Why commercial teams must treat carbon as a contract issue

Imagine entering a contract negotiation after pricing a project at £500m and agreeing once in contract to deliver it for £320m with no mechanism for recovery.

No commercial professional would ever agree to such a position because the contract price is established at tender, agreed in the contract and managed through defined mechanisms for change.

This is the basis for project resilience and long-term business viability, yet this is the opposite of how carbon is being managed across major infrastructure projects today.

The issue is not whether carbon should be managed, but whether it is being managed in a commercially coherent and realistically deliverable way.

Across major infrastructure projects, the prevailing approach to carbon is to include a reduction target within contracts.

A carbon baseline is established for the project, and contractors commit to delivering the project at a defined percentage below that baseline.

In some cases, carbon reduction commitments also form part of tender evaluation scoring, creating a further incentive for bidders to increase the ambition of their carbon offer in order to strengthen the competitiveness of their submission.

While this appears progressive, these carbon commitments are usually established before the means of delivering them have been properly understood, planned or priced, resulting in commercial, delivery and organisational implications.

Commercially, this introduces a fundamental flaw where contractors are effectively agreeing to deliver more than they are being paid for, leading to margin erosion and financial exposure.

This is because carbon reduction requires changes to design, procurement strategy, material specification, construction methodology and construction programme to be successful. 

Each of these carries cost and risk implications that must be identified and commercially managed throughout delivery.

When carbon commitments are not properly structured at tender stage, the obligation does not disappear, it simply becomes an unfunded requirement sitting outside the original commercial model, resulting in additional costs and eroding margins.

Similarly, contractual penalties or the loss of incentives may apply where contractual carbon requirements have not been adequately planned for and are not achieved, increasing the financial exposure of the project.

The precise consequence will depend on the contractual mechanism adopted; however, the commercial reality remains the same.

Obligations that are not properly planned for create financial exposure once delivery begins and may result in additional commercial management effort as parties seek to establish responsibility for outcomes.

This lack of consideration also undermines the deliverability of the contractual carbon commitment because it is disconnected from reality.

Reduction targets are often established without a properly priced or realistically deliverable implementation plan, which means that commitments are difficult to deliver in practice.

This is often because the technical team has not been sufficiently involved in the formation of the carbon reduction plan, which results in two separate plans existing: the project delivery plan and the carbon reduction plan.

These plans are typically not structured to adapt as the project evolves and scope changes.

Projects rarely remain static, and when carbon obligations that are not linked to scope change through any defined mechanism, they become increasingly difficult to manage as they are simply not designed to evolve alongside project change.

In addition, many of the most significant opportunities for carbon reduction are realised during the design phase, where fundamental decisions regarding scope and materials are made.

As projects move into procurement and delivery, the opportunity for transformational change reduces significantly and what remains is increasingly optimisation through areas such as procurement, logistics, temporary works and construction methodology.

This raises an important question regarding the extent to which large carbon reduction commitments established at tender stage can realistically be achieved if many of the most influential decisions have already been made.

Organisationally, the implications are equally significant, as the sustainability team is often held accountable for carbon outcomes, while the decisions that determine those outcomes are made by commercial and technical teams.

This creates accountability without authority, where responsibility is separated from decision-making. The result is often tension between sustainability and delivery functions while carbon continues to sit outside the core commercial framework of the project.

Reputationally, failure to achieve contractual or publicly stated carbon commitments can damage client trust and organisational standing.

As carbon requirements become increasingly visible within procurement and contractual frameworks, organisations are likely to face greater scrutiny regarding both the commitments they make and their ability to deliver against them.

These are not sustainability issues, they are failures of commercial structuring.

That means they should not be established before the means of delivering them have been properly understood, planned and costed.

The period before contract execution presents the greatest opportunity to achieve this.

Carbon commitments should be developed through collaboration between commercial, technical, procurement, planning and sustainability teams to ensure that they are appropriately integrated into a project's delivery strategy.

This ensures that the teams responsible for delivery understand both the obligation and what is required to meet it.

The contract itself must then support delivery of that commitment. Carbon obligations need to be clearly linked to project scope and accompanied by mechanisms that allow the carbon implications of change to be managed as the project evolves.

Standard forms of contract are already beginning to move in this direction, and the approach they are taking is instructive.

JCT 2024 introduces sustainability-related provisions through article 3, embedding sustainability considerations within the core contract and signalling the industry's direction of travel.

However, the provisions remain largely aspirational in nature and do not establish enforceable carbon management requirements.

Under NEC4 option X29 Climate Change, carbon is embedded through climate change requirements within the scope alongside performance targets captured through a performance table.

These requirements form part of the contractor's contractual obligations, while the performance table introduces financial incentives linked to performance outcomes.

Carbon has been brought into the contract, but it remains split between compliance obligations and incentivisation rather than managed as a single controlled commercial variable in the same way as cost.

The International Federation of Consulting Engineers (FIDIC) has taken this a step further through its Carbon management guide, which was launched in November 2025 following extensive international consultation.

Under the guidance, contractors are required to propose a carbon emissions position at tender stage in the same way that they propose price. This forms part of tender evaluation and subsequently flows into the contract.

Rather than treating carbon as a stand-alone reduction target, the guidance introduces a carbon emissions budget which is established before contract award, linked to project scope, monitored throughout delivery and adjusted as the project evolves.

The significance of this shift should not be underestimated. It recognises that carbon cannot be managed through commitment alone but must be budgeted and actively managed throughout delivery, as cost is.

Through this approach, carbon management is brought closer to the way commercial professionals already manage cost: as a defined quantity linked to scope, subject to change and requiring active management throughout the project life cycle.

In doing so, many of the commercial, delivery and organisational challenges outlined above begin to be directly addressed.

As carbon moves into contractual frameworks, disciplines such as budgeting, change management, forecasting and value optimisation become increasingly relevant.

This is particularly evident within the FIDIC approach, where carbon begins to resemble a managed budget rather than a stand-alone reduction target.

Therefore, the challenge is less about capability and more about adoption. 

As contractual approaches continue to evolve, organisations need to support commercial teams in developing familiarity with emerging carbon obligations and ensure that project governance structures enable carbon to be considered alongside cost, programme and risk.

Doing so will help ensure carbon commitments remain realistic, deliverable and actively managed throughout project life cycles.

It must be understood at tender stage, structured appropriately within the contract, and managed through delivery with the same discipline that is applied to cost.

There is no debate around whether carbon will be a commercial variable. It already is. It is whether the industry now chooses to align with that reality before or after the consequences arrive.