Managing the Contractual Risks when responding to Government Tenders

Government contracts are lucrative and governments hold a strong bargaining position in many contractual negotiations. This guide identifies the 12 most significant contractual risks for suppliers responding to Australian government tenders — from force majeure and indemnities to proportionate liability, liability caps, and termination rights — so that an informed decision can be taken as to whether or not those risks should be accepted.

By Michael Pattison, Lawyer & Founder, ContractProbe · Published 2022 · Updated June 2025

The desire to win a particular piece of government work can occasionally lead to critical legal risks being accepted without sufficient scrutiny. Government contracts are often presented as standard and non-negotiable — but all 12 risks below are negotiable to some degree, and suppliers who understand them are better placed both to price the risk correctly and to push back where it matters.

Which one-sided clauses should a supplier push to make mutual?

Government contracts are highly sought after and often awarded by competitive tender. It is accordingly important that bidders pick their battles in a way that balances the competitiveness of their bid against the risks being accepted under the contractual terms.

Where a provision is one-sided or unreasonable, requesting that it be redrafted so as to be mutually applicable can often be a good way of raising the issue and highlighting its unreasonable nature. It might prompt the Government either to amend the unreasonable aspects of the clause or give the bidder an equivalent right.

Practical approaches:

• Request that one-sided provisions be redrafted as mutually applicable obligations.
• Submit both a compliant and a non-compliant bid with prices adjusted accordingly — this draws the Government's attention to the benefit of accepting more reasonable terms, and ensures the bidder has both a competitive and balanced offer in play.
• Focus negotiating capital on the clauses with the highest financial exposure rather than trying to negotiate everything.

How should a supplier approach force majeure clauses in a government contract?

Force majeure clauses are often tucked away at the back of a contract and given scant regard during negotiation. Recent history — in particular the Covid-19 pandemic — has shown that these clauses are far too important to be treated in this way. They provide a list of potentially "frustrating events" which either bring the contract automatically to an end, absolve one party of liability, or give rise to a right of termination.

From a supplier's point of view, force majeure clauses should be written as a non-exhaustive list and not as a restrictive definition. The phrasing "force majeure includes" is preferable to "force majeure is" or "force majeure means", both of which might be read as exhaustive. This keeps the list of potentially frustrating events open and allows for the inherent difficulty of forecasting all causes that might impact on performance. In light of recent history, any list of force majeure events should always include pandemics explicitly.

It is often difficult to know in advance how a force majeure event might affect performance — will it only affect certain parts of the contract or will it cut across the contract as a whole? And will it make performance impossible, or just delay the time for completion? Given these uncertainties, suppliers should check that the force majeure clause applies to the contract generally and not just to specific provisions.

Key protections to negotiate:

• "Force majeure includes" wording (non-exhaustive) rather than "force majeure means" (exhaustive).
• Express inclusion of pandemics in the list of force majeure events.
• Application of force majeure to the contract generally, not just to specific provisions.
• A right to terminate if the force majeure event persists beyond a defined period — this allows an escape where a long-term, destabilising event affects performance, with likely consequences on the cost of supply.

What are the risks of indemnities and warranties, and when should they be rejected?

These clauses — otherwise known as the lawyers' picnic ground — can result in a supplier being liable for losses for which they would not otherwise be liable. They need to be considered carefully to ensure that the risks allocated to the supplier are reasonable in the context of a particular supply.

For example, a warranty that the supplied materials will not contain any defects might be acceptable in a contract for supply of physical goods. It should not be accepted in a contract for the supply of software, as it is generally impossible to ensure that any software is totally free of defects. At the very least such a warranty should be qualified by the word "material", so it does not apply to trivial bugs in the software.

Indemnities should be scrutinised particularly carefully as they have the potential to make a party liable for acts over which they have no control and should not be responsible. The normal common law rules protecting a supplier against damage that is too remote, and requiring a customer to mitigate their losses, will not always apply to indemnities. In addition, indemnities are also often an exception to the agreed cap on liability in the contract or to the contract's exclusion of consequential loss clause — so they represent a potential source of unlimited liability for indirect losses.

Questions to ask before accepting an indemnity:

• Is the subject matter of the indemnity properly something for which an indemnity is needed, or should the customer simply rely on their rights for breach of contract? If damages for breach of contract would protect the Government adequately, the indemnity should be rejected.
• Does the indemnity apply to acts outside the supplier's control?
• Is the indemnity carved out from the agreed liability cap or from the consequential loss exclusion?
• For software contracts — is any defect warranty qualified by the word "material" to exclude trivial bugs?

How should a supplier protect itself from consequential loss claims?

The losses that a party suffers from breach of contract can be broadly categorised as being either "direct" or "indirect". A direct loss is typically the value which was lost as a result of incomplete performance of an obligation. For example, a car manufacturer who contracts to have 10 tonnes of steel delivered, but receives only 7, may sue for the cost of the 3 tonnes which were not delivered.

"Indirect" (also known as "consequential") losses are losses beyond a party's direct loss. This may include loss of profit on subsequent transactions. If insufficient steel was delivered, the car manufacturer's inability to meet orders placed on it may cause further losses in terms of lost profits, cancelled orders, lost customers, and wasted expenditure. The amount of indirect losses is much harder to predict in advance and can include factors over which the supplier has no control.

It is normally in the bidder's best interests to exclude indirect losses totally from the contract. The wording of such exclusions is very important.

Drafting tips for exclusion clauses:

• Think carefully about what types of losses the customer might suffer if the contract is not performed successfully, then exclude those types expressly.
• If the customer might waste money or lose profits, exclude "wasted expenditure" and "lost profits" by name — do not rely on the generic phrase "indirect losses" to capture these heads of damage.
• Check that the exclusion is mutual and not drafted only in favour of the Government.

What are the common traps in liability capping clauses in Australian government contracts?

The contract should cap the maximum amount that can be recovered for those types of losses that are not excluded totally. That ensures the supplier is not potentially liable for far more than the contract is worth. There are four common traps worth looking out for in these capping clauses.

Four traps to identify and address:

• Professional Standards Scheme clauses. Many government contracts contain clauses affording limitations on liability for contractors who are members of professional bodies registered under the scheme. The clause will not apply if the contractor is not part of such a body. Engineers, for example, are not currently registered under the scheme and would not be protected by a clause of this kind. It is essential to check whether the provision will apply before relying on it.
• Clause-specific caps. Some limitation of liability provisions only apply for liability arising under certain clauses of the contract. Bidders should request a global maximum for liability under all clauses of the contract.
• Cap amount versus contract value. Check that the amount of the cap is fair given the amount you expect to earn. In supply agreements, bidders might request that liability not exceed the total amount they are to be paid under the contract.
• Exceptions to the cap. There may be exceptions for liabilities under indemnities, or for losses arising out of death, injury, disease or illness, or for breach of confidence. Contractors should consider whether these exceptions are reasonable and check that each exception only applies to loss caused by the contractor's own wrongdoing.

Should a supplier accept clauses that exclude proportionate liability legislation?

Each Australian State and Territory has passed laws that limit a party's liability to the proportion of loss that they cause. In NSW, for example, the relevant legislation is Part 4 of the Civil Liability Act 2002 (NSW). Some government contracts will exclude the application of these laws, using language such as: "The parties agree that the provisions of the Contract exclude the provisions of a Proportionate Liability Law."

It is generally in the bidder's interest, even in a tender situation, to maintain the application of proportionate liability legislation. This is because the legislation will generally protect the bidder from being liable beyond their proportion of fault. If the legislation is excluded, the bidder may be liable for the full extent of any loss, even if they only contributed to a small part of it. Contracting out of proportionate liability legislation may also reduce the bidder's ability to claim under its insurance should something go wrong in the supply, as they have assumed liability beyond that which would apply at law.

A bidder would have a strong argument to insist that clauses excluding proportionate liability legislation be removed. Not only are they unfair, but they normally apply mutually.

Key points on proportionate liability in Australia:

• Each State and Territory has its own proportionate liability legislation — check which applies to your contract.
• Government contracts frequently attempt to exclude this legislation entirely.
• If excluded, a supplier may be liable for the full extent of any loss even if it caused only a fraction of it.
• Contracting out of proportionate liability may also limit the supplier's ability to claim under its own insurance.
• Note that in some circumstances proportionate liability can also protect the customer — if several parties contribute to a loss but only the Government has funds to pay, the supplier can only recover the Government's proportionate share. In those specific circumstances, excluding the legislation might suit the supplier. However, in the vast majority of cases it is the supplier who has the most to gain from allowing proportionate liability to apply.

What should a supplier check about subcontractor flow-down obligations?

Government contracts may request that any subcontractor also submit to some or all of the terms of the main contract. If a bidder intends to use subcontractors, they should check these provisions with any key subcontractors before accepting such an obligation and consider how those additional obligations might affect the subcontractor's price.

What to check before accepting subcontractor provisions:

• Whether subcontractors are required to submit to all or only some of the main contract terms.
• How flow-down obligations affect subcontractor pricing — costs will typically flow through to the bidder's own cost structure.
• Whether the main contract requires government approval before engaging or changing subcontractors, and whether that creates delivery risk.

What insurance obligations in government contracts can affect bid pricing?

Government contracts often insist that certain insurance requirements are met. If such an obligation would require the bidder to take out additional insurances, or to change the terms of its existing insurances, the associated costs should be taken into account when preparing the bid.

The insurance obligations might also continue for several years past the termination of the contract. The cost of maintaining the insurance for this additional period of time should also be taken into account when pricing the bid.

Insurance obligations to price carefully:

• Additional insurances required beyond the bidder's existing policies.
• Extended post-termination insurance tails — price the cost of maintaining cover beyond the active contract period.
• Obligations to "note" the Government's interest on an existing insurance policy — these need to be checked with the insurer before being accepted, as they may result in an increased premium.

How does a precedence of documents clause affect a supplier's Statement of Work?

Government contracts will often list a "precedence of documents" — essentially a hierarchy for resolving any ambiguity or inconsistency between the various parts of the contract, wherein the main instrument usually takes top priority.

Where the Statement of Work appears above the Conditions of Contract in the hierarchy, a bidder can include important protections in their Statement of Work. This can be a convenient way to deal with technical or commercial risks arising out of the supply. If there is subsequently a dispute, this will raise a clear inconsistency and the Statement of Work will prevail.

Some precedence clauses, though, do not allow this approach — they give the Conditions of Contract priority over the Statement of Work. Where this is the case, it will be important to ensure that the Statement of Work is checked carefully for any potential inconsistencies, and that those inconsistencies are expressly resolved in the Details Schedule.

What to check in a precedence clause:

• Does the Statement of Work rank above or below the Conditions of Contract?
• If the COC prevails, have you identified and resolved all inconsistencies with the SOW in the Details Schedule?
• Can supplier-friendly protections be embedded in the SOW and relied on if a dispute arises?

What makes a government contract's rejection clause risky, and how should it be assessed?

If the contract contains a right for the customer to reject the supplied goods or services, the test for rejection should be objective and the conditions for rejection specified clearly. If the customer has a subjective right to reject, or the conditions are expressed vaguely, the Government will have a substantial discretion to avoid paying for those goods or services, even if the supplier considers it has done everything it needs to do.

What to look for in a rejection clause:

• Is the rejection standard objective (measured against a defined specification) or subjective (e.g., "to the Government's satisfaction" or "in the Government's opinion")?
• Are the conditions for rejection clearly and specifically defined?
• Is there a right of rectification before rejection becomes final?

When should a supplier negotiate a price variation clause in a long-term government contract?

Government contracts can be long-term arrangements and often have provisions permitting their extension. In such contracts a supplier should consider requesting a clause which allows for the price of the contract to be varied during the life of the agreement. The variation can occur automatically, as with a CPI indexation clause, or in accordance with some agreed process, such as a benchmarking provision.

Without a price variation mechanism, a supplier is exposed to cost increases over the life of the contract with no ability to adjust the contract price accordingly. This risk increases significantly in longer-term or multi-year government agreements where inflation, labour costs, or supply-chain conditions may change materially.

Price variation mechanisms to consider:

• CPI indexation clause for automatic annual price adjustment.
• Benchmarking provision for periodic market comparison.
• Extension pricing — ensure that any right to extend the contract is matched by a right to renegotiate price at that point.

How should a supplier manage termination-for-convenience clauses in Australian government contracts?

A Government will often seek a right to terminate a contract for convenience — that is, for any reason or no reason at all. Governments will typically seek to justify such clauses on the basis that they need the freedom to accommodate changes in Government policy. Despite their inherent unfairness, a supplier is likely to have to accept such a clause in order for its bid to remain competitive.

Suppliers should nonetheless protect themselves against the consequences of terminations of this kind. One method of doing that is to factor any potential terminations of the contract into the business model and adjust the price of the contract accordingly. Another method is to negotiate an appropriate break fee to be paid in the event of such a termination.

The Government will also typically have a right to terminate for certain breaches of the agreement. The contract should allow a period in which breaches or defects can be rectified by the defaulting party, with the period allowed for rectification being of reasonable length. Some contracts have a period as short as 24 hours — bidders should think carefully about whether such a short period of time will be enough in all circumstances.

Supplier protections for termination-for-convenience:

• Price the risk of early termination into the bid from the outset.
• Negotiate a break fee payable on any termination-for-convenience event.
• Ensure an adequate rectification period — assess whether the period in the draft contract is realistic for the types of breach most likely to arise.
• Confirm an equal right to terminate for the Government's own material breach.

This guide is general information only and does not constitute legal advice. Suppliers should obtain independent advice for their specific circumstances before accepting or executing any government contract.