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.

Suburban Rail Loop construction under way at Clayton.Credit: Justin McManus

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.

An artist’s impression of a Suburban Rail Loop train.

These savings, or overruns, would also be factored into any final payout figure if the project were cancelled.

The contract allows the government to suspend the project at any time, with compensation available to the builders in most instances.

However, the state could avoid paying this if it determines the project is headed for a blowout that would exceed its target cost by a significant amount. The exact figure to trigger this has been redacted from the contracts seen by The Age.

Infrastructure Australia last month warned it had low confidence in the $34.5 billion price tag for SRL East and recommended no further federal funding, beyond the $2.2 billion already committed, without updated costings and evidence the project stacks up on its own.

That report has raised concerns Victoria will not be able fund a third of the railway with Commonwealth money as expected, with Opposition Leader Peter Dutton vowing to withdraw the existing $2.2 billion in federal cash if elected.

Two industry sources, speaking anonymously to avoid repercussions, said by the end of the year work would be so far progressed on the rail loop that any cancellation compensation would likely be between $1 billion and $2 billion. This would likely be higher by November 2026 when tunnel boring machines would be digging under Melbourne’s eastern suburbs, they said.

Victoria paid $1.1 billion to cancel its contract for the East West Link after the Andrews government came to power in 2014, with only some early works under way at the time.

Infrastructure Partnerships Australia chief executive Adrian Dwyer, who in 2022 said cancelling the rail loop would cost twice as much as cancelling East West Link, told The Age that Victoria had worked hard to “shed the baggage” of ripping up that contract, and speculation on the rail loop sent a concerning signal.

“The very structure of our stable, dependable system of doing business is underpinned by the mutually acknowledged fact that contracts matter,” he said.

“Certainty is crucial in infrastructure. With major projects spanning a decade, and programs often multiple decades, we can’t afford to signal to global markets that every election will see the map re-drawn.”

Swinburne professor of future urban mobility Hussein Dia said that by the time of the next state election in November 2026, it would be too late to go back on the project, and it would be very expensive to stop.

He said billions had already been spent on early works before considering the “quite hefty” cost of compensation.

“In many of these [cancellation] cases, the private sector gets handsome compensation ... These are very big projects, and the companies are very experienced.”

David Donnelly, a partner with the law firm Allens, said that previously, major projects had attracted more expensive fixed prices because contingencies were added for uncertain or unquantified risks.

He said pain-share, gain-share contracts removed these contingencies and incentivised both sides to deal with those types of risks efficiently when they arose.

“It is a symmetrical deal, in the sense that there is some exposure to necessary additional costs, but also some benefit that flows from the state, from available savings,” Donnelly said.

An Allan government spokesperson said they were getting on with building the rail loop with works under way across Melbourne.

Jacinta Allan, then-minister for the Suburban Rail Loop, inspects works in Burwood in 2023.Credit: Jason South

“There are no plans to terminate any contracts – questions of costs are best directed to the Liberals, who need to come clean on whether they would want to rip up the contracts, sack 4000 workers, leave our suburbs disconnected and block 70,000 homes,” the spokesperson said.

Opposition transport infrastructure spokesman Evan Mulholland said the premier should cancel the contracts before “enormous costs are incurred that we cannot get out of as a state”.

“By signing these contracts, Jacinta Allan has engaged in the most financially reckless decision in the history of Victoria, second only to her mismanagement of the Commonwealth Games,” he said.

“To sign something like this, without the required federal contribution, with scathing assessments from independent authorities, is a betrayal of all Victorians.”

The Allan government is negotiating the next contract for the SRL, which will cover the costs of getting the underground line operational, including sourcing new trains, communication systems, power supply and maintenance facilities.

The contract is scheduled to be awarded this year, but the announcement of a preferred bidder was anticipated by the industry as soon as last month.

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