March 3, 2022

Henry Clarke, construction partner at Spencer West, explores how the Russa-Ukraine conflict will have a noticeable impact on the costs of UK construction projects, due to fuel inflation

Russia’s invasion of Ukraine has resulted in increased sanctions against Russia and exposed the vulnerability of the European continent’s fossil fuel supplies, but how will increasing fuel costs impact construction projects here in the UK?

Up to 43% of the EU’s oil comes from the Russian Federation, along with up to 25% of its oil. The medium to long term nature of the conflict in Ukraine, and related sanctions means fossil fuel supply and its vulnerability will be an issue for the construction industry for some time.

High fuel prices may be a stimulus to at least non-OPEC oil and gas production, but perhaps not generate enough additional oil and gas flow from existing non-OPEC sources to reduce prices to pre-invasion levels. This means energy costs in producing construction materials and for direct use in transport and on construction projects may remain high generating an inflationary trend within construction.

Impact of increasing fuel costs

What does that mean for construction projects from a contractor perspective?

The attractions of off-site construction become stronger if contractors can demonstrate they can manufacture units more cost-effectively off-site with resultant fewer vehicle journeys to and from site or around the site compared to traditional construction (and with more efficient use of labour). A realisation of this attraction would mean a wider prevalence of contracts with such suppliers on projects.

The combination of high energy prices, increased recognition of the environmental impact of fossil fuels and their security vulnerability and the national security risk of reliance on oil and gas will encourage an increase and acceleration of the construction of renewable and alternative energy projects to wean the UK off such fuels.

Some proposed projects will be shelved as the finances become less certain or not profitable as costs rise. The property market may become subdued as the public and the business community assesses the economic impact of the Ukrainian conflict. In future, such shelved projects may raise planning issue renewal issues and perhaps disputes between successive landowners over the interpretation of overage clauses if such projects are started later.

New projects that do go ahead will have liquidated damages clauses that contractors should carefully assess to ensure they are realistic pre-estimates of loss in the current environment and a liability that they can accept. Contractors will place greater preference on the use of fluctuation clauses. The fluctuations clauses in these contracts should be carefully reviewed by contractors to allow for price rises in an inflationary environment so the risk of the inflationary impact of the Ukrainian conflict is passed on to the employer.

Cost-based issues for contractors

Existing projects will have had their financial models dented with rising costs. This will lead to a range of cost-based issues for the parties to tackle in what is a traditionally adversarial industry.

In particular, contractors making a loss on a project will be carefully considering the nature of the loss that is recoverable under their contracts, thereby testing the interpretation of ‘direct loss’ at law.

Contractors will also check fluctuation clauses for the same reasons as for new projects.

Contractors will focus on properly documenting loss or increased costs to ensure any claims stand a good chance of success in negotiations or at later stages of dispute resolution; and should check their project management processes and procurement processes as the timing of the ordering of supplies or services and thus fixing their pricing will impact the costs of projects and the grounds for claim by contractors.

If the Ukrainian conflict causes a bulge of construction industry claims because of rising costs, then the litigation funding industry may also focus on innovating the financing of such claims. Look out for new product offers from such providers.

The Ukrainian conflict has reinforced competitive pressures in the UK construction market. It is a market in which well-managed contractors with good project management skills, an appreciation of risk management and an openness to innovation and investment in training are likely to succeed and thus not have to rely as much on the points set out above. Nevertheless, all contractors should consider these issues as part of their project management cycle.

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Netherlands-based football club Feyenoord has scrapped plans for a new stadium in Rotterdam, after cost estimates from the project developer BAM soared.

The Feyenoord City project, which included a new 63,000 capacity stadium on the banks of the River Nieuwe Maas as well as shops and houses, was originally projected to cost £385M, but BAM informed the club that the price would be significantly increased. This is due not only to increasing building costs, but BAM’s new direction for the project, which will see the price reach at least £425M.

The construction company also recently announced a new policy by with they will withdraw from any projects they consider to be risky.

An official announcement is yet to be made by either Feyenoord or BAM, but sources close to the club say they are outraged at the developer’s new proposals and will cancel the project. This is inevitable, especially considering its financial situation.

Local sports journalist Arno Vermeulen has said that “Feyenoord is financially on the edge of an abyss”. The club is already £8.5M in tax debt and faces the repayment of a £25M bridging loan to Goldman Sachs if the new stadium plan does not go ahead. Feyenoord’s current stadium De Kuip is on the line as collateral should they fail to make payments.

Fans of Feyenoord will be in quandary. They opposed the building of the new stadium, preferring to stay in the beloved De Kuip. However, it could soon be owned by the American firm.

If the club manages to keep hold of the stadium, it will look to expand it in lieu of a whole new project. This in itself is likely to cost around £200M, and will mean reduced capacity – and income – while the stadium expansion project is undertaken.

BY ROB HAKIMIAN

Formula 1 Race Director Michael Masi has expressed confidence over the construction of the Jeddah Corniche Circuit ahead of its debut event.

Formula 1 is due to visit Jeddah on December 3-5 for the Saudi Arabian Grand Prix, the penultimate round on this year’s 22-event calendar. A 6km 27-turn quasi street circuit, which is set to be among the fastest on the schedule, is being developed on Jeddah’s Corniche adjacent to the Red Sea.

Photos and videos that emerged from a recent preview segment carried out by Formula 1’s broadcast team highlighted the work that is still required. But Masi has asserted that everything will be ready in time for the circuit’s debut at the start of next month. “There is a lot going on there,” said Masi at the Mexico City Grand Prix. “There is a huge amount of work happening.

“The FIA and F1 are getting daily updates of where things are at, and it’s progressing very, very quickly. “Yes, there’s a lot to do – there’s nothing to deny there, I think everyone will acknowledge there’s a lot to do – but I’m still confident of the race going ahead, no problems.” Masi pointed to previous circuit builds in conceding that “there’s always an element of worry with everything” but outlined that “having been involved [with] Korea in 2010, and I think India was talked about, [and] both of those went off with no problems, I’m quite confident Saudi will be exactly the same.”

Masi is due to make another visit to Jeddah ahead of its inaugural grand prix, either shortly before or after the preceding event in Qatar. “There are areas absolutely complete [and] the quality of work is first class,” Masi asserted. “They will finish, I have confidence. Given that the Jeddah Corniche Circuit is being built in record time, it was always the case that timings would be tight. Construction remains on schedule and will be completed on time ahead of F1’s arrival next month,” said Saudi Arabian GP CEO Martin Whitaker in a statement.

Saudi Arabia has a 10-year contract to host Formula 1 races and next year’s event, set to be held in late March, will also take place at Jeddah. Long-term the plan remains to move the event to the Qiddiya entertainment facility under construction on the outskirts of capital Riyadh. The Jeddah circuit will then form part of the Corniche’s regeneration that includes sustainability and environmental projects, along with recreational areas for residents.

Morgan Sindall Infrastructure and Arup have been awarded an extension to deliver the remaining term of the Infrastructure Strategic Alliance (ISA) contract by Sellafield Ltd. The ISA is an alliance between Sellafield Ltd, Morgan Sindall Infrastructure and Arup that delivers a programme of infrastructure projects for Sellafield’s aging asset portfolio.

The ISA is one of several long-term strategic supply agreements aligned to the Sellafield acquisition strategy. Initially awarded in 2012, the ISA is responsible for a £1.1bn contract to provide essential infrastructure assets to the Sellafield site.

Over the past nine years, the contract has played a significant role in supporting Sellafield’s mission, as well as delivering socio-economic benefits across Cumbria.

Simon Smith, managing director for Morgan Sindall Infrastructure, said: “Securing the third term and extension to the ISA contract, is another great opportunity for Morgan Sindall Infrastructure. Alongside our role on the programme and project partners partnership, which is also being delivered on the Sellafield site, we can continue to work with local organisations and the community to help build sustainable local economic growth. Creating greater opportunities for future generations as part of our commitment to being a responsible business.”

Arup’s digital leader for UK, India, Middle East and Africa, Jim Johnson, said: “We are committed to maintaining a positive presence wherever we operate – and as such we look forward to continuing to play a key role in supporting the local economy in the years to come. The extension of this contract is great news and testament to the hard work of all partners in this alliance.”

The contract is primarily aimed at utility assets, such as electricity, water supply and compressed air, bulk chemical storage and distribution, civil infrastructure, the site’s drainage networks and other facilities including roads, bridges, car parks and general buildings. It also includes some non-utility assets such as analytical services facilities, transport systems, flask maintenance plant and emergency management systems.