NZS 3910 Risk Allocation: Fuel, Variations and Who Carries the Risk?.

This week, I had a contractor call me with a question that I think will become more common over the coming weeks.

With conflict overseas and ongoing uncertainty around fuel prices and supply routes, the question was simple:

Where do we stand in terms of variations and risk allocation under NZS 3910?

When the question was asked, I did go straight to Clause 5.11.10, and I will come back to that shortly.

But first, I want to reflect on the concept of Excepted Risks.

Excepted Risks

For those of you who have been on our NZS 3910 training, you might remember that civil unrest, war and invasion are listed as Excepted Risks.

Given what is happening around the world at the moment, it is understandable that some might think that the existence of war or invasion that directly affects the delivery of a project may sit as a Principal’s risk.

However, it is important to understand what the Excepted Risks provisions are actually there to deal with.

Clause 5.6 generally explains that it is the responsibility of the Contractor to take care of the Site unless an Excepted Risk occurs.

Excepted Risks come into play where there is:

• Loss or damage to the Contract Works
• Loss or damage to Materials
• Loss or damage to the Site

So, if there is civil unrest locally that results in damage to works or materials that are under the Contractor’s care, then that may be treated as a variation.

However, where global conflict simply affects:

• Fuel prices
• Logistics
• General market conditions

This does not trigger a variation under the Excepted Risks provisions.

It is also worth noting that materials that are still in transit internationally, and not yet in the Contractor’s possession, may sit outside that allocation of risk.

Coming back to Clause 5.11.10.

Clause 5.11.10

This clause deals with situations where a government or local authority takes action that increases or decreases the Contractor’s cost.

If, for example, the government were to require Contractors to bus their construction teams to site to conserve fuel supply, then that would be a cost to the Contractor which may be treated as a variation.

Equally, if the government were to remove or reduce fuel taxes, and that reduces the Contractor’s cost, that decrease may also be treated as a variation.

We do not often talk about decreases in cost, but the clause clearly provides for both increases and decreases.

However, where fuel prices simply rise due to global market conditions or supply constraints, and there is no direct government intervention affecting cost, then there is no entitlement to a variation under this clause.

In that situation, the Contractor’s general obligation to provide labour, plant and materials means that the risk may still sit with the Contractor.

For projects that are already under contract, understanding where these risks sit is important.

For projects that are about to be tendered or negotiated, this is where I would strongly encourage Principals and Contractors to spend time developing a project-specific risk plan.

Risk Allocation in Practice

In the same way that we would prepare a site-specific safety plan, we can prepare a project-specific risk profile.

Even an hour spent together post-tender can help identify risks such as:

• Fuel volatility
• Supply chain disruption

and provide clarity on who carries that risk.

As these international risks begin to impact the industry, we will see those risks being priced and included in the next pricing schedules.

Unless those risks are discussed upfront and agreed.

If the Principal carries the risk, we should see evidence of pricing reductions.

If the Contractor carries the risk, then it should be clearly included within the pricing schedule, potentially as a specific line item aligned to the agreed risk profile.

One final point worth mentioning is the valuation of variations under these types of clauses.

Where there are no relevant line items in the Schedule of Prices, the parties may agree to value such variations on a cost-plus basis.

This means:

• Actual cost
• Plus overhead and profit

Not market rates. Not sell rates.
Evidenced cost.

So, where these situations arise, it is important to maintain proper records to demonstrate cost at a later stage.

Some of you may also be thinking about insurance, and how that interacts with these types of risks.

I am not a construction insurance specialist, but I do know one.

We will cover that in the next podcast, where I will bring in an expert to discuss to what extent these events can be insured.

Lastly, if you need any support framing conversations around risk allocation on your next project, feel free to get in touch.

🎧 You can listen to the full podcast here:
https://open.spotify.com/episode/2UESpdh5e22Ed0G6fYGYEQ

⚖️ Disclaimer

The information provided in this article is intended as general commentary on industry practices and contractual principles under NZS 3910. It does not constitute legal, contractual, or professional advice.

Each project and contract is unique, and parties should seek specific advice relevant to their individual circumstances before making any commercial or contractual decisions.