Contract clauses

Your contracts should always be commercial and make it easy for suppliers to understand their obligations and your needs.
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What you need to know
  1. You should always take a commercial approach to drafting key contract terms.
  2. This can help suppliers understand their obligations and your needs.
  3. Keep contracts short and simple when possible so that everyone knows their terms.
  4. Don’t deter suppliers with onerous conditions, including insurances and indemnities.
  5. Take care when thinking about proportionate liability and always respect the intellectual property of suppliers.
  6. Make sure you always compensate suppliers fairly when you draft any termination clause.
  7. You should also make sure you try to resolve disputes informally and act in good faith.

Commercial approach to key contract terms

You should use a commercially balanced approach to key contract terms whenever you can. This makes it easy for suppliers to understand and comply with the contract, so they can get on with delivering goods and services to you without onerous conditions.

You should always look to keep your contracts short and simple, with standard terms and conditions. Use plain English so that everyone understands their obligations.

Contract periods

Generally you shouldn’t make the contract last longer than 5 years, including any extensions. Work out a suitable length based on all the project’s circumstances, the nature of the goods and services and market dynamics, and have your agency head or delegate approve it.

Reporting requirements

You must include reporting measures in every contract. These should determine whether suppliers are meeting their performance obligations as well as reporting on Aboriginal employment and businesses, SMEs and regional businesses.

Goods and services contracts

For goods and services contracts over $10 million, you must make sure suppliers have a plan for Aboriginal participation.

For contracts over $3 million, you must incorporate supplier commitments to SMEs and regional businesses, as well as other sustainability obligations.

Construction contracts

For construction contracts over $1 million, you must allocate 1.5% of the project value to Aboriginal participation. You must include the commitments and reporting clauses outlined in the 'Aboriginal Participation in Construction Policy' (APIC).

For contracts over $10 million, you must also include a clause on apprenticeship and training targets (See PBD-2017-05 Construction Training and Skills Development).

Insurance

You must determine an appropriate level of insurance based on:

  • the type of procurement
  • contract value
  • risk profile
  • category and market profile, and
  • any other relevant factors.

Don’t make suppliers insurance obligations so onerous that it acts as a deterrent. The default levels of insurance are $10 million for public liability and, if required, $10 million for product liability.

Professional indemnity insurance

Only include professional indemnity insurance when a supplier provides professional services.

Indemnities

You should always cap any supplier indemnities at a reasonable amount. We do not consider it reasonable to require a supplier to provide an uncapped liability in favour of the State.

You must work out this cap based on the goods or services being supplied. The default indemnity is a multiple of the annual contract value, such as 5 times.

You shouldn’t provide indemnities to suppliers as a general rule. If you ever indemnify a supplier, it shouldn’t be for more than the contract value.

Guarantees

You should avoid financial securities such as bank guarantees or performance guarantees, unless they’re absolutely necessary.

Proportionate liability

Generally, the NSW Civil Liability Act 2002 covers you from economic loss or property damage caused by someone else’s act or omission. Part 4 of the Act applies to situations where you suffer economic loss or property damage caused by two or more other parties. Under these provisions, liability for the loss is divided between those parties according to their respective responsibility for the loss.

The Act allows you to set your own terms for rights, obligations and liabilities under the contract. This allows you to ‘contract out’ of proportionate liability and agree that one party may recover all of its loss from the other party to the contract. The exception is for personal injury matters.

If you choose to contract out of proportionate liability provisions, you need to be sure it is justified and fair to the supplier or other parties. You should also consider if it will increase the cost of the contract due to suppliers passing higher insurance premiums and other costs back to government.

Don’t contract out routinely

That said, you shouldn’t routinely contract out of Part 4 of the Civil Liability Act. Instead, consider whether it’s warranted based on:

  • the procurement’s size, cost, complexity and risk level
  • the extent to which you can manage procurement risks through other means, such as better assessing suppliers’ expertise, skills and finances
  • the extent to which contracting out will potentially reduce competition and value for money
  • any potential flow-on costs due to contracting out
  • any other relevant circumstances.

Be fair and flexible

You should always be fair and flexible and take any supplier concerns about liability into account.

Don’t expose suppliers to liability that’s out of proportion to their actual contribution to the loss as this could force up insurance premiums and reduce competition.

Construction contracts

You can only contract out of Part 4 of the Civil Liability Act in a construction contract when an assessment clearly demonstrates that it’s justified. If you do contract out, you must submit a report to Public Works Advisory, setting out the reasons why it’s justified.

Intellectual property

Don’t use the contract to alter ownership of intellectual property (IP) rights. The default position is that the supplier owns IP rights in any new material and you’re given a perpetual, transferable, royalty-free licence to use them.

You can change this default position when it’s warranted.

Price refresh mechanisms

You should carefully consider whether you allow for price adjustments to the contract and, if so, which mechanism you use. Always make sure:

  • The party best placed to manage the price adjustment carries the risk. For example, a supplier may be exposed to fluctuations such as commodity spot prices or increases in regulated labour costs. You may be best placed to manage price increases by adjusting demand. If the supplier controls much of their own supply chain, they may be better able to bear the risk.
  • You only apply price adjustments to that part of the price influenced by changes in circumstances. For example, if the price is governed by a labour cost index, only adjust labour’s portion of the total cost. For FX fluctuations, only adjust the price of those parts of the product or service produced overseas.
  • You capture price decreases. As you become more familiar with the purchaser’s business, systems or processes, you may notice areas where economies of scale take place.

Common indicators of falling input prices include:

  • indices such as a Primary Producers Index or Labour Price Index
  • FX rates (based on average movement over a period)
  • commodity prices
  • pre-agreed changes
  • benchmarking.

You should also consider applying caps on price rises or only triggering an adjustment after a minimum increase.

Termination

If you include a clause that lets you terminate the contract early for convenience, always make sure the supplier will be fairly compensated. You should always agree to the terms of this compensation in advance.

Extending the contract

Generally, you must only use an extension option where you can demonstrate the contract will continue to deliver value for money.

You must never include an extension option to avoid PDB-2019-05 Enforceable Procurement Provisions. You must also never cancel a procurement or modify or terminate a contract for the same reason.

Dispute resolution

When a dispute arises you must always act in good faith and attempt to resolve it informally. If you can’t, you should use mediation.

Avoid expert determination, especially where the value of goods and services is low or the risk is minimal.

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