The escalating conflict between Russia and Ukraine, and subsequent U.S. and international sanctions against Russia, have disrupted global construction operations — and the broader U.S. economy and markets — in numerous ways.
Here are key impacts to the construction industry, why they matter to your industry, and what you can do to navigate these new challenges.
Trend 1: Increased costs to operate
The conflict in Ukraine has significantly increased costs to operate for construction companies, with record fuel prices and increased material costs.
Fuel prices: Rising fuel prices — particularly diesel — means that it costs significantly more to operate trucks, cranes and other heavy equipment. Some of these costs may be offset through more efficient use of equipment, but only to a certain degree.
Consider how fuel prices will affect workers, including contractors. Much of the workforce travels long distances to get to job sites, especially in expensive urban areas. The extra costs may cause some workers to look elsewhere for work, rather than pay for costly commutes.
- Increase temporary housing near the jobsite during workdays.
- Establish worker hubs for commuting if groups of your workers live in the same general area.
- Give workers a commuter bonus to offset their increased fuel costs.
Materials costs: Rising fuel prices also put pressure on materials pricing. For example, petroleum is involved in the manufacture of PVC pipe. Expect to see significantly increased pipe prices and possible pipe shortages in the near term.
Trend 2: Supply chain and transportation disruption
Supply chains already reeling from a global pandemic have become further disrupted by the conflict with Ukraine, driving up costs, causing materials shortages and lengthening project timelines, sometimes significantly. Transportation lanes and international cooperation may be affected, causing further supply chain ripples.
Under the Montreux Convention, Turkey has the right to block the Dardanelles and Bosporus straits that connect the Black Sea to the Mediterranean Sea. While this right is generally limited to the passage of warships, it gives Turkey the right to stop certain merchant vessels and could result in disruptions from other countries bordering the Black Sea, including Romania and Bulgaria.
- Does your project require a lot of aluminum for curtain walls or other materials produced in Russia or Ukraine?
- Have you surveyed your suppliers to find out if their own supply chains are impacted by the current conflict?
- Consider developing alternate suppliers in a different region for a more agile and flexible supply chain.
Trend 3: Growing use of escalation clauses
With growing costs and inevitable slowdowns, more companies are revising bids and contracts to include escalation clauses to address the risk of fuel surcharges, labor impacts and supply chain disruptions arising from the conflict. Most standard form contracts provide that war and civil unrest are bases for some relief — usually with respect to contract time. These clauses, however, do not usually justify a claim for additional money.
- Consider including a price escalation clause in future contracts (at least negotiated work). You can also propose price escalation clauses for design-bid-build work in the request-for-information process or submit a qualified bid/proposal, provided it does not violate the instructions to bidders.
- When reviewing clauses in existing contracts, note that most of these clauses are very general and provide relief if operations are disrupted by "war." Few such clauses require your project to be in a war zone. Even a distant invasion can give rise to a potential claim. The same is true of clauses giving relief for embargo — you do not need to be embargoed, just affected by the embargo.
- It is critical that you promptly provide written notice of any impacts and specifically reference the war and any other covered causes for relief in the notice.
- If you have a cost-plus or time and material contract, you can pass the increases onto the owner, at least until you hit your guaranteed maximum price. If you have a fixed-price contract, you are mostly out of luck on passing on increases.
- Consider building contingencies into your contract to address escalation needs. If project owner agrees, you can use a change order to add a price escalation clause into any existing contract; however, this change can be challenging. You can apply price escalation across the board or to select commodities (pipe, major components, etc.).
Trend 4: Force majeure clauses
Events arising from the Russia/Ukraine conflict may cause a force majeure contract provision that relieves the parties from performing their contractual obligations because of circumstances beyond their control.
- Read the force majeure provisions in your contracts.
- Pay particular attention to the timing of your notice requirements, both initial notice and follow-up costs.
- Pay attention to the definition of notice in your contract and adhere to it. For example, if the contract says notice must be by certified mail, follow this stipulation exactly.
- Force majeure events entitle you to a time extension, but not to a cost increase.
It is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.