Collaboration option for contractors faced with Ukraine-related cost and delay

As with Covid-19 before it, the war has caused many in the construction industry to re-assess their contractual entitlements to time and money relief should their projects be affected in an environment of increased costs, delays in delivery, shortages of labour and materials, subcontractor default and non-payment by employers.

At the same time, regardless of the form of contract used, those seeking to claim relief will face an uphill struggle to tie delays and additional cost to the war in Ukraine only and no other possible causes. Those seeking to defend claims will almost certainly challenge causation: whether the war in Ukraine has in fact caused the delay or additional cost that is being claimed. The effects of the war – and related sanctions – on construction projects will be difficult to identify and quantify. Even where there is some effect, separating that from pre-existing causes such as Brexit and Covid-19 will be far from straightforward.

While some contractors may be considering how to mitigate the impact of the war through contractual solutions, a collaborative approach may offer a successful alternative.

Amending the contract

Contractual force majeure clauses will often expressly include “war” as a force majeure event.

However, how this will be interpreted is open to question: will “war” apply to any war, or only where the country in which the project is being executed is an active participant?

Despite this, we have seen very few amendments being introduced into contracts which expressly refer to the war in Ukraine. Perhaps that is because main contractors are taking the view that the difficulty around proving causation means that such additions will be relatively hollow in practice and provide little additional protection.

Rather than adding additional, specific relief events, our recommendation is to focus on the wider issue of who is best placed to manage the price increases, which are brought about by global inflation and a growing shortage in labour and materials – which the Ukrainian war is exacerbating but may not be causing. In our experience, clients are dealing with these wider issues in a number of ways including:

• avoiding ‘lump sum’ contracts where possible and instead pushing for target cost type contracts with fluctuation risk shared via the pain/gain regime;
• linked to the above, including provisional sums or building in a “cost plus” element to the price;
• ensuring contracts include price escalation / indexation provisions, often linked to specific materials which are prone to significant price fluctuations such as steel, concrete and glass. In NEC contracts, Option X1 should cover general increases in prices as well as circumstances which emanate from the current conflict and also gives a right to assessment;
• building in plenty of float to programmes to account for possible disruption and scarcity of materials/labour; and
• agreeing lower liquidated damages (LDs), LD holidays and overall caps on LDs so exposure for delays is capped.

Any party concerned about their exposure and ability to claim relief should always carefully weigh up the risk and then negotiate out the risks on each project/contract. They can do so by way of a variety of amendments, which may include some of the above.

Fluctuation formulae are imperfect as they apply a general solution to specific materials. Parties should consider likely implications and tailor inflation clauses to specific materials. Overall solutions are unlikely to be satisfactory to either party.

Collaboration as an alternative

Separate from any contractual safeguards, main contractors can sometimes be better served by having frank and open communications with their employer and supply chain. Discussing ways of managing or sharing cost increases exacerbated by the war may be preferable – and more productive – than seeking purely contractual solutions. Certainly, the delivery of a project at an increased price without insolvencies and delays is likely to benefit all parties. Potential project failures leading to cost overrun and an inevitable increase in cost for engaging a replacement contractor are in no one’s interests.

Previously, we speculated that the stars may be aligning for greater collaboration in the construction industry, citing exceptional events such as the Covid-19 pandemic as important drivers for that change in emphasis. More recently, we looked at the importance of behavioural and collaborative contracting as part of crisis management and noted some of the advantages of collaborative supply chains when managing exceptional events, namely:

• flexibility, agility and good risk management;
• willingness to make decisions day to day that will drive the best outcome for the project;
• contractual reinforcement of aligned best for project behaviours including proactive risk reduction and strong project governance and culture;
• the use of aligned incentivisation arrangements allowing all parties to measure performance against the same project wide goals.

Clearly, the war in Ukraine is another such exceptional event. 

The advantages that come with greater collaboration – increased profitability, sustainability and resilience – are clear. However, these advantages can only be realised after careful thought has been put into setting up a truly collaborative model.

Covid-19 provided a powerful illustration of the importance of supply chains communicating and working together to minimise disruption and keep the industry moving forward. The same practices could be adopted to deal with the effects of the Ukrainian war on UK construction projects.

Nigel Blundell and Mark Job contributed to this article.