The Queensland Court of Appeal’s decision in Santos Limited v Fluor Australia Pty Ltd & Amor [2021] QCA 204 is a stark warning for parties using “collaborative” and incentivised target-cost contracting. Despite the “collaborative” cost‑plus/incentivised target-cost contract, Santos claimed in excess of $1 billion from Fluor and the Court ultimately held that $475 million of Fluor’s costs were not recoverable.

This case demonstrates that even under “collaborative” contract models, mismatched expectations and unclear drafting can unravel a project and lead to years of litigation and eye‑watering financial exposure.

Background

Santos engaged Fluor under a “collaborative” cost‑plus/incentivised target-cost contract to engineer, procure, and construct coal seam gas hubs.

Under clause 4.2, Santos was required to pay Fluor the Contract Price comprising:

• a fixed fee of $210 million;
• early‑completion bonuses; and
• reimbursement of “Actual Costs, calculated in accordance with Schedule 3″.

Fluor failed to achieve Mechanical Completion by the Target Date but continued work and claimed costs incurred, which were paid by Santos as Actual Costs. After completion, Santos audited Fluor’s cost records and disputed approximately $475 million of time‑related costs that Santos said would not have arisen had Fluor achieved Mechanical Completion by the contractual dates (MC Delay Costs). Santos claimed repayment of the MC Delay Costs.

The primary judge ruled in favour of Fluor and allowed it to recover the MC Delay Costs as Actual Costs on the basis of Schedule 3.

The Court of Appeal overturned the primary judge’s decision and held that despite the drafting of Schedule 3, the MC Delay Costs were Excluded Costs that Fluor was not entitled to claim.

What went wrong?

Two key issues drove the dispute:

1. Competing definitions of actual costs

The Contract contained two inconsistent definitions of Actual Costs:

Clause 1.1

“Actual Costs” was defined as “actual costs properly incurred… excluding profit, overheads and Excluded Costs“.

Schedule 3

“Actual Costs” was defined as “costs properly and reasonably incurred directly in performance of the Work without mark‑up, profit or overheads”.

Critically, the Schedule 3 definition of Actual Costs did not refer to Excluded Costs.

The primary judge held that costs meeting the Schedule 3 definition were included in the Contract Price, even if they were Excluded Costs elsewhere under the Contract.

Perhaps unsurprisingly, the Court of Appeal rejected this, finding that:

• the Contract must be read as a whole;
• costs excluded by clause 1.1 could not be revived by Schedule 3; and
• Schedule 3 operates within the broader clause 4.2 payment framework of the Contract.

Noting that Actual Costs carved out Excluded Costs such as amounts:

… (vi) which [Fluor] is precluded from claiming under the Contract or which the Contract expressly provides are to be incurred at the cost of [Fluor]; and

(vii) expressly excluded under any other provision of the Contract”,

the Court then turned to consider whether the Contract required Fluor to bear the costs of delay and disruption.

2. Excluded costs and the combined effect of the delay and delay cost clauses

The delay and disruption clauses of the Contract provided:

23.5 Sole remedy

Subject to clause 23.6, [Fluor] acknowledges that any entitlement of [Fluor] to an extension of time in respect of any Delay Event and any relief allowed under clause 23.2 will be [Fluor’s] sole remedy in respect of that Delay Event, and, except as provided in clauses 17 and 23:

(a)[Fluor] will not be entitled to any adjustment to the Target Budget Estimate or Fee;

(b)[Santos] is not liable for, or in connection with, any Claim by [Fluor]; and

(c)[Fluor] is not entitled to make and is absolutely barred from making any Claim,

arising out of, or in connection with, the Delay Event or any delay and disruption to the progress of the Work.

23.6 Delay Costs

(a)Where [Fluor] has been granted an extension of time under clause 23.3:

(1)   [Santos] will pay to [Fluor] its Actual Costs incurred by reason of the relevant Delay Event (Delay Costs); and

…

(b)The Parties acknowledge that nothing in this clause 23.6 or item 1 of the definition of “Excluded Cost” set out in clause 1.1 precludes [Fluor] from claiming Actual Costs incurred after the Date for Mechanical Completion (including where Mechanical Completion is achieved after the Date for Mechanical Completion).”

Reading clauses 23.5 and 23.6 together, the Court distinguished the Actual Costs of performing the works referred to in clause 23.6, from the delay costs referred to in clause 23.5. The Court of Appeal noted that delay costs were costs that arose out of or were exacerbated by a delay to the works. The Court of Appeal held that Fluor’s entitlement to delay costs was limited to costs where both:

1. a Delay Event had occurred, and
2. Fluor had been granted an extension of time.

The MC Delay Costs arose out of a delay which did not qualify for or result in an extension of time. Consequently, the Court held that the Contract required Fluor to bear the risk of these delay costs and that they were Excluded Costs. As a result, Fluor was not entitled to the MC Delay Costs claimed.

Commentary

Even well‑intentioned “collaborative” contracts can unravel and become adversarial under commercial pressure and schedule slippage.

Typically, under a lump sum construction contract delay costs are only recoverable for a limited subset of delay when an extension of time is granted (eg delay caused by the Principal but not neutral or contractor caused delays). In that sense, Santos Limited v Fluor Australia Pty Ltd & Amor [2021] is not unique. But are there circumstances in the “collaborative” cost‑plus/incentivised target-cost contract that should have caused this principle to be tested? For example, should Fluor have allowed for such risks in contingencies or allowances for time-related overheads? Alternatively, if Santos pressed for removal of allowances for contingencies and risk, should the Contract have expressly preserved recovery of these time-related delay costs despite no entitlement to an extension of time arising or should a higher contractor’s margin have applied to accommodate this risk? The parties (and their lawyers) should arguably have given more focus to the special circumstances of the “collaborative” cost‑plus/incentivised target-cost contract and the likelihood of neutral delay or contractor caused delay. Specifically, interactions between the incentive target-cost schedule and the delay and disruption clause should have been worked through by the parties to ensure a proper meeting of the minds between Santos and Fluor on this key point. Investing in this approach from the outset may have flushed out the issue avoiding years of litigation, many millions in litigation costs, and supporting “project success”.

Key takeaways for Principals and Contractors

• “Collaborative contracts” can still lead to high stakes disputes if drafting is inconsistent or misaligned to the intention of the parties.
• Cost-plus/target-cost models require special consideration, especially around delays.
• Parties should expressly consider how time-related costs are treated when no EOT arises.
• Early-stage legal review of payment, risk and delay frameworks can ensure proper contractual alignment and prevent disputes.

How we can help

We assist principals and contractors to:

• streamline and align drafting across complex contract models including “collaborative” cost‑plus/incentivised target-cost contracts and others;
• review Actual Costs and Excluded Cost payment mechanisms;
• identify and rectify misaligned terms before they become disputes; and
• support project teams with practical contract‑administration guidance.

Please reach out if you would like assistance with a “collaborative” (or other) contract or a targeted briefing.

This article was written by Angela Armstrong, Partner, Evanna Kamal, Senior Associate and Mitchell Smith, Solicitor