Planning for Uncertainty: How the Iran War May Impact Capital Projects
As one of the world’s most important oil routes, the Strait of Hormuz has become a critical pressure point in the Iran war.
Introduction
Capital projects don’t happen in a vacuum. External forces—policy shifts, market volatility, and global conflict—can quickly reshape the landscape in which projects are delivered.
The emerging impacts of the Iran war are a reminder of that reality.
While none of us can predict exactly how events will unfold—especially amid mixed signals from the current Administration—there is real value in starting conversations now about potential impacts.
Start the Conversation Early
It can be difficult to forecast cost or schedule impacts tied to geopolitical events. But early alignment creates meaningful advantages:
- Clarifying how Owners and Contractors will handle delay and cost claims
- Establishing mutually agreeable contract language
- Defining contingencies and seeking supplemental funding sources
It can be difficult to forecast cost or schedule impacts tied to geopolitical events. But early alignment creates meaningful advantages.
Where Impacts May Show Up First
Fuel and Transportation Costs
Fuel surcharges are often the first visible signal of disruption. In March, the USPS announced a temporary, transportation-related price increase to address rising fuel and logistics costs.
Petroleum-Based Materials
Rising oil prices typically drive increases in asphalt paving, roofing materials, and other petroleum-based construction products. When oil prices change rapidly and frequently, projects commonly carry the asphalt price index as a contract allowance. The contract is adjusted based on the index price at the time paving activities are completed.
Broader Supply Chain Pressures
Projects may experience material cost escalation, limited availability of key products, and procurement delays. These can be caused by labor or material shortages, sanctions, transit restrictions, or other changes in the domestic or international marketplace.
Force Majeure and Delay
War is commonly treated as a force majeure event – an unforeseeable, uncontrollable event that prevents one or both parties in a contract from fulfilling their obligations. Force majeure defines how the situation is handled in a contract. One of the most widely used standard construction documents, the AIA A201 is essentially a rulebook for how a construction project is administered.
Under AIA A201-2017 Section 8.3, delays caused by factors beyond the Contractor’s control may justify time extensions. While war is not explicitly listed, it is widely interpreted to fall under ‘other causes beyond the Contractor’s control.’ Time extensions not only delay project completion, but typically add to overall project cost.
War is commonly treated as a force majeure event – an unforeseeable, uncontrollable event that prevents one or both parties in a contract from fulfilling their obligations.
Practical Steps to Manage Risk
Procurement Strategy
Early identification and procurement of long-lead materials and equipment is critical to reducing exposure to price volatility and schedule delays.
Contractor Qualifications and Exclusions
Project owners should expect increased use of bid qualifications, exclusions, and allowances as contractors manage uncertainty. Bids should be reviewed carefully to ensure that proposals are “apples to apples” and that there is no hidden scope or risk.
Confirm Contract Treatment of Delay and Escalation
Project owners should look for language or qualifications that clarify how Section 8.3 of the AIA A201-2017 will be applied to potential war impacts. Review contract language carefully to clarify how schedule delays, material cost increases, substitutions, and related claims will be addressed if market conditions shift during procurement or construction.
Prioritize Base Scope and Alternates
Owners may benefit from identifying essential project elements versus deferrable items so that optional scope can be structured as alternates or phased work, if pricing or funding conditions change.
Contingency Structuring
Project owners should clearly understand how Owner contingency, Contractor contingency, and escalation included in bids are defined and intended to be used. This review ensures there are no gaps, overlaps, or unintended use of funds.
How the Market is Responding
Some owners are taking a wait-and-see approach, while others are concerned that cost spikes, like tariff surcharges, may not be recoverable. Contractors are actively planning for volatility and uncertainty. Owners may seek to reduce project scope – focusing on core elements and limiting “nice to haves,” while treating optional scopes of work as alternates that can be incorporated later if conditions allow.
A Collaborative Path Forward
Uncertainty does not eliminate the need to move projects forward. When Owners and Contractors communicate openly about risks, define expectations, and plan for multiple scenarios, projects are better equipped to navigate uncertainty.
Ready to take the next step? We’d love to chat with you!
