South African construction contractors face a growing financial threat as global oil prices surge, and contractual safety nets may not protect construction contractors from the damage.
That is the warning from construction law specialist MDA Attorneys, which has seen a sharp increase in queries from contractors grappling with the cost implications of rising fuel and materials prices linked to the war in the Middle East. The practice has been advising clients on how these increases are likely to be treated under the FIDIC suite of standard construction contracts, one of the most widely used frameworks in South Africa and internationally.
“The ripple effects of conflict on the other side of the world translate into very real cost pressures on construction sites in South Africa, and contractors will be affected by the impact of surging oil prices,” says Clairize Malan, senior associate at MDA Attorneys.
Under many FIDIC contracts, price adjustments are agreed upfront using formulas and indices, a mechanism known as contract price adjustment (CPA). While CPA clauses are designed to account for fluctuations in the cost of labour, materials and fuel, they are calculated against longer-term trends and benchmarks. They were not built to absorb sudden, steep price spikes triggered by geopolitical conflict. This means that when oil prices jump sharply in a short period, contractors may find the CPA mechanism does not cover the gap, leaving them to absorb the shortfall.
With CPA clauses offering limited relief, some contractors are looking to the force majeure provisions in FIDIC contracts as an alternative avenue for recovery. FIDIC’s force majeure clause allows a contractor to claim costs where it is prevented from performing its obligations due to an extraordinary event, and war is specifically listed as one of those events.
Under FIDIC, recoverable costs include expenditure reasonably incurred by the contractor, whether on or off-site.
But relying on force majeure is not straightforward, as it depends on the contract’s definition of war. FIDIC could be interpreted narrowly to mean only a war occurring within South Africa, which would be outside the scope of the clause.
“Employers will typically push for the narrower interpretation of war, which limits their exposure,” explains Malan. “Contractors understandably prefer a wider reading that would allow them to recover costs flowing from conflicts beyond our borders. Whether a contractor can recover these costs will ultimately come down to how the contract is interpreted.”
MDA Attorneys is urging contractors to review their contracts carefully and take proactive steps. This includes examining whether their CPA formulas adequately capture oil-linked costs, assessing whether force majeure notices should be issued, and ensuring that cost records are meticulously maintained. Contractors who fail to give timely notice under FIDIC risk losing their right to claim altogether.
“The construction industry is already operating on tight margins,” says Malan. “Contractors cannot afford to sit back and hope this passes. They need to understand their contractual position now, take the right steps to preserve their claims, and engage with employers early. The longer this is left, the harder it becomes to recover these costs.”
The situation is evolving rapidly, and MDA Attorneys continues to monitor developments and advise clients on a range of standard-form contracts. Contractors operating under NEC, JBCC, and GCC contracts may face different contractual positions and should seek specialist advice tailored to their specific agreements.