Why Smart Brokers Are Backing Rise and Fall Clauses

Here's something I've learnt after 25 years in markets: the best deals happen when everyone wins.

Australian commercial construction is stuck in a contracting model that forces one party to lose. Fixed-price contracts push all market risk onto contractors, which ultimately costs borrowers, lenders and brokers more than necessary.

There's a better way forward.

What's Happening in Australian Construction

Between March 2020 and March 2024, residential construction prices rose 3.0% annually in the year to June 2025, with the Property Council reporting 3.4% cost increases over 2024 according to CoreLogic's Cordell index.

That's a fundamental shift in how we need to think about long-term construction pricing.

While construction cost growth has stabilised to 2.8% annually (the slowest since 2007), costs remain historically elevated. The Reserve Bank notes that residential construction continues to face pressure from high building costs and labour shortages.

Meanwhile, rise-and-fall clauses reduce contractor risk in pricing, which means more competitive bids. Contractors don't need to pad their quotes with massive contingency buffers when they know legitimate cost increases are addressed fairly.

The Opportunity for Commercial Mortgage Brokers

If you're structuring finance for commercial developments, rise-and-fall clauses give you something powerful: transparency.

Instead of trying to second-guess what risk premium a contractor has hidden in their fixed-price quote, you can model actual market scenarios. You can show your lending panel exactly how cost adjustments would work based on published indices.

This creates better conversations with lenders and more confident borrowers.

The clause itself becomes a risk management tool rather than a source of uncertainty. When everyone understands the adjustment mechanism upfront, there are no nasty surprises mid-project.

How Rise and Fall Clauses Create Better Outcomes

Think about the traditional fixed-price scenario from a contractor's perspective. They're bidding a 24-month commercial project in a volatile market. With the Property Council reporting projected cost escalation of 4–7% across major states, contractors face significant pricing uncertainty.

What do they do? They price in a hefty buffer.

If costs stay stable, the developer overpays. If costs spike beyond the buffer, the contractor faces losses or the project faces delays and disputes.

Nobody wins that game.

Rise-and-fall clauses change the equation. Contractors can bid their actual costs plus reasonable margins. Developers get more competitive pricing upfront. When market conditions shift, adjustments happen transparently through predetermined formulas tied to published ABS indices.

Everyone's working with the same data. Everyone knows the rules.

Making It Work in Practice

The key to successful rise-and-fall implementation is standardisation. You need three elements locked down before construction starts:

Clear measurement criteria: Which specific ABS Producer Price indices will you reference? Which labour cost benchmarks apply? Get specific about the data sources.

Defined adjustment triggers: At what threshold do adjustments occur? Legal frameworks across Australian jurisdictions support quarterly reviews with adjustments triggered when indices move 3-5% from baseline.

Transparent calculation methods: The formula for converting index movements to contract price adjustments needs to be crystal clear. No room for interpretation or disputes.

When these elements are standardised across your deals, the administrative burden drops significantly. It becomes routine rather than complex negotiation.

What Lenders Actually Think

Lenders would rather finance a project with transparent cost adjustment mechanisms than one with hidden contractor risk premiums. They can model different scenarios. They can set appropriate covenants. They can monitor the project more effectively.

The less sophisticated lenders worry about budget certainty. But that's where brokers add real value by educating them on how rise-and-fall clauses actually reduce risk rather than increase it.

A contractor who's financially stable because they're not absorbing unpredictable market shocks is far less likely to fail mid-project. That's the kind of certainty lenders should care about.

The Technology Angle

Rise-and-fall clause management doesn't need to be manual spreadsheet work.

Modern platforms can automate index tracking, calculate adjustments, and provide real-time visibility to all parties. The ABS publishes construction cost data quarterly. That data can feed directly into project management systems.

This removes the administrative friction that's historically limited adoption of more sophisticated contracting approaches.

At Lendhaus, we're seeing exactly this evolution in how global financiers evaluate Australian commercial property projects. They want data-driven transparency, not gut-feel risk assessment.

Moving Forward Together

The Australian commercial property market is evolving. The developers, contractors and financiers who embrace more sophisticated risk-sharing mechanisms will have competitive advantages over those clinging to outdated fixed-price models.

For commercial mortgage brokers and aggregators, this represents an opportunity to add genuine value. You can help your clients understand why rise-and-fall clauses create better outcomes for everyone involved.

You can structure deals that attract better contractors, satisfy sophisticated lenders, and give borrowers more competitive pricing.

That's the kind of win-win scenario that builds long-term relationships and sustainable businesses.

The market's already moving this direction. The question is whether you'll lead the shift or follow once others have established the new standard.

References

1. Australian Bureau of Statistics - Producer Price Indexes, Australia, June 2025 (July 31, 2025) - View Source

2. CoreLogic Australia - Construction Costs On Road Towards Normalisation (Cordell Index Q1 2024) (March 2024) - View Source

3. Property Council of Australia - Homebuilding Costs Up 3.4pc in 2024 – Will 2025 Bring Relief? (February 3, 2025) - View Source

4. Reserve Bank of Australia - Statement on Monetary Policy – August 2024 (August 2024) - View Source

5. Property Council of Australia - Labour the Biggest Challenge to Construction Costs: Slattery (March 2024) - View Source

6. Australian Bureau of Statistics - Insights into Output of Building Construction Prices (August 1, 2024) - View Source

7. Vincent Young Lawyers - Rise and Fall Clauses in Construction Contracts (2024) - View Source

8. Bradbury Legal - Rise and Fall Clauses in Construction Contracts (January 22, 2023) - View Source