Global Vantage – Looking at Inflation: Managing Cost Escalation on Global Projects

Price escalation remains a significant issue across the international construction and infrastructure sector – that’s certainly what Beale & Co is seeing and advising on across its international offices.

Contractors in the UK and Europe, Canada, and the Gulf Cooperation Council (GCC) continue to face cost pressures arising from labour shortages, increasing prices for key construction inputs, supply-chain disruption and geopolitical uncertainty. Tariffs, volatile energy prices, rising wage and resource costs and disruption to shipping routes have added further pressure, particularly for contractors locked into lump-sum or fixed-price contracts or contracts with a longer duration.

Although these pressures are common across the globe, the mechanisms available to address them differ. In common law jurisdictions, such as the UK and the majority of Canada, price escalation risk is typically managed through the contract itself. For example, it is common for construction and infrastructure contracts to contain mechanisms to address escalation, but these must be agreed during contract negotiations. In civil law jurisdictions, such as in the UAE, Saudi Arabia and Kuwait, in addition to contractual provisions, relief may be provided through the doctrine of exceptional circumstances where performance remains possible but has become so burdensome that it threatens the contractor with serious loss.

UK and Europe

Across Europe, major public investment programmes in transport, energy transition, defence infrastructure and data centres are maintaining demand and creating competition for labour and materials. At the same time, shortages of skilled trades and rising wage costs are increasing project delivery costs.

Conflicts in the Middle East and Ukraine have caused sharp increases to raw material costs, particularly for steel, cement and other energy-intensive products. Ongoing disruption to shipping routes in the Middle East has increased freight costs and delivery times for imported materials. In addition, carbon-related regulation, including the EU Carbon Border Adjustment Mechanism (CBAM) and preparation for the UK CBAM from next year, is contributing to higher steel prices and increased procurement costs for some projects.

Under JCT contracts, price escalation may be addressed through the bespoke amendments or the Fluctuations Provisions. Option A covers changes in taxes and levies, Option B allows adjustments for labour, materials, fuel and electricity costs, and Option C provides a formula-based method linked to recognised cost indices.

NEC contracts include Secondary Option X1 (Price Adjustment for Inflation), which permits periodic adjustment of the contract price using agreed indices. FIDIC contracts also allow for schedules of cost indexation to be included, enabling contract price adjustments where agreed cost indices demonstrate increases in labour, materials or other inputs.

Whilst these standard form contracts all contain mechanisms to address price escalation, these must be selected and considered during contract negotiations and do not automatically apply. Depending on the agreed approach, the selected indices must be carefully considered given this acts as a benchmark for escalation claims by contractors. Given that we are seeing volatile price shifts in the market, especially for materials, the ‘standard’ approach in contracts may not be sufficient to adequately address the price increases contractors are being faced with.

GCC

FIDIC contracts are widely used across the GCC, often with bespoke amendments. In the Red and Yellow Books, Sub-Clause 13.8 (1999) and Sub-Clause 13.7 (2017) provide for cost adjustments using agreed indices, but only where the required adjustment data or schedules are included. Changes in law are addressed separately under Sub-Clause 13.7 (1999) and Sub-Clause 13.6 (2017). Contractors should consider the Particular Conditions, select appropriate indices and comply with applicable notice and claims requirements.

Although construction contracts commonly allocate the risk of cost escalation to the contractor, the civil codes of the UAE, Saudi Arabia and Kuwait provide relief through the doctrine of exceptional circumstances. Unlike force majeure, which concerns impossibility, this doctrine applies where performance remains possible but has become so burdensome that it threatens the contractor with serious loss.

Canada

Tariff-driven increases in steel, aluminium, lumber and other key construction materials, persistent skilled-labour shortages, and ongoing supply-chain disruption continue to cause cost pressures for contractors in Canada.

The courts will not readily rescue a bad bargain nor are there statutory protections in situations of unanticipated cost increases. As such, upfront drafting to include clear force majeure and change-in-law clauses, tariff pass-through mechanisms, and price-adjustment formulas tied to recognised indices remain the most reliable protection for contractors.

Across all our jurisdictions, the evidential burden is high. Contractors should act promptly, maintain contemporaneous records of cost movements and mitigation, and demonstrate how escalation undermined the financial basis of their contract compared to the assumptions at the time of tender.

For further analysis, see Beale & Co’s three-part article series on price escalation in the GCC.

Conclusion

Across the UK and Europe, Canada, and the GCC, clear contractual risk allocation remains essential when addressing price escalation. Force majeure and change-in-law clauses, tariff pass-through provisions, and price-adjustment mechanisms may provide contractors with a route to recovery, but they must be carefully drafted and, where applicable, selected during contract negotiations.

The civil codes of the UAE, Saudi Arabia and Kuwait may provide an additional route to relief where exceptional circumstances make performance excessively onerous, but the evidential burden is high.

Across all our jurisdictions, contractors should act promptly, comply with notice and claims provisions, maintain contemporaneous records of cost movements and mitigation, and demonstrate the effect of escalation on the contract. Careful drafting of well-defined price-adjustment mechanisms in the contract at the outset is the most dependable safeguard for contractors but these must be actively implemented on projects to be effective.

Beale & Co have experience of advising clients on payment-related clauses and issues across their international offices. Should you have any questions in respect of the themes mentioned in this update, please contact the authors.