Rebuilding Ukraine: key considerations and contract conditions for construction and engineering businesses

Our earlier series updates have highlighted some important developments in respect of Ukraine and the potential future implications for the construction and engineering sectors. As the potential discussions concerning peace and future reconstruction efforts in Ukraine continue to gain focus, these industries will be presented with significant contractual and commercial opportunities. However, they will also come with unique challenges and risks that must be carefully assessed and managed through well-drafted contract terms and robust governance and risk management strategies on projects.

This article builds upon Beale & Co’s earlier Rebuilding Ukraine series update, published in May 2023, and outlines the key developments and considerations for businesses looking to engage in the rebuilding of Ukraine with a view to preparing for such opportunities gaining momentum.

Overview

According to the Rapid Damage and Needs Assessment  released jointly by the Ukraine Government, the European Commission, the World Bank Group, and the United Nations a year ago, the total estimated cost of rebuilding Ukraine would be $486 billion over the following decade[1]. This projected cost, reported as of 31 December 2023, underscores the importance and scale of the reconstruction task and has potentially since increased. This is particularly relevant given the fact that the projected figure had increased from $411 billion (equivalent to €383 billion) – estimated the year before – and has likely been compounded by inflation.

Given the scale and urgency of the reconstruction process, the rebuilding of the area offers potentially profitable opportunities and contracts for those businesses seeking to engage with complex and prominent projects. Such opportunities will not come without risk, for example, and therefore we offer a recap of some of the key considerations and risks businesses should be alert to in future contract discussions and project delivery.

Procurement requirements

Beale & Co have previously provided an update on procurement processes.

Based on recent developments, we may see steps to align the Ukrainian procurement processes with international standards and practices. However, the overall approach to procurement will likely be influenced or governed by the relevant source of the project funding and parties involved.

Businesses should therefore be aware of the relevant procurement processes which will apply to opportunities and take appropriate steps to comply with them.  For example, there may be additional administrative steps or evidence requirements associated with bidding or winning such contracts. Businesses should also stay informed about available market developments, opportunities, incentives and incorporate them into their contract negotiations and project planning as appropriate.

Contract terms to think about

• Due diligence: on all projects, it is recommended that appropriate due diligence checks are satisfactorily completed and corporate policies and governance procedures followed. When completing due diligence, it will also be helpful to assess the specific location and nature of the project, the nature of the works or services to be undertaken, as well as the client and potential partners/suppliers to the contract.

Businesses should also consider the financial stability and other project delivery risks as part of this exercise. This is particularly important if a significant amount of resource and reliance is being placed on local suppliers.

• Insurance and limiting liability: a key consideration for businesses will be how to insure their employees, assets, and the works/services or goods (if required under the contract). It is crucial to ensure that appropriate insurance cover is being maintained and that applicable exclusions and limitations contained in the insurance policies are properly reflected in the contract terms agreed to help mitigate risks associated with potential damages and liabilities. For more information, please refer to Part 2 of our Rebuilding Ukraine Series.

Effective contractual provisions should be included to protect the contractor or consultant from risk, including any appropriate limits of liability. Considering such provisions alongside of the governing law of the contract, and other associated provisions, will also be important and may require specialise legal advice.

• Ground risk and site conditions: many sites in Ukraine have been subject to intense damage and shelling during military operations, leading to the possibility of unexploded ordinances on or under the ground. Further, a significant amount of demolition and clearance work will be required following the conflict as part of the overall reconstruction efforts.

In the UK, liability for unforeseen adverse ground or site conditions typically sits with the contractor. Therefore, it will be essential to complete any necessary surveys, ask for relevant information and identify and allocate these risks between the parties. It would be prudent for contractors/subcontractors to ensure they have fully investigated and priced for any remaining risks, either directly or through the right to claim additional fees. This is especially important where the risk cannot be allocated to the employer/client or avoided altogether.

• Programming and pricing: businesses may wish to consider alternative methods to reduce the impact of risks related to the project or contract, which could be more acceptable or palatable than including conflict-specific relief events, for instance:
• Adopting a pragmatic approach to scheduling by incorporating ‘float’ to benefit the contractor and mitigate potential delays or disruptions caused by supply chain and material issues.
• Including appropriate provisions to deal with inflation and currency risk. For example, some key elements of the pricing could be adjusted to include a fluctuation provision (shared via a pain/gain regime), the use of provisional or contingent sums, or incorporating a “cost-plus” element into the price.
• Seeking to agree to lower any applicable liquidated damages or ‘breaks’ from liquidated damages for certain types of delay events, or circumstances outside of the party’s control.
• Delay and Loss & Expense relief provisions and events: businesses will want to incorporate express provisions that deal with conflict (or circumstances related to conflict), or other relevant events, as grounds that the business can rely on to secure any necessary extensions of time to completion of the project and reimbursement of associated loss and expense. Businesses will have to take a pro-active and considered approach to negotiation of relief events and be prepared to argue for robust but precise amendments in order to secure entitlements they require. Supporting documentation on such provisions and to evidence future claims should also be retained.
• Suspension and termination provisions: these provisions should be carefully drafted to address scenarios where work may need to be halted or terminated due to unforeseen circumstances, thereby ensuring that both parties are protected and have clear guidelines on how to proceed (and the consequences arising from such action). Consideration will also need to be given to relevant subcontract arrangements.
• Design obligations and innovative design processes: businesses responsible for design and specification will want to ensure that their obligations to, for example, avoid specifying materials that are prohibited or deleterious, are appropriately drafted to apply at the point of specification only (rather than at the potentially much-delayed point of use or completion). Alternatively, businesses may wish to negotiate corresponding price and programme for a checking of their specification immediately prior to the point of use depending on their role and the amount of time which has elapsed on the project.

Businesses may also wish to consider whether to use sustainable and innovative designs solutions (e.g. the use of technology/digital tools or prefabricated modular units) where appropriate, as this may offer advantages such as compliance with tender requirements, reduced site time, and other efficiencies. For example, the construction industry press and certain products manufacturers have reportedly observed the application of cost-effective technical solutions made up of composite materials to facilitate the rapid restoration and strengthening of damaged structural elements, avoiding the need for additional foundations or loading of structures or materials-intensive solutions.

• Collaboration: rather than solely relying on contractual amendments to safeguard and protect against risk, it may be more effective to emphasise collaboration. In fact, the use of joint ventures and consortia was actively encouraged by the EU in its Call for Expression of Interest to mobilise private EU business to invest in Ukraine’s recovery and reconstruction in November 2024[2]. Although collaboration brings the prospect of significant benefits, parties should nevertheless exercise caution when suggesting a collaborative approach to a new client or employer, especially if the employer is insisting upon a fixed price lump sum contract tied to a rigid or difficult programme. Appropriate contractual arrangements should also be put in place in respect of the project, scope, decision-making, and ways of working (amongst other things).
• Funding: in particular, consultants and contractors should pay careful attention to how their projects are funded (i.e. foreign aid, development bank funding, external government/organisational funding, private financing, export finance / guarantees) – and whether any of these are channelled through the Ukrainian government or disbursed directly. There is a risk of funding potentially being suspended, delayed, or cancelled due to events outside the consultant’s or contractor’s, and the funders’ control, e.g. if there is a cross-default or a general default / cessation of payments on external debt by the Ukrainian government, or a resumption of hostilities. Consultants or contractors should consider what options or protections they require in each of those scenarios and make sure that these are appropriately drafted into contract documents. This could take the form of an express right to suspend or terminate; wasted or breakage costs; or perhaps taking security to call on. The exact provisions (and extent that these provide comfort in practice) would depend on the nature of the project and contract, as well as the parties involved.

• Dispute resolution considerations: it is common for international arbitration to be selected as the agreed dispute resolution forum for contracts in Ukraine. However, the specific provisions on choice of law and jurisdiction are usually decided by the source of funding and parties on a project-specific basis. Businesses will therefore have to be prepared to consider these aspects on a deal-by-deal basis, alongside any other dispute escalation and supply chain management mechanisms which may be required.

• Applicable Law, Governing Law, and legal and regulatory reforms: Ukraine’s aspirations for EU membership may drive further legislative and regulatory reforms in construction law. These reforms will generally seek to create a more favourable legal environment for the country, as well as potentially for developers, contractors, and investors. It will be important for businesses to stay updated on these changes and ensure their contracts comply with the new regulations.

Creating a stable and predictable legal environment is crucial for reassuring investors and construction firms. Contracts should be drafted to provide clear terms and conditions, minimising ambiguities and ensuring that all parties understand their rights and obligations. Understanding the interaction between the different legal requirements, and provisions setting out applicable legal regimes (especially if this is based on a different legal system), will also need to understand and be managed in practice.

Concluding thoughts

The rebuild of Ukraine presents significant opportunities for growth and productivity in the construction and engineering sectors. The specific parameters and nature (including the funding, structure, and client/employer identity) of the contracts for the reconstruction and recovery efforts are yet to be fully revealed. However, by carefully considering and negotiating the key contract conditions covered above, businesses can better navigate the potential challenges and risks associated with these projects, and ultimately help contribute to the successful rebuilding of Ukraine.

Beale & Co has specialist expertise in advising on a range of contracts and projects throughout the overall project lifecycle (both in the UK and internationally). Our Contracts & Project Advisory Team have extensive experience in advising on contract terms and conditions, including on contract negotiations and risk management strategies based on the latest legal developments. Beale & Co is also supported by law firm contacts under the Lexicom network of independent commercial law firms across Europe (founded by Beale & Co) in advising on such contracts, projects and disputes. For more information, please contact Antony Smith, Nadir Hasan, or visit our website.

[1] UN News, Ukraine recovery and reconstruction: $486 billion over the next decade, 15 February 2024

[2] EU launches Call for EU business to invest in Ukraine’s recovery and reconstruction – European Commission, 13 November 2024