Cancelling Suburban Rail Loop likely to cost billions

Any future government seeking to cancel the Suburban Rail Loop would have to shell out billions of dollars to compensate builders for missed profits, overheads and the time and money invested in the project, contract documents show.

Victoria could also suspend the project with limited compensation to builders if the state proves it is headed for major blowouts.

Previously unreleased copies of the project’s two tunnelling contracts, obtained by The Age, show any attempt to cancel SRL East, an underground railway between Cheltenham and Box Hill, will become increasingly expensive the further it progresses.

Industry insiders, who are familiar with the documents but not permitted to speak publicly, estimate the cost could significantly exceed the $1.1 billion it cost the Andrews government to cancel the East West Link, with the figure rising all the time.

The wording of the two tunnelling contracts, valued at $3.6 billion and $1.7 billion each, have become a key political concern for the state opposition which has called on the Allan government to scrap the project now, but have stopped short of pledging to rip up contracts if it were to win the 2026 state election.

By then, tunnel-boring machines will be in the ground, and Opposition Leader Brad Battin says a government he leads would need to review the documents before making a final decision on what to do with the project.

What the builders can claim if the SRL is “terminated for convenience”

•  Corporate overhead and profit and any expenses that were due to be reimbursed
• The builder’s share of savings from the completed work minus any blowouts
• Cost of plant or materials reasonably ordered by the contractor for the works
• Investments reasonably made by the builder in the expectation of serving out the full contract 
• Reasonable cost of removing all labour and equipment from site

The Allan government says it has no plans to terminate the contracts.

Redacted versions of these contracts, released for the first time since they were signed last year, show there would be significant compensation payable if the state decided to cancel work.

“In considering any such amounts that may be payable, the principal representative must, in good faith, estimate the amount which would have been payable if this deed had not been terminated,” the contract says.

Under the project’s cancellation clauses, the builders would be able to request that the corporate overheads and profit margins written into the project’s price range be paid out.

They would also be able to seek compensation for the time and money invested in the project, including purchases made with the assumption they would see out the life of the contract over years of tunnelling.

The SRL contracts also rely heavily on a “pain-share, gain-share” model in which the state government and builders split the overruns and savings on the project equally.

To enforce this, their contract has a “target” cost, which is regularly compared to actual spending. The builders open their books to the state and receive monthly payments reimbursing it for money spent so far. Builders can also claim additional incentives if they meet performance targets.

If costs are blowing out past their target, the builders must provide an “overrun cure plan” that includes an itemised list of expenses, details of why they are higher than promised and a strategy to minimise further increases or find savings elsewhere.

The Age