OUT-LAW ANALYSIS 7 min. read
Civil engineers discussing a construction project in Sydney. Royalty Free via Getty
23 Jun 2026, 3:49 pm
We have previously considered why Australian projects should consider adopting the more collaborative NEC4 contract. However, questions arise as to whether the standard NEC4 contract works for the Australian market in its unamended form, so successful adoption is likely to require some amendments.
Whilst ‘Z clauses’ – a key feature of NEC4 contracts which allow parties to introduce additional, bespoke conditions of contract – are required, there is a balance to be struck between making necessary amendments and amendments which fundamentally change the core NEC4 mechanisms or allocation of risk.
‘Z clauses’ are a key feature of NEC4 contracts and allow parties to introduce additional, bespoke conditions of contract. NEC acknowledges the potential need for Z clauses including to: supplement the standard clauses to reflect project specific requirements or align with local laws; and to amend the standard form NEC clauses to reflect local market positions, agreed risk allocation or to clarify the interpretation of a clause.
In Australia, the current approach to major infrastructure projects is on risk transfer and fixed pricing. There is a recognition within the industry that this approach is not effective, however widespread change had not yet happened. NEC4 offers a more balanced approach to risk allocation – and that approach is integral to the collaborative ethos of the contract.
However, if the NEC4 risk allocation or the core mechanisms are fundamentally altered through extensive Z clauses, the benefits that NEC4 offers to project outcomes will not be realised. This is both a challenge and an opportunity.
Significant use of Z clauses can increase costs during contract review and execution of works, with project teams bogged down in navigating complex or conflicting provisions. Where Z clauses conflict with other conditions of contract, they may also provide parties with a false sense of confidence with respect to their rights and obligations.
However, well thought through use of Z clauses can increase clarity and efficiency between the parties – a key principle of the NEC drafting team.
Parties must strongly resist the urge to unnecessarily pass through Z clauses which have been simply ‘lifted’ from previous or template forms of contract. This approach is inappropriate and increases the risk of conflict with the conditions of the NEC, with terminology and approach to drafting often diverging.
Pertinent client requirements should be distilled into Z clauses which align with the terminology of the NEC, with any other necessary requirements finding their way into the scope.
This approach is endorsed by a recent study by the UK’s Competition and Markets Authority (CMA) into the civil engineering market, which highlighted the differing approaches to use of Z clauses in public sector contracts. While use of Z clauses is not considered counter to the principles of the NEC, the report noted that NEC contracts “can contain dozens, and sometimes hundreds, of Z clauses”.
Use of Z clauses in such instances occasionally sought to radically alter the risk position agreed in the main clauses of the NEC contract. Ultimately, the CMA recommended that “procuring authorities should conduct a zero-based review of Z clauses in model contracts, to remove historical clauses altering how risk is allocated that are no longer required”.
The UK is a mature and established user of the NEC suite of contracts. The Australian market has the opportunity to learn from these findings and avoid replicating similar practices which have been shown to undermine the effectiveness of the NEC framework.
In practice, Australia’s current contracting environment is dominated by bespoke contracts and heavily amended Australian Standards and GC21 forms, where the purpose of original clauses is largely subverted by drafting focused on arming the principal with procedural arguments to pass on risk, impair efficient project management and reject otherwise valid claims made by the contractor. Such practices are consequently passed down the supply chain, often further handing risk to those parties least able to manage it.
While the over-zealous amendment of standard form contracts is not therefore a unique issue to the NEC, the consequences of doing so are more profound given the collaborative approach and ethos upon which the NEC is founded. This reinforces that behaviour and mindset shifts are needed to ensure successful adoption of the NEC4.
The NEC publishes jurisdiction-specific clauses known as ‘Y clauses’ to use within their contracts, which in Australia’s case – Y(Aus)1 – helpfully aligns the contract’s payment mechanism with the security of payment legislation in each state. This provision includes the minimum requirements that parties will need to ensure compliance, and the drafting notes identify the applicable requirements and differences between states.
In addition, amendments are required to reflect specific projects and market positions. These may include:
Under NEC4 there is no default standard of design responsibility. Clause 21.1 simply provides that the ‘Contractor’ designs the parts of the works which the ‘Scope’ states the contractor is to design. The scope therefore defines the contractor’s design obligations.
If secondary option X15 is selected, the contractor’s design responsibility is limited to that of “the skill and care normally used by professionals designing works similar to” the contractual works. This is however subject to any specific design warranties included in the scope.
In design and build contracts in Australia, it is not uncommon for the contractor’s design responsibility to include a clear obligation that the design is fit for the purposes stated in or ascertainable from the contract. To reflect this position under NEC4, the parties will need to either ensure that the Scope clearly defines this obligation or include an additional provision as a Z clause setting out such requirements.
The default NEC4 position is that the parties’ liability is unlimited.
Secondary option X18 can be selected to impose an overall liability cap and, amongst other things, separately limits the contractor’s liability for the client’s “indirect or consequential loss”.
In Australia, contracts for major infrastructure projects commonly contain extensive drafting in respect of consequential loss. This includes expressly defining the losses the parties consider to be indirect or consequential and often covers losses arising in relation to loss of profit and loss of use. The broad position is that both parties’ liability for consequential loss will be excluded, but the exclusion will be subject to carve outs.
The NEC4 has no definition of indirect or consequential loss. This is determined by reference to the position at common law, which means that losses commonly defined as consequential such as loss of profit may on the facts be found to be direct loss, and therefore subject to the overall liability cap.
Parties seeking certainty as to the losses excluded or capped should include an appropriate Z clause amending X18 accordingly.
X18 imposes no limitation on the client’s liability either for consequential loss or by way of overall liability cap, therefore the client’s liability is unlimited.
Ground conditions are another common cause of time and cost overruns, particularly in projects involving sub-surface work. A recent example of this can be seen from the troubled M6 motorway project in Sydney, where sinkholes forming during construction have been reported to have halted the project for over a year so far.
In Australia it is usual for contractors to take ground condition risk save for any project specific carve outs, which are usually narrow and fact specific.
NEC4 deals with responsibility for site conditions through a compensation event 60.1(12). This entitles the contractor to additional time and cost if they encounter physical conditions which:
In judging the physical conditions for the purpose of assessing a compensation event, the contractor is assumed to have taken into account:
Therefore, the default NEC position is not to transfer all site conditions risk to the contractor. Instead, the focus is on what the experienced contractor should reasonably have allowed for and what additional information they might be expected to obtain to supplement the site information provided by the client.
If contracting parties in Australia wish to affect a full risk transfer, amendments to the standard NEC drafting will be required – but is this appropriate?
It can be said for certain projects that full risk transfer for ground conditions is not aligned with the NEC philosophy which focusses on collaborative behaviours and good project management. One of the principles of NEC is that the party that is best able to manage a risk should take responsibility for it.
For example, in projects involving subsurface works, only a small proportion of the ground will have been investigated prior to construction. Contractors will likely not be able to undertake more comprehensive ground investigations at tender stage due to time or access constraints. Subsurface conditions can also be variable such that construction methods may need to adapt based on actual ground conditions encountered.
NEC has recognised this challenge and published a detailed practice note on ground conditions in underground projects which noted that, in terms of risk allocation, as a client has more time and resources to assess the ground and related risks, unanticipated ground conditions should be allocated to the client, and performance related risks for anticipated ground conditions should be allocated to the contractor.
The NEC guidance proposes an alternative approach to the standard risk allocation clause by reference to a geotechnical baseline report (GBR). All results from geotechnical investigations are compiled in the GBR, which is included to tenderers as part of the site information.
The key contractual role of the GBR is to set baselines for the anticipated subsurface conditions. Conditions within those baselines are deemed ‘foreseeable’ and are the contractor’s risk, with conditions outside the baselines being a compensation event and therefore the client’s risk.
NEC4 presents an opportunity for the Australian infrastructure sector to move away from adversarial contracting practices and towards a model that prioritises collaboration, efficient project management and fair risk allocation.
However, parties must avoid the temptation to amend contracts to reverse risk allocation or produce inconsistent outcomes. The contract must be allowed to work as intended.
Discipline will be important when considering each Z clause. Each amendment should serve a clear purpose, align with NEC4 terminology and, critically, preserve the collaborative framework upon which the contract's effectiveness depends.
Australia has the advantage of entering the NEC4 market with the benefit of lessons learned from more mature jurisdictions – but is it ready to put these lessons into practice?
Written by
