantly different outcomes depending on market conditions[2] |
The base date trap. Is the benchmark measured at the time of tender or at the time of contract? Where there is a significant gap between the two, this makes a big difference.[2] On government work that gap is routinely three to five months, and on a volatile input it can consume a meaningful share of the protection the clause was meant to provide. Push for a base date at tender close — that is when you actually priced the work.
Thresholds and triggers
Principals commonly limit exposure with one of two thresholds.[2]
- Time-based — no adjustment claimable until a specified period has elapsed, commonly six to twelve months.
- Percentage-based — adjustment only available where costs move by a minimum percentage.
Both are reasonable in principle. Both can be set at levels that make the clause meaningless. The warning is direct: a percentage threshold that is too high, or a time threshold that is too long, can defeat the entire purpose of the rise and fall mechanism.[2]
A twelve-month time threshold on a fourteen-month contract is a clause that does nothing. Check the threshold against the actual duration and the actual expected movement before treating the clause as protection.
There is a further question the clause must answer, and it is frequently left ambiguous: where a percentage threshold applies, does the adjustment apply to total costs or only to the amount exceeding the threshold?[2] On a 5% threshold with 9% movement, that is the difference between recovering 9% and recovering 4% — nearly half the value of the clause, decided by a sentence.
Finally, most contracts contain barring provisions preventing contractors from claiming additional costs outside the agreed times.[2] A rise and fall entitlement is subject to the same notice discipline as any other claim — diarise the adjustment dates and claim on time, or the entitlement lapses. The system for that is in our guide to contract administration for civil SMEs.
What a well-drafted clause must specify
Drawing the guidance together, a clause you can actually rely on answers all of the following.[2][3]
- Scope of application — which costs adjust. Labour, materials, or both, and which specific trade packages or material types.
- The base price and its effective date, showing precisely when indexation begins.
- The index, identified completely — full title and any codes, including the specific sub-component and geographic area. Cite the index series rather than a table number, because table numbers and table contents are subject to change.
- Timing of the benchmark — tender date or contract date.
- Adjustment frequency, and the method of calculating the indexation factor.
- The formula, set out explicitly, with a worked example.
- Thresholds, and whether adjustment applies to total costs or only the excess.
- A fallback index — a default mechanism for determining an equivalent appropriate index if the nominated series is renamed or discontinued.
- Protection against re-referencing, so neither party is adversely affected when the ABS changes a reference base period.
- Express provision for negative movements, so the “fall” side operates as intended.
- Claim timing, so the barring provisions are clear.
Items 8, 9 and 10 come directly from the ABS’s own guidance to contract drafters, and they are the ones most often missing. An index being restructured or discontinued mid-contract is not hypothetical — the ABS notes that price indexes can be reviewed or restructured, resulting in component series being renamed or discontinued.[3] A clause with no fallback simply stops working.
Labour costs and award movements
Labour is usually the larger half of a civil contractor’s cost base and it moves on a different rhythm from materials — annually, on a known date, by an amount announced in advance.
That predictability cuts both ways. It means an annual award movement is foreseeable, which weakens an argument that you could not have priced it — and on a contract of a year or less you generally should have. But on a three-year panel, three compounding annual movements are a substantial number, and reference to national award rates may be used to track those changes accurately.[1]
Two practical notes:
- Award-linked adjustment is cleaner than index-linked adjustment for labour, because the movement is published, unambiguous and directly relevant to your actual cost. Where a principal resists a materials clause, they will sometimes accept a labour one.
- Enterprise agreements complicate this. If your labour cost is set by an EA rather than the award, an award-linked adjustment may not track your real movement. Say so and propose the mechanism that matches your cost structure.
The ABS cautions every clause should answer
The ABS publishes specific guidance for contract drafters using its price indexes, and it is worth reading before agreeing to any indexation wording.[3]
| ABS caution | What the clause needs |
|---|---|
| Revisions — most indexes are not revised, but seasonally adjusted and trend wage price index series can be revised as extra terms are added | Specify original (not seasonally adjusted) series where possible, or state how a revision is handled |
| Discontinuation — indexes can be reviewed or restructured, and component series renamed or discontinued | A default mechanism for determining an equivalent appropriate index |
| Re-referencing — reference base periods change periodically | Drafting that ensures neither party is adversely affected by a change of base |
| Index selection — the index chosen affects the price change recorded | Careful, deliberate selection matched to what is actually being indexed |
| Table numbers change | Cite the index series, not the table number |
| Currency of data | Use the latest available data rather than locking into a historical base period |
| Negative movements | Allow for them explicitly |
The ABS also recommends obtaining appropriate professional advice when drafting indexation clauses.[3] On a multi-year panel worth seven figures, that advice is inexpensive relative to what an unworkable clause costs.
Asking for a clause during the tender period
The tender clarification period is the only realistic window. After award you have no leverage; before submission, a well-framed question is a normal part of the process.
What works:
- Frame it as improving tender comparability, not as seeking protection. “Without a stated mechanism, tenderers will allow for escalation at different levels, which reduces the comparability of prices.”
- Propose the specific mechanism, not the concept. Name the index, the adjustable proportion, the frequency and the threshold. A principal can say yes to a proposal; they cannot say yes to a request for “some form of escalation”.
- Emphasise the symmetry. Rise and fall. The clause can reduce the contract price.
- Ask early. Late clarifications get shorter answers, and a substantive change to the conditions of contract needs time to be issued as an addendum to all tenderers.
- Accept a partial win. Labour only, or a single named material, or a clause that starts at month twelve, is better than nothing — provided the threshold does not render it inoperative.
Where the answer is no, that is not a wasted exercise. You now know the risk is being transferred deliberately, and you can price it as a known quantity rather than an assumption.
Pricing escalation into a fixed bid
Most of the time there will be no clause. The task then is to price the exposure deliberately rather than absorb it invisibly.
- Split your cost base. What proportion sits in volatile inputs — bitumen, cement, steel, aggregate, fuel — and what proportion in labour and stable items? A road resurfacing job and a drainage job have very different profiles.
- Map spend against the programme. Escalation only applies to what you buy later. A job that procures 70% of its materials in the first two months has far less exposure than one that spends evenly across two years.
- Fix what you can. Supplier price-hold agreements, forward orders and early procurement remove the risk rather than pricing it. This is almost always cheaper than carrying a contingency, and it is the first move rather than the last.
- Price the residual explicitly, as a line item in your estimate. Not as a vague uplift on rates. A recorded allowance can be reviewed, defended and adjusted; a fudge factor buried in a rate cannot, and it disappears the moment someone tightens the bid.
- Decide whether the residual is acceptable. Where uncontrollable escalation on a long fixed-price contract could consume the whole margin, that is a legitimate input to the go/no-go decision rather than something to be optimistic about.
Step 3 deserves emphasis because it is the one that actually reduces risk rather than transferring its cost to your competitiveness. A supplier price hold covering the bitumen on a nine-month resurfacing contract removes the largest single exposure on the job, and it costs a phone call.
Multi-year panels and standing offers
Panel and standing offer arrangements concentrate every risk in this guide, because the rates are fixed for a term, the volume is uncertain, and the arrangement usually cannot be exited without commercial consequences.
What to establish before accepting a place:
- Is there a rate review mechanism, and is it a right or a request? “Rates may be reviewed annually by agreement” is not a mechanism — it is a conversation you may not win. “Rates shall be adjusted annually in accordance with [index]” is a mechanism.
- What is the review date and the notice requirement? Annual review rights routinely lapse because nobody diarised them.
- Does the arrangement extend? A three-year panel with two one-year options is a five-year exposure, and the options are usually the principal’s to exercise.
- Are you obliged to accept work at the panel rates? Where you can decline individual jobs, an unprofitable rate is survivable. Where you cannot, it is not.
Our guide to winning work off panels and standing offers covers how these arrangements operate across LGP, Local Buy, WALGA and the CUAs, and what makes a panel place worth holding.
If you are already in a fixed-price contract
Realistic options are limited, and it is better to be honest about that than to encourage hope.
- Check whether an escalation mechanism already exists. Contractors are occasionally surprised. Read the special conditions rather than relying on memory of the tender.
- Check whether a rate review right exists on a panel, and whether the window is open.
- Separate escalation from entitlement. Where cost has increased because scope changed, the ground was different, or you were delayed, those are variation, latent condition and delay claims — and they are frequently mischaracterised as “costs went up”. Escalation is what happens to the price of things you always knew you had to buy; everything else is a claim.
- Ask, on the record, without expecting much. Some principals will negotiate on a long contract where the alternative is a contractor in distress, particularly where the relationship matters and the movement is well documented. Approach it with data — indices, invoices, the specific inputs affected — rather than a general statement that costs have risen.
The third point is the practically important one. A meaningful share of what contractors experience as “escalation” is actually unclaimed entitlement, and the claims in the post-award cluster are available where escalation relief is not.
What rise and fall is not
Three mechanisms get confused with it, and the confusion costs money.
| Mechanism | Answers which problem | Key difference |
|---|---|---|
| Rise and fall | Known scope, changing input prices | Adjusts price by index. Generally does not require adjustments to the contractor’s margin[2] |
| Provisional sum | Unknown scope or cost | Substitutes actual cost for an allowance, and will often require adjustments to the contractor’s margin[2]. See provisional sums and PC sums |
| Variation | Changed scope | New or different work, valued under the variation hierarchy |
| Delay damages | Time-related cost caused by delay | Compensates prolongation, not input price movement |
Where a principal prefers greater cost control than a fixed lump sum allows, early contractor involvement arrangements are often used as an alternative to traditional lump sum engagements.[2] On larger civil packages that is worth knowing about, because it changes the conversation from “who carries escalation” to “how do we price this together once the scope is understood”.
Checklist
Before you bid
- How long is the contract, including any extension options?
- What proportion of cost sits in volatile inputs, and when is it spent?
- Is there an escalation clause? If so, which index, what base date, what threshold, what frequency?
- Does the threshold render the clause inoperative given the actual duration?
- If there is no clause, is it worth asking during the clarification period? Propose a specific mechanism.
- What can you fix by supplier agreement instead of pricing?
- What is the residual exposure, as a number, in your estimate?
If a clause exists
- Is the index identified completely, including sub-component and region?
- Is there a fallback index if the series is discontinued?
- Is the base date at tender or at contract?
- Does adjustment apply to the total or only the excess above the threshold?
- Is the formula stated, with a worked example?
- Are the adjustment dates diarised, with the claim notice period?
The short version
- Fixed rates over a long term is a position on input prices. Take it deliberately or not at all.
- Ask during the tender period, propose a specific mechanism, and frame it as improving comparability.
- Match the index to the work — a house construction input index is a poor proxy for a bitumen-heavy panel.
- Check the base date, the threshold, and whether adjustment applies to the total or only the excess. Any one of the three can gut the clause.
- Always include a fallback index. Series get discontinued.
- Where there is no clause, fix what you can with suppliers and price the rest as an explicit line.
References
This guide is general information for Australian civil construction businesses and is not legal or financial advice. Indexation clauses should be drafted with professional advice, and index availability and structure change over time. All examples are illustrative. Always work from the tender and contract documents and confirm current index series with the Australian Bureau of Statistics.
- Vincent Young — Rise and Fall Clauses in Construction Contracts; Bradbury Legal — Rise and Fall Clauses in Construction Contracts; Mondaq — Rise And Fall Clauses In Construction Contracts (Construction & Planning, Australia); Blaze Business & Legal — Rise and Fall Clauses in Construction Contracts Australia. Rise and fall clauses allowing the price of a fixed-price or lump sum construction contract to increase or potentially decrease in accordance with fluctuations in supply prices and wages growth, for specific materials and labour, in the geographical region where construction occurs; the Producer Price Indexes published quarterly by the Australian Bureau of Statistics as the predominant price indices tracking cost fluctuations of building materials in Australia; the “Input to the House construction industry” index specifying overall trends in prices for various types of building materials in each of the capital cities; the use of indices such as “Output of the Construction industries” for infrastructure contracts; the requirement that price adjustments follow a pre-determined formula typically in accordance with price indices published by institutions such as the ABS; and the use of national award rates to accurately track changes in labour input costs for the labour input portion of a contract sum. ↩ ↩ ↩ ↩ ↩ ↩ ↩
- Turtons Lawyers — 5 crucial tips for a rise and fall clause. The need to define clearly which costs are subject to adjustment, with clauses able to apply to labour costs, materials costs or both, and the recommendation to target specific trade packages or types of materials; the question whether the benchmark is measured at the time of tender or the time of contract, which can make a big difference where there is a significant gap between the two; the need to specify adjustment intervals (monthly, quarterly, annually or one-time), which could produce significantly different outcomes depending on market conditions; the observation that most contracts contain barring provisions to prevent contractors from claiming additional costs outside the agreed times; the Producer Price Indexes published by the ABS as the most commonly used, with the recommendation to include a fallback index such as the Consumer Price Index in case the preferred index ceases to be published, and to be precise about which index applies; the two common threshold types (time-based, typically 6–12 months, and percentage-based), together with the warning that a percentage threshold that is too high or a time threshold that is too long can defeat the entire purpose of the rise and fall mechanism, and the need to clarify whether calculations apply to total costs or only amounts exceeding the threshold; the two cost adjustment approaches (tendered versus actual costs, with labour adjustments typically following national award rates, and index-based formulas); the caution against confusing rise and fall clauses with provisional sum mechanisms, noting that provisional sums will often require adjustments to the contractor’s margin whereas rise and fall provisions generally do not; and the note that early contractor involvement contracts are often used as an alternative to traditional lump sum engagements where principals prefer greater cost control. ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩
- Australian Bureau of Statistics — Use of Price Indexes in Contracts (information paper, detailed methodology information). Producer Price Indexes available for selected manufacturing, construction, mining and service industries; guidance to establish a base price with a precise effective date showing when indexation begins, to select appropriate indexes carefully to represent the item being indexed, to identify the index completely including its full title and any codes, to state the adjustment frequency and set out the method to be used in calculating the indexation factor, and to define the adjustment formula explicitly with a worked example; the caution that most indexes are not revised but that the seasonally adjusted and trend wage price index series can be revised as extra terms are added; the caution that price indexes can be reviewed or restructured, which may result in component index series being renamed or discontinued, and that clauses should include a default mechanism for determining an equivalent appropriate index; the caution that reference base periods change periodically and that clauses must be drafted so the parties are not adversely affected by a change; the statement that the index or indexes selected will affect the price change recorded and should be chosen carefully; and the recommendations to seek appropriate professional advice, to allow for negative price movements explicitly, to use the latest available data rather than locking into historical base periods, and to cite specific index series rather than table numbers, as table numbers and the contents of tables are subject to change. ↩ ↩ ↩ ↩ ↩ ↩ ↩ ↩