Hormuz Disruptions: Managing Construction Project Risk and Commercial Exposure

Rising geopolitical tensions in the Middle East, particularly disruptions affecting the Strait of Hormuz, are increasing costs, delaying projects, and reshaping risk allocation in construction contracts. Stakeholders must move beyond force majeure and adopt a strategic approach, combining contractual analysis, renegotiation, and practical mitigation measures, to preserve project viability and manage legal and commercial exposure.

Ongoing tensions in the Middle East are creating significant uncertainty for construction projects across the region. While the immediate focus for project stakeholders has been on safety and operational continuity, attention is now shifting toward the broader commercial and legal implications of sustained disruption.

A key pressure point is the disruption to regional and global supply chains, particularly through strategic maritime chokepoints such as the Strait of Hormuz. As one of the world’s most critical energy and trade corridors, any instability affecting this route has immediate consequences for shipping timelines, freight costs, and insurance premiums.

For construction projects, this translates into delayed delivery of materials, increased input costs, and logistical uncertainty. These effects are compounded by constraints on skilled labor and the rising cost of project financing and insurance in a riskier geopolitical environment.

As a result, stakeholders are now moving beyond immediate crisis management and reassessing project viability, contractual obligations, and risk allocation.

Key questions for stakeholders

In practice, most contractors, developers, and investors are grappling with a consistent set of questions:

• Is the project still economically viable?
• Is the project practically feasible under current conditions?
• Who bears the risk for delays, disruption, and increased costs?
• Can force majeure be invoked, and if so, with what consequences?
• What are the available options: continue, renegotiate, suspend, or terminate?

The answers depend on the specific contractual framework and the governing law. In the Middle East, this is particularly relevant given the differences between common law approaches (such as English law) and civil law systems in jurisdictions such as the UAE and Saudi Arabia.

See also: Oman’s Strait of Hormuz Advantage in a Time of Regional Disruption

Is the project still economically and practically viable?

The first step is to distinguish between technical feasibility and commercial viability.

A project may still be technically deliverable (for example, materials can be sourced through alternative routes avoiding disruption in the Strait of Hormuz) but at a significantly higher cost. This is especially problematic in contracts where pricing is fixed.

Contractors operating under lump sum EPC contracts are particularly exposed. Increases in material costs, freight charges, and subcontractor pricing cannot easily be passed on, meaning that even moderate disruption can erode margins or lead to losses.

At this stage, stakeholders should undertake a structured reassessment, including:

• Quantifying cost increases across materials, logistics, and labor;
• Evaluating delays and their impact on project timelines;
• Modeling different disruption scenarios, including prolonged instability.

If a project remains technically feasible but commercially unsustainable, the focus must shift to risk mitigation and contractual strategy.

Who bears the risk for delay and increased costs?

Risk allocation is primarily governed by the contract. While force majeure is often the first concept considered, it is not always the most relevant mechanism in practice.

Construction contracts may include provisions for:

• Extensions of time;
• Variations to scope or pricing;
• Allocation of specific risks to the employer or contractor.

Under standard forms such as the FIDIC Red Book, certain geopolitical events—including war or hostilities—may entitle contractors to additional time and, in some cases, cost recovery, provided procedural requirements are met.

However, many contracts in the region—particularly lump sum EPC agreements—do not include price escalation clauses. In such cases, contractors may bear the bulk of the financial impact, even where disruption arises from external events such as shipping delays linked to regional tensions.

This makes it essential to review the full contractual framework, rather than relying solely on force majeure provisions.

Is this force majeure?

Force majeure is often seen as a potential solution, but its application is limited and highly fact-specific.

Under UAE law, a force majeure event must be unforeseeable and unavoidable, and must render performance objectively impossible. Saudi law adopts a similar approach, referring to circumstances beyond the control of the debtor.

In the context of current tensions, these criteria are not easily satisfied. Disruption linked to the Strait of Hormuz, for example, may delay shipments and increase costs, but does not necessarily make performance impossible if alternative routes or suppliers are available.

Foreseeability is also a key issue. Contracts entered into after the escalation of regional tensions may struggle to meet this requirement, particularly where the risk of supply chain disruption was already apparent.

In addition, the event must be the direct cause of the inability to perform. This can be difficult to establish in complex supply chains, where multiple factors may contribute to disruption.

For these reasons, force majeure should be approached cautiously. It is not a universal remedy and may not provide the relief that parties expect.

What if the works cannot continue at all?

Where performance becomes genuinely impossible, both UAE and Saudi law provide for termination of the contract.

However, the threshold for impossibility is high. Performance must be objectively impossible, not merely difficult, delayed, or more expensive. Courts and tribunals are likely to interpret this requirement strictly.

For contractors facing significant losses under fixed-price contracts, termination may appear commercially attractive. However, wrongful termination carries substantial risks, including liability for damages and reputational consequences.

As such, termination should only be considered after a detailed legal and commercial assessment, supported by clear evidence of impossibility and documented mitigation efforts.

What if the works can continue in part?

In many cases, disruption affects only part of the project. Both UAE and Saudi law recognize partial impossibility, allowing affected obligations to be extinguished without terminating the entire contract.

This can support practical solutions such as:

• Re-sequencing construction activities;
• Deferring certain project components;
• Substituting materials or suppliers.

However, partial performance may not always align with the project owner’s objectives. Large-scale infrastructure and energy projects often depend on integrated delivery, and partial completion may undermine overall project value.

As a result, decisions around re-scoping are typically negotiated and require alignment between technical feasibility and commercial priorities.

The works can proceed but at higher cost: Who pays?

This is likely to be the most common scenario. Projects continue, but at increased cost and with extended timelines.

Force majeure provisions are generally of limited assistance in this context, as they do not typically address cost recovery for ongoing performance. Instead, parties must look to their contract.

Under the FIDIC framework, contractors may be entitled to additional costs where employer risk events result in loss or damage. Variation clauses may also provide a route to adjust scope and pricing where changes to materials or methods are required.

In the absence of contractual relief, statutory hardship provisions under UAE and Saudi law may provide an alternative.

These provisions allow courts to intervene where exceptional and unforeseeable circumstances render obligations excessively onerous and threaten substantial loss. Courts may adjust obligations, extend timelines, or restore the contractual balance.

While their application is discretionary, these provisions can serve as a powerful negotiating tool, encouraging parties to reach a commercial solution.

Practical guide: Managing disruption and reducing dispute risk

In an environment of ongoing disruption, a structured and proactive approach is essential. Key practical steps include:

• Review contractual provisions in detail, focusing on risk allocation, notice requirements, and available relief mechanisms;
• Issue notices promptly and in compliance with contractual requirements, particularly under FIDIC-based contracts where time bars are strictly enforced;
• Document disruption and mitigation efforts comprehensively, including shipping delays, cost increases, and alternative sourcing strategies;
• Engage in early and informed discussions with counterparties, supported by a clear understanding of legal and commercial positions;
• Assess negotiation options, including adjustments to pricing, timelines, or scope, before escalating to dispute resolution.

Failure to comply with procedural requirements can result in loss of entitlement, even where the underlying claim is valid. As such, project management and legal strategy must be closely aligned.

Outlook

The impact of Middle East tensions (particularly on critical trade routes such as the Strait of Hormuz) is reshaping the risk landscape for construction projects across the region.

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While legal frameworks in the UAE and Saudi Arabia provide mechanisms for relief, these are not automatic solutions. Their effectiveness depends on the specific circumstances and the ability of stakeholders to deploy them strategically. In practice, the most effective responses are likely to combine legal analysis with commercial pragmatism. Renegotiation, re-scoping, and adaptive project management may offer more sustainable outcomes than strict reliance on contractual remedies.

As uncertainty persists, stakeholders that adopt a proactive, structured approach will be better positioned to manage risk, preserve value, and navigate disruption in an increasingly volatile environment.

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