June 6, 2022
The Australian Labor Party (Labor) has regained power forming a majority government. The new government inherits the opportunities and challenges of Australia’s economic recovery from the COVID-19 pandemic. On the one hand, Labor will have the opportunity to stimulate this recovery by making smart investments in major infrastructure, of which the economic, social and environmental benefits could be enjoyed by Australia for years to come. On the other hand, the all-too-familiar pain points of critical supply chain issues, labour shortages, and extraordinary escalation of material prices may put a squeeze on progress and contribute to cost blowouts and project delays. Among the many issues the new government will face is shoring up the nation’s infrastructure sector – undoubtedly a priority.
What can Australia expect?
On the back of its National Platform, Labor promises to modernise Australia’s infrastructure in order to meet the needs of a rising population, while providing a boost to productivity, and building a prosperous nation. Although the detailed particulars of its infrastructure strategy have not yet been revealed, Labor has provided some indication of its plans for current and future projects. While a review of the viability and costs of all Coalition-backed infrastructure projects is on the cards, Labor has also promised to take the politics out of projects, having foreshadowed an independent review of the powers of the Labor-established independent infrastructure advisory agency, Infrastructure Australia (IA) (of which Mr Albanese played a lead role in setting up during his time as Minister for Infrastructure, Transport, Regional Development and Local Government). Labor will likely task IA with a central role in identifying a pipeline of infrastructure projects for the long-term, and to provide greater scrutiny of Commonwealth-funded projects prior to funding approvals.
Rail projects will feature prominently in Labor’s infrastructure expenditure, with $500 million already earmarked from the budget for the plans for the resurrected, and now, top priority high-speed rail link from Melbourne to Brisbane (with stops in Canberra, Sydney, and regional centres along the way). Labor will also establish the ‘High-Speed Rail Authority’ to review and update the business case for the project and begin work delivering it. Further investments of circa $50 billion in transport (including additional rail, road, and bridge projects) will likely follow, signaling a green light for continued activity in the sector.
Consideration might also be given to China’s recent efforts to increase its presence in the Pacific region. In order to support Australia’s strategic interests, and counterbalance China’s growing influence, we could expect the federal government to seek more opportunities to invest in defence projects throughout the region.
Considerations for project participants
Never before has it been more expensive, and uncertain, to deliver major infrastructure projects on time and within budget. A pandemic-driven surge in the costs of essential materials for infrastructure, such as steel and concrete, have led to higher project costs, while critical shortages in raw materials and labour have contributed to project delays. Unfortunately, the reality of this crisis has hit home as we have seen the collapse of some of the construction industry’s biggest players, along with reports of others teetering close to the edge. Nevertheless, the federal government will likely forge ahead with its plans to deliver Australian infrastructure.
In the current market conditions, parties should implement a concise plan to deal with material price increases in order to maximise outcomes for the project and the participants. Of course, parties will seek to sufficiently protect themselves from the impacts of material price volatility. Principals may seek to minimise their exposure by passing the risks onto Contractors. However, if this position is advanced too heavily, a Principal may attract unwanted adverse effects on the project, including:
- unrealistically high bids for projects;
- non-participation or exit of high-quality Contractors from the bidding pool;
- unnecessary increases to project costs; and
- project delays.
On the other hand, Contractors will be wary of exposing themselves to an unsustainable level of financial risk. If a Contractor takes on too much risk, and cannot manage it, the consequences can be devastating for the Contractor, and ultimately, the project may suffer from cost blowouts and delays. Therefore, it is critical that participants come to clear terms on who is responsible for the risks of procurement.
With this in mind, Principals and Contractors can get ahead by comprehensively addressing these risks early on during pre-contract negotiations. Parties will benefit from coming to an agreement on the appropriate delivery model and contractual mechanisms to effectively deal with the risk of material price escalation, should it arise during the project. This may be achieved by:
- allocating the risk to the Principal for further price increases for specific materials above a threshold percentage of the as-bid price;
- sharing the risk between the parties where further price increases exceed an agreed amount;
- allocating the risk to the Principal for specific Principal-supplied materials; or
- adopting cost-plus pricing.
It should come as little surprise that proper planning at the outset of a project is essential to mitigate and manage the impacts of a further rise to material costs into the foreseeable future.
Lamont Project & Construction Lawyers
We have the industry knowledge and experience to assist both Principals and Contractors in all major infrastructure projects. If you would like to discuss any of the matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
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