For many years, public sector procurement has operated on a relatively simple premise: transfer as much risk as possible to the contractor and allow competitive tension to determine the price of that risk.
Design and Construct (D&C) and lump sum contracting models have often been the primary mechanisms used to achieve that outcome.
However, as Queensland’s infrastructure pipeline accelerates toward 2032, that approach is increasingly being tested by market realities.
In the lead up to 2032, that approach is now under sustained pressure.
Contractors are increasingly unwilling to accept broad, unquantified or poorly understood risks. Where they do accept them, those risks are being priced in, often conservatively, or managed through qualifications, exclusions and claims strategies.
The result is a market where:
- bids are higher or fewer;
- risk is not truly transferred, just deferred; and
- delivery outcomes are less certain.
In many cases, the market is responding exactly as procurement theory would predict. Where risks are poorly defined, unquantifiable or outside a contractor’s control, bidders either increase their prices, seek contractual qualifications, or elect not to bid at all. In this environment, dumping risk on the contractor is not protecting the principal. It is undermining value for money and project success.
Certain categories of risk are consistently driving tension in the current market:
- Latent conditions
Blanket transfer of latent condition risk is becoming increasingly difficult to sustain, particularly on brownfield projects and projects involving ageing infrastructure. Where site investigations are incomplete or available information is limited, contractors are increasingly pricing for worst-case scenarios or seeking extensive contractual carve-outs.Design risk under D&C
While D&C models assume contractor design responsibility, in practice this risk is often shared, particularly where the principal provides concept designs, performance specifications or stakeholder constraints. Misalignment here is a common source of disputes and cost escalation. - Escalation and market volatility
Fixed lump sum pricing in a volatile market has proven difficult to sustain. Contractors are seeking escalation mechanisms or shorter pricing validity periods to manage cost uncertainty such as labour, materials and supply chain. - Interface and integration risk
On complex projects, particularly those involving multiple workstreams or existing infrastructure, contractors are increasingly resistant to taking full integration risk without corresponding control.
The Hidden Cost
One of the more significant, and often overlooked, consequences of aggressive risk transfer is the impact it has on value for money.
Procurement frameworks often focus on transferring risk away from the principal. However, if contractors are unable to properly assess or control that risk, the outcome is frequently higher pricing rather than better protection.
Where risk is:
- uncertain;
- outside the contractor’s control; or
- not capable of being properly assessed at tender stage,
contractors will price it conservatively or include contingency allowances.
This leads to a situation where principals may be:
- paying for risks that never eventuate;
- paying multiple contractors to price the same risk; or
- receiving inflated bids that reduce competition and affordability.
The irony is that many principals ultimately pay for these risks regardless of where the contract says they sit.
They either pay for them upfront through higher tender prices or pay for them later through variations, claims, disputes and delivery delays.
Market Response: Moving Towards Collaboration
In response, there is a clear shift towards more collaborative delivery models, including:
- Early Contractor Involvement (ECI), engaging contractors early to inform design, methodology and risk allocation;
- Two-stage procurement models, allowing risks to be better understood and priced before commitment to a lump sum; and
- Alliancing or hybrid collaborative models, sharing risk in a more structured and transparent way.
These models recognise a key reality: risk allocation should be driven by capability and control, not simply contractual leverage.
Better outcomes are generally achieved when risks are allocated to the party best able to understand, manage, mitigate or price them.
Resetting the Approach
A more effective risk allocation approach does not mean shifting risk back to the principal. It means being deliberate, evidence-based and market-aware.
In practice, this involves:
- Allocating risk to capability, not position
Identify who can realistically control, mitigate or price the risk, and allocate accordingly. - Improving upfront information
Invest in site investigations, design development and market engagement to reduce unknowns. - Using targeted risk sharing mechanisms
For example:- latent condition regimes with defined baselines;
- escalation clauses tied to objective indices;
- shared contingency pools for high-uncertainty risks.
- Aligning contract model to project profile
Not all projects suit D&C or lump sum contracting. Procurement strategy and contract model selection should reflect project complexity, design maturity, market conditions, risk profile and delivery objectives. - Maintaining clear governance and probity frameworks
Particularly where more flexible or collaborative approaches are adopted.
For local governments, this is particularly important. Many councils are delivering increasingly complex infrastructure projects while operating within tight budget constraints and heightened public scrutiny.
A procurement strategy that discourages market participation or produces inflated pricing can quickly undermine both project affordability and delivery objectives.
Getting the Balance Right
The objective is not to remove risk from contractors entirely, nor to compromise probity or accountability.
It is to strike a balance where:
- risks are understood and transparently allocated;
- pricing reflects actual exposure rather than uncertainty; and
- contractual positions support, rather than hinder, delivery.
From our experience advising councils, government entities and project owners, smarter risk allocation leads to better pricing, fewer disputes, and stronger delivery outcomes.
The current market is sending a clear signal to project owners and procurement teams.
Procurement strategies built around blunt risk transfer are becoming increasingly difficult to sustain in a constrained and competitive market.
The challenge is no longer how much risk can be transferred. The challenge is how risk can be allocated in a way that supports value for money, encourages competition and improves delivery outcomes.
How Muscat Tanzer Can Help
Muscat Tanzer advises councils, government entities and infrastructure delivery agencies on procurement strategy, probity, contract structuring and risk allocation across major infrastructure, development and public sector projects.
We assist clients to:
- assess whether procurement and contract models remain fit for purpose in current market conditions;
- develop balanced and commercially realistic risk allocation frameworks;
- structure ECI, collaborative and two-stage procurement approaches;
- maintain strong governance and probity throughout procurement processes; and
- improve market participation, pricing outcomes and delivery certainty.
As infrastructure delivery pressures continue to increase, procurement strategy and risk allocation decisions are becoming critical determinants of project success. We work with clients to ensure those decisions are informed by both market realities and procurement best practice.
Paul Muscat
Director
Muscat Tanzer
