Fuel price volatility: what it means for Australian construction and infrastructure projects

A common question we are being asked now is: ‘How does my company avoid cost escalation arising from recent volatility and disruption across global fuel markets?’

In short, Australia’s construction sector is facing yet another set of challenges: volatile fuel prices owing to the conflict in the Middle East, supply constraints, and subsequent rising costs. Global instability, refinery issues, and domestic fuel cost pressures (and in some cases, availability) are hitting projects hard, especially infrastructure, civil works, and remote builds where fuel is obviously critical.

The bottom line

The fuel crisis has exposed structural vulnerabilities in traditional construction risk allocation. For Australian projects (particularly those with long durations or heavy plant use) failing to address fuel volatility at contract stage increases the likelihood of cost overruns, delays, and disputes. In our experience, thoughtful drafting, early engagement, and collaborative risk management are proving essential to keeping projects viable.

Project owners are increasingly reluctant to absorb rising costs, seeing many implement a temporary fuel surcharge across their respective businesses. By way of example, some are reviewing and assessing this weekly in line with the Singapore Gasoil index, on top of passing on other unforeseen supply chain costs. And this will continue for as long as fuel prices are inflated.

We set out below likely impacts to projects and tips for managing fuel price escalation risk in contracts. If you are navigating fuel-related contract issues or want to review your risk allocation strategies, we would be happy to discuss how these approaches might work for your projects.

How this affects your projects

Cost blow-outs

Fuel powers everything on site – plant, equipment, generators, and transport. When diesel and petrol prices spike unpredictably, contractor margins erode quickly. Fixed-price contracts are particularly exposed.

Programme delays

Supply interruptions and logistics costs are already restricting procurement and delivery, thereby delaying availability of plant and materials. In regional and remote areas, fuel scarcity can halt works entirely – and those delays can be hard to recover contractually.

Supply chain pressure

Higher fuel costs are flowing through to subcontractors and suppliers. The result? Shorter price-hold periods, more variations, and disputes over who pays. Smaller subcontractors are especially vulnerable downstream, raising insolvency risks across projects in an already strained post-COVID market.

Contractual disputes

Many standard contracts weren’t drafted with prolonged fuel price volatility in mind. Now, principals and contractors (and subcontractors) are increasingly disputing whether fuel impacts qualify as compensable variations, latent conditions, force majeure, or ‘change in law’ events.

Managing fuel risk in your contracts

With higher fuel prices here to stay for (conservatively) the medium term, parties must be agile and consider the risks that significant volatility and disruption across global fuel markets will likely bring to their projects. From our experience, we set out below how parties are allocating and managing this risk more transparently.

Rise and fall clauses

These clauses tie contract prices to published indices (like diesel wholesale benchmarks), allowing partial cost sharing. They reduce the likelihood of claims and contractor distress – and they are making a comeback. When carefully drafted, they offer a pragmatic middle ground between fixed-price certainty and full cost reimbursement.

Rise and fall clauses adjust contract prices to reflect changes in input costs between tender and delivery. They were common in long‑term infrastructure contracts but fell out of favour when principals wanted fixed lump sums. The current fuel and supply chain crises have brought them back.

For fuel volatility, these clauses share unpredictable price risk rather than loading it entirely onto the contractor or principal.

Best practice drafting tips include:

• using objective, independently published indices;
• clearly specifying base dates, review periods, and adjustment methodology;
• limiting application to clearly identifiable fuel‑affected costs;
• aligning rise and fall clauses with variation, delay, and force majeure provisions; and
• including early warning obligations where fuel price movements threaten project viability.

Expanded variation definitions

Another approach is for contracts to expressly include ‘extraordinary fuel price movements’ or ‘fuel supply disruptions’ as compensable events, entitling contractors to time and/or cost relief where thresholds are exceeded.

Provisional sums and cost reimbursement

For fuel-intensive work, provisional sums or cost-reimbursable arrangements can be used to manage uncertainty. While less attractive for principals seeking price certainty, they can reduce embedded risk premiums in lump sum pricing.

Force majeure and relief events

Parties are refining force majeure clauses to expressly reference fuel shortages, embargoes, or government-imposed restrictions. Clear drafting around time extensions (and whether cost relief applies) is essential. Australian contracts typically do not allow for cost relief for force majeure events, however, so use of such clauses may only address time relief, which is less of an issue for fuel cost volatility.

Fuel hedging strategies

Some contracts now require contractors to adopt fuel hedging or forward purchasing strategies, with transparency around pricing assumptions. These can stabilise costs but must align with contract risk allocation.

Early warning and collaboration

Robust early warning mechanisms allow parties to respond proactively – resequencing works, approving alternative materials, or agreeing temporary commercial relief before problems escalate.

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