Rise and fall clauses: Protecting projects from cost volatility

By

Josh Krissansen

Last Updated May 7, 2026

By

Josh Krissansen

On fixed-price construction contracts, material and labour costs can shift significantly between tender and delivery. When this happens, contractors often absorb the increase, which can erode margins and increase the risk of disputes or financial stress.

A rise and fall clause adjusts the contract sum in line with defined cost movements, so the impact of changing input costs is shared rather than carried by the contractor alone.

In this article, we explain how rise and fall clauses work, where they apply in Australian construction contracts, and how to structure and administer them to reduce risk, protect margins, and maintain delivery certainty.

What is a rise and fall clause?

A rise and fall clause is a contractual mechanism that adjusts the contract sum based on movements in published cost indices, typically the ABS Producer Price Indexes. Its purpose is to share cost risk between the principal and contractor, rather than leaving one party to carry it alone.

For example, consider a commercial builder in NSW that tendered a $12 million warehouse project in Q1 2023 with a 14-month programme. By Q3 2023, steel prices had risen 8% and concrete 5%.

Without a rise and fall clause, the contractor would need to absorb the full increase. With one tied to ABS PPI indices, the principal might pay 60% of the increase above an agreed buffer, preserving the contractor's margin and avoiding a dispute.

The clause works in both directions, depending on how input costs move over time. When input costs rise, the contractor receives additional payment, and when they fall, the principal receives a reduction. 

Some contracts cap or exclude downward adjustments, so the drafting needs to be reviewed carefully.

A rise and fall clause (known as an escalation clause in the US) is distinct from other mechanisms that handle cost uncertainty in contracts:

• Provisional sums: Estimated allowances for undefined work, adjusted once the scope is confirmed
• Prime cost items: Allowances for materials or equipment not yet selected, adjusted to actual cost on purchase
• Cost-plus arrangements: The principal pays actual project costs plus an agreed fee, with no fixed price

How rise and fall clauses differ from fixed-price contracts

Understanding how rise and fall clauses differ from fixed-price contracts helps clarify when they are appropriate and how risk is allocated.

Under a fixed-price contract, the contractor carries all input cost risk from contract award through to completion. If material or labour costs change between tender and completion, the impact is absorbed in the contractor’s margin.

Rise and fall clauses developed as a response to this type of risk allocation, particularly during periods of sustained inflation where fixed pricing became difficult to manage.

Their use increased significantly after 2020, as supply chain disruptions and post-COVID demand pushed construction prices up 31.1% through mid-2024. At that level of cost movement, fixed-price contracts began exposing contractors to losses on otherwise well-run projects.

Where these clauses appear in Australian contracts

Rise and fall clauses appear in a range of Australian construction contracts, though not always by default. 

• ---

  AS 2124-1992 and AS 4300-1995:

  Allow parties to annex a rise and fall clause.

• ---

  AS 4000-1997 and AS 4902-2000:

  Do not include one as standard, but can be amended to do so.

• ---

  GC21:

   Used widely on NSW Government projects. Includes rise and fall provisions as a standard feature on contracts above defined value thresholds.

• ---

  Bespoke commercial contracts:

   May include tailored rise and fall mechanisms negotiated between the parties.

How a rise and fall clause works

A rise and fall adjustment is typically calculated using a process like the one below. The resulting amount is submitted as a claim adjustment through a progress claim or separate schedule. 

Adjustments are calculated retrospectively once the relevant index is published, creating a lag between when costs are incurred on site and when the adjustment is received. On long programmes, that lag can affect the contractor's working capital position and should be factored into cash flow forecasting from the outset.

Base date and reference period

The base date is the starting point for measuring index movements, typically set at tender, contract execution, or a specified date after site access is granted. The reference period is the interval used to calculate adjustments, commonly monthly or quarterly, and aligned to ABS index publication cycles.

Both need to be clearly defined in the contract, as ambiguity in either can lead to disputes.

Cost indices and fallback

The most commonly referenced indices in Australian rise and fall clauses are the ABS Producer Price Indexes (ABS PPI, Catalogue 6427.0).

The right series depends on the type of work and the cost inputs being tracked. For instance, a steel-heavy project will need to reference a different series from a labour-intensive fitout.

The contract should also specify a fallback index if the primary series is discontinued or materially revised. Without one, the mechanism may break down, requiring agreement between the parties or formal dispute resolution. NSW GC21 Schedule 7 addresses this directly, providing guidance on index substitution that can serve as a useful reference point when drafting bespoke clauses.

Eligible value and exclusions

Eligible value, sometimes called effective value, is the portion of each progress payment subject to the rise and fall adjustment. Depending on how the clause is drafted, the adjustment may apply to specified materials, labour, or defined portions of the work only.

Standard exclusions include:

• Contractor's margin 
• Preliminaries
• Daywork
• Provisional sums
• Prime cost items
• Work completed on an actual-cost basis
• Variations agreed at current prices

The contract should set out how eligible value is determined, whether by cost code, trade package, or a percentage breakdown in an annexed schedule. Leaving this undefined is a common cause of disputes when claims are submitted.

What costs rise and fall clauses typically cover

Defining which costs are included in a rise and fall clause ensures the adjustment reflects actual project risk.

Rise and fall clauses typically cover the cost inputs most exposed to market volatility and hardest to forecast accurately during tendering. In Australian commercial construction, these are most commonly:

• Materials: Steel, concrete, timber, copper, and aluminium are the inputs most likely to move materially over a long programme
• Labour: Skilled trades wages, particularly in markets where enterprise bargaining agreements or labour shortages drive cost increases between tender and delivery
• Fuel and logistics: Less common but relevant on projects with significant plant, haulage, or remote site costs

Not all of these need to be included in every clause if they aren’t relevant to the project's actual cost profile. A concrete-heavy civil project carries a different kind of exposure to a steel-framed commercial fitout, and the clause should be drafted to match.

When a rise and fall clause makes sense

Rise and fall clauses aren’t needed on every project, as they add administrative complexity for contractors and reduce price certainty for the principal.

A rise and fall clause is worth considering when:

• The construction programme exceeds 12 to 24 months, giving material and labour costs time to shift between tender and completion
• The scope is heavily weighted toward volatile inputs such as steel, timber, copper, or fuel, where price swings can be significant and difficult to absorb
• Market conditions are unstable, such as periods of high inflation, supply chain disruption, or strong infrastructure pipeline activity that drives up labour demand

The trade-offs of including a rise and fall clause differ depending on which side of the contract you’re on.

• Principals:

  Give up some price certainty but typically receive lower tender prices, as contractors do not need to price excessive risk buffers into their tenders. They also help reduce the likelihood of disputes or financial stress during the project.

• Contractors:

   Reduce margin erosion and insolvency risk but take on additional administrative responsibility to track indices, adjust documentation, and submit claims correctly and on time.

When the conditions are right, the clause benefits both sides.

Legal and regulatory considerations in Australia

Rise and fall clauses are generally permitted in commercial construction contracts across all Australian states and territories without restriction.

On residential building contracts, however, two states have consumer protection legislation in place that limits or prohibits their use to help limit cost uncertainty for homeowners:

1. Western Australia: Rise and fall clauses are prohibited for residential contracts under $500,000 under the Home Building Contracts Act 1991 (WA). 
2. Victoria: Rise and fall clauses are prohibited for domestic building contracts under $500,000 under the Domestic Building Contracts Act 1995 (Vic), with limited exceptions.

Contractors in WA or Victoria working on residential contracts below the threshold should seek legal advice before including a rise and fall clause. In WA, including such a clause in contracts under $500,000 may result in penalties of up to $10,000.

Alternatives where a rise and fall clause is not feasible

Where a rise and fall clause is not available or appropriate, there are other mechanisms for managing cost uncertainty:

• Provisional sums

  Provisional sums are estimated allowances for undefined work, adjusted to actual cost once the scope is confirmed. They are less precise than a rise and fall clause and can create their own disputes if not well documented.
  

• Early contractor involvement (ECI)

  ECI brings the head contractor into the project during design, allowing for collaborative pricing and greater cost transparency before a contract sum is fixed.

• Alliance contracts

  Alliance contracts are a relationship-based construction delivery method common in Australian infrastructure, where cost risk is shared between parties under a pain/gain sharing arrangement rather than a fixed price.
  

How to implement a rise and fall clause

The most common reason contractors miss out on legitimate adjustments is poor claim management, not bad drafting.

The steps below cover how to set up, calculate, and submit adjustments so they are paid.

1. Set up cost codes

Before work commences, map eligible value by cost code or trade package in your cost management system and tag each code as eligible or excluded for rise and fall adjustments. 

Getting this right at project setup helps avoid confusion later about which costs are subject to adjustment when claims are being prepared months later.

2. Track indices

Subscribe to ABS PPI updates and record the base index value at the contract's base date. This becomes the fixed reference point against which all future movements are measured, so it needs to be documented and agreed upon before the project gets underway.

At each claim period, record the current index against the same series in a shared project file accessible to both the commercial and project management teams.

3. Calculate adjustments

At each progress claim period, check whether the index movement exceeds the threshold defined in the contract. If it does not, no adjustment applies for that period. For movements above the threshold, apply the formula:

(Current index – Base index) / Base index × Eligible value

Document the calculation in a schedule attached to the claim so there’s a clear record. That clear paper trail is what separates an adjustment that gets paid from one that gets disputed.

4. Attach evidence

Include a copy of the relevant ABS index release with each claim adjustment. This helps confirm the index values used in the calculation and gives the site manager or contract administrator a complete basis for assessment, reducing the likelihood of queries or rejection.

5. Submit the adjustment

The contract should specify the procedure for submitting rise and fall adjustments. Where it does not, the variation procedure is commonly used as a reference point. 

Check the contract particulars before submitting and follow the prescribed form and timeframes, as late or incorrectly formatted submissions are commonly rejected.

6. Reconcile at practical completion

Some contracts require a final reconciliation of all rise and fall adjustments at practical completion, once all indices are published. It helps to build this into your project close-out programme early, as index values are occasionally revised after initial publication, and the final reconciliation should use the confirmed figures.

Rise and fall clauses help manage cost risk on long programmes

When input costs shift over long programmes, a well-structured rise and fall clause helps ensure the financial impact is shared rather than absorbed by one party. Clear drafting and disciplined administration are what determine whether that protection holds in practice.

Written by

Josh Krissansen

76 articles

Josh Krissansen is a freelance writer with two years of experience contributing to Procore's educational library. He specialises in transforming complex construction concepts into clear, actionable insights for professionals in the industry.

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