The Red Sea Crisis: A note on how to avoid drowning in construction material prices

Off the back of the supply chain delays caused by the war in Ukraine, contractors are facing another setback with the ongoing crisis in the Red Sea where cargo ships are facing attacks by rebel militia leading to delays in supply and a sharp increase in freight prices.

If Contractors believe these issues will impact their current projects, the remedies available to them will depend on the terms of the contract.

NEC 3 and 4

Under clause 60.1 of the NEC contract, the Compensation Event mechanism allows Contractors to recover time and increased costs if an event preventing the completion of the works occurs.

The Contractor must notify the Project Manager within 8 weeks of becoming aware of such event (clause 61.3). Notification must be issued separately from all other communication in a format that can be "read, copied, and recorded" (clause 13).

The Contractor must also demonstrate that the events in the Red Sea have caused the delay and/or increase in price.

If the project has not yet been affected by the crisis, but will likely be, the Contractor should issue an Early Warning notice (clause 15.1).

Finally, Contractors should also consider if the prevention mechanism under clause 19 applies and if so, give notice under that clause.

SBCC/JCT

Comparatively, the remedies available under this form of contract are more limited. The Contractor may receive an extension of time, as opposed to loss and expense.

This is because, under the JCT, force majeure and the threat of terrorism and/or the activities of the relevant authorities in dealing with such event or threat are Relevant Events under 2.26.10 and 2.16.14. 

In contrast, Contractors cannot rely upon force majeure or threat of terrorism to recover loss and expense as these are not Relevant Matters. However, it may be possible to argue that earlier Relevant Matters pushed the project into the period of this crisis which has resulted in higher material prices. This approach was previously used for the increased prices caused by the Ukraine War.

Final Considerations

Given that the situation in the Red Sea is fluid, Contractors should continue to monitor the position, and its potential to impact live and future projects. In order to mitigate the impact of the crisis, the following points should be considered:

• Ensure that claims are notified timeously and with sufficient detail to avoid losing compensation rights.
• If the contract is under the NEC, and it is reasonably foreseeable a project will be affected, give an Early Warning notice as soon as possible.
• If possible
  • negotiate contract options allowing for fluctuations or inflation provisions,
  • consider off site / advance payment options for potentially volatile materials/products.
  • agree contract wording to deal with material issues for a particular project.