- Debbie Lai
1. Introduction
Construction projects are rarely insulated from global events. A conflict occurring thousands of kilometres away can still affect projects in Malaysia through rising fuel prices, material shortages, shipping disruptions, financing pressure, and uncertainty in the supply chain.
The ongoing conflict in the Middle East has again highlighted the vulnerability of the construction industry to external geopolitical events. The conflict’s effect together with wider market volatility, are increasingly relevant to Malaysian construction projects, particularly where projects depend on imported materials, fuel-intensive logistics, and fixed-price contracts.
Contractors may face higher operating costs, delayed deliveries, shrinking profit margins, and increasing difficulty maintaining project timelines. Employers and developers, on the other hand, may have to deal with delayed completion, financing concerns, and a growing number of contractual disputes.
What makes these issues particularly significant in construction is that the outcome often depends less on general commercial fairness and more on the wording of the contract itself. Questions relating to additional payment, extension of time, force majeure, or loss and expense will ultimately turn on how risk has been allocated between the parties under the relevant construction contract.
2.1 Increase in Fuel and Energy Prices
One of the earliest effects of war is usually instability in global energy markets. Construction projects rely heavily on fuel at almost every stage of the works, from transporting materials and operating machinery to manufacturing building components and carrying out site activities.
When fuel prices increase, the impact is not limited to transport alone. The cost increase filters through the entire construction chain. Suppliers spend more on production, logistics companies raise freight charges, and contractors face higher operational expenses on site.
As a result, contractors may experience increased costs involving:
- diesel and machinery operation;
- transportation and haulage;
- shipping and logistics;
- material production; and
- site-related operational expenses.
For projects operating on tight margins, even a moderate increase in fuel prices may significantly affect profitability.
2.2 Escalation in Material Prices
The rise in energy costs has also contributed to higher prices for construction materials such as steel, cement, concrete, aluminium, bitumen, glass, and mechanical and electrical equipment.
Recent Malaysian construction data also supports the need to treat this issue seriously. For instance, the Department of Statistics Malaysia’s (“DOSM”) construction material price data for April 2026 recorded increases in key building materials such as sand, aggregates, steel and cement.
Public reports also indicate that the Government has been monitoring construction cost pressures arising from the Middle East conflict. These developments do not, by themselves, create a legal entitlement to additional payment, but they provide useful commercial context for why price fluctuation, procurement delay and force majeure issues are likely to become more contentious.
Imported materials are particularly affected. Delays at ports, disruptions to shipping routes, higher insurance premiums, and fluctuating freight charges have made procurement increasingly unpredictable.
For contractors working under fixed-price arrangements, this creates a difficult commercial position. Unless the contract contains a fluctuation clause or another mechanism permitting adjustment of the contract sum, the contractor will usually have to absorb the additional costs.
In large-scale projects where material costs form a substantial portion of the contract value, prolonged price escalation can severely erode profit margins and place pressure on cash flow.
3. Supply Chain Disruption and Procurement Difficulties
3.1 Delay in Delivery of Materials
Modern construction projects depend heavily on coordinated international supply chains. Where war disrupts ports, shipping lanes, manufacturing hubs, or transportation networks, delivery timelines are inevitably affected.
Delays in obtaining key materials may then affect the entire construction sequence. For example:
- delayed steel delivery may impact structural works;
- late arrival of M&E equipment may postpone testing and commissioning; and
- shortages in specialised materials may stall downstream trades.
Construction programmes are highly interconnected. A delay involving one critical component often affects multiple stages of the project.
3.2 Shortage of Materials and Equipment
Apart from delays, contractors may also struggle to secure certain materials altogether. This may force contractors to source products from alternative suppliers at significantly higher prices or with longer lead times.
In some situations, substitute materials may require approval from consultants, architects, engineers, or relevant authorities before they can be used. If approvals are delayed, the disruption may extend beyond procurement and directly affect site progress.
The practical reality is that supply chain issues rarely remain confined to procurement alone. They often evolve into delay claims, extension of time applications, and disputes over responsibility for additional costs.
4. Delays and Liquidated Damages
4.1 The Domino Effect on the Construction Programme
Construction works are typically carried out in a carefully coordinated sequence. Once one activity falls behind schedule, subsequent activities may also be affected.
A delay in structural works, for instance, may postpone architectural works, mechanical and electrical installation, testing, commissioning, and ultimately practical completion.
This chain reaction is particularly problematic in projects operating on tight timelines or involving multiple contractors and consultants. Even where the initial disruption originates externally, the consequences can spread across the entire project.
4.2 Risk of Liquidated Damages
Where completion is delayed beyond the contractual completion date, employers may impose liquidated ascertained damages (“LAD”).
To avoid liability for LAD, contractors affected by war-related disruption may seek an extension of time (“EOT”). However, entitlement to an EOT is never automatic.
Most standard form contracts require the contractor to:
- issue notices within the prescribed time;
- provide sufficient particulars of the relevant delaying event;
- demonstrate that the relevant event caused delay to the works; and
- establish that the delay affected the critical path of the project.
5. Price Fluctuation: Contractor’s Risk or Employer’s Liability?
One of the most contentious issues arising from the current conflict is whether contractors are entitled to recover increased construction costs from employers.
Under most Malaysian standard form contracts, the starting position remains relatively clear: unless the contract expressly provides otherwise, the contractor generally bears the risk of price escalation.
In other words, a rise in labour costs, fuel prices, freight charges, or material prices after the tender date does not automatically entitle the contractor to additional payment.
5.1 PAM Contract 2006/2018 — Clause 13
Under the Clause 13 of the PAM Contract 2006/2018, the Contract Sum is generally fixed and may only be adjusted strictly in accordance with the express provisions of the contract. Any pricing errors should be dealt with before execution of the contract and should not alter the overall Contract Sum.
Therefore, unless the contractor can bring the claim within an express contractual adjustment mechanism, a mere increase in fuel, labour, or material prices will not automatically entitle the contractor to additional payment.
5.2 IEM Forms 1989/2011/2017 — Clause 53
Similarly, Clause 53 of the IEM Forms 1989/2011/2017, the Contract Sum is generally not subject to adjustment for any increase or decrease in the cost of labour, materials, or other construction-related costs after the tender date, except where such changes arise from variations.
This means that, in the absence of a valid variation or other express contractual entitlement, the contractor will usually bear the risk of price escalation.
5.3 PWD 203/203A (Rev. 1/2010) — Clause 30
Under the Clause 30 of the PWD 203/203A (Rev. 1/2010), price fluctuation adjustments are only available where the contract expressly includes specific fluctuation provisions. Where such provisions apply, the adjustments may be reflected through interim payments and later incorporated into the final Contract Sum.
Accordingly, contractors under PWD forms should not assume that price fluctuation is automatically recoverable. The entitlement depends on whether the relevant fluctuation provisions have been incorporated into the contract.
5.4 AIAC Standard Form of Building Contract 2024 (“AIAC SFC”) — Clause 13
Under the Clause 13 of the AIAC SFC (read together with Articles 3.1 and 3.2 of the AIAC SFC respectively), where the parties have entered into a lump sum contract, the Contract Sum is fixed and may only be adjusted in accordance with the express provisions of the contract.
This reinforces the general position that cost escalation, without more, does not automatically justify an upward adjustment of the Contract Sum.
5.5 FIDIC Red Book and Related Forms — Clauses 13.7 and 13.8
The FIDIC forms adopt a more flexible approach in certain situations. Under certain FIDIC editions, provisions dealing with changes in law and/or adjustments for changes in cost may allow contract price adjustment after the Base Date.
However, these provisions only operate where the relevant clauses have been incorporated into the contract and, where required, the necessary price adjustment formula and supporting particulars are provided. Without those provisions, contractors may still face difficulty recovering escalation costs.
6. Force Majeure and War-Related Disruption
6.1 Force Majeure Is Contract-Based
Force majeure is often raised whenever major global events affect project performance. However, force majeure is not a general legal doctrine that automatically excuses performance. Its availability depends entirely on the wording of the contract.
A contractor seeking to rely on force majeure must usually establish that:
- the event falls within the list of force majeure events under the contract;
- the event has prevented, hindered, or delayed performance;
- the contractor has complied with the notice requirements;
- the contractor has taken reasonable steps to mitigate the impact; and
- the contract provides relief such as extension of time, suspension, or termination.
6.2 ‘Treatment’ Under Common Standard Forms
The treatment of war differs across standard forms.
Unlike forms which expressly list war or hostilities, some Malaysian standard forms may not expressly identify “war” as a standalone force majeure event. In such cases, reliance on war-related disruption may be more difficult unless the consequences of the conflict fall within other relevant contractual provisions, such as force majeure, governmental restrictions, change in law, or other delay events.
However, if the effects of the war lead to government regulations, changes in law, restrictions, embargoes, or other official measures that affect performance, contractors may still explore whether other contractual provisions are engaged, depending on the wording of the contract.
6.3 PWD 203/203A, AIAC SFC and FIDIC Red Book and related forms
By contrast, the PWD 203/203A (Rev. 1/2010), the AIAC SFC, and certain FIDIC forms may expressly recognise war, hostilities or similar exceptional events within their force majeure or exceptional events framework.
However, the inclusion of war does not mean that relief is automatic. Under the AIAC SFC, the contractor must still show that the event:
- was beyond the parties’ control;
- was not reasonably foreseeable at the date of the contract;
- could not reasonably have been avoided or overcome; and
- was not substantially attributable to the other party.
Even so, the existence of war alone is insufficient. Contractors must still prove that the event directly affected project performance.
6.4 Force Majeure Does Not Automatically Cover Price Escalation
A distinction must also be drawn between inability to perform and increased cost of performance.
If the contractor is still capable of carrying out the works, but at a higher cost, force majeure may not provide relief. Commercial hardship alone is rarely enough.
In practice, force majeure clauses are more likely to support claims involving delay, disruption, suspension, or impossibility rather than claims based purely on reduced profitability.
7. Extension of Time and Loss & Expense
7.1 Extension of Time Claims
Where war-related disruption delays the works, contractors may seek an EOT to protect themselves from LAD exposure.
However, contractors must still comply strictly with the procedural requirements under the contract. This usually includes:
- issuing the required notice within the time prescribed by the contract;
- providing sufficient particulars of the delaying event;
- establishing causation between the event and the delay; and
- demonstrating that the event affected the critical path or delayed completion of the works.
Force majeure therefore operates within the contract. It does not provide a free-standing remedy outside the agreed contractual procedure. Poor documentation remains one of the most common reasons otherwise valid claims fail.
7.2 Loss & Expense Claims
Even if the contractor is entitled to an extension of time, this does not necessarily mean that the contractor is entitled to recover additional costs.
In many standard form contracts, force majeure is treated as a neutral event. This means it is not caused by either the employer or the contractor. The usual relief is time, not money. Therefore, the contractor may be granted an extension of time but may still have to bear the increased costs arising from the disruption.
Loss and expense claims are usually reserved for employer-caused delay or disruption, such as late instructions, variations, failure to give possession of site, or other acts of prevention by the employer. Unless the contract expressly provides otherwise, a contractor will usually face difficulty recovering additional costs caused purely by external events such as war, market volatility, or supply chain disruption.
8. Variation Claims and Escalating Costs
Variation provisions are sometimes used by contractors in an attempt to recover increased costs. However, variation clauses are not intended to operate as a general price escalation mechanism.
Under the PAM Contract 2006/2018, IEM forms, PWD 203/203A, AIAC Standard Form Contract 2024 and FIDIC forms, the general position is that where variation works are of a similar character and are carried out under similar conditions as the original contract works, the existing contract rates will usually apply.
These contract rates are the rates agreed at the outset of the project. Therefore, if the varied works are substantially similar to the original scope, the employer may argue that the contractor remains bound by the original contract rates, even if material prices have increased after the contract was entered into.
Market rates may only become relevant where the varied works are materially different in nature or carried out under substantially different conditions.
In such circumstances, there may be greater room for valuation based on fair, prevailing, or market rates, depending on the wording of the contract.
Accordingly, variation claims must be used carefully. They should be based on actual instructions or changes to the works, not merely general price increases caused by war, market volatility, or supply chain disruption.
9. Change in Law and Government Measures
Another issue that may arise is whether government action connected to geopolitical developments amounts to a “change in law”.
There is an important distinction between:
- ordinary market-driven price increases; and
- actual legal or regulatory changes affecting the project.
To rely on a change in law provision, contractors would generally need to identify a specific legislative or governmental measure introduced after the contract date which directly affects the works.
At present, there does not appear to be any specific legislative or regulatory change in Malaysia which expressly allows contractors to recover increased material costs arising from global events such as the Middle East conflict. In the absence of such measure, increased construction costs will usually remain a commercial risk borne by the contractor.
10. Frustration and Commercial Impossibility
Contractors facing severe financial pressure may argue that the contract has become commercially impossible or frustrated.
However, frustration under Malaysian law is applied narrowly. A contract is not frustrated merely because performance has become more expensive, onerous or commercially unattractive. The supervening event must make performance impossible, illegal, or radically different from what the parties originally undertook.
In construction disputes, courts are usually reluctant to discharge parties from contractual obligations merely because market conditions have deteriorated or the project has become less profitable than originally expected.
For that reason, commercial negotiation is often more practical than pursuing arguments based on frustration. This may include:
- agreed termination;
- structured settlement of outstanding payments;
- demobilisation arrangements;
- cost-sharing mechanisms; or
- a clean exit that allows the employer to appoint a replacement contractor.
11. Industry Pressure on Contractors:
11.1. Reduced Profit Margins
Contractors working under fixed-price contracts may suffer reduced profit margins where material, fuel, and logistics costs increase after the contract has been awarded. Unless the contract allows adjustment, the contractor may have to absorb the additional costs.
11.2. Cash Flow Pressure
Higher costs may also create cash flow difficulties. Contractors may need to pay suppliers, subcontractors, workers, and logistics providers before receiving payment from the employer. Where claims are disputed or payments are delayed, this may place contractors under serious financial pressure.
11.3. Risk of Insolvency
In severe cases, prolonged cost escalation and cash flow issues may lead to contractor insolvency. This may result in project abandonment, termination, or the need for the employer to appoint a replacement contractor. This can increase costs and delay completion even further.
12. Impact on Employers and Developers
12.1 Higher Project Costs
Employers and developers may also be affected by the war, even where the contract is fixed-price. If the contractor becomes financially distressed or unable to continue, the employer may have to deal with delay, replacement costs, re-tendering, and additional supervision.
12.2 Financing Difficulties
War and economic uncertainty may also affect financing. Banks and investors may become more cautious, and borrowing costs may increase. Developers may therefore postpone, scale down, or reconsider certain projects.
12.3 Delay in Project Delivery
Where projects are delayed, employers may face wider commercial consequences, including delayed handover, delayed sales, loss of rental income, reputational damage, and disputes with purchasers or end-users.
13. Increasing Construction Disputes
13.1 Disputes Over Delay
The present climate is likely to generate more disputes across the industry, particularly involving:
- delay and EOT claims;
- entitlement to additional payment;
- fluctuation and variation disputes;
- force majeure arguments; and
- termination issues.
Disagreements often arise because contractors view the disruption as unforeseeable external hardship, while employers maintain that the contract allocated such risks to the contractor from the outset.
Ultimately, the outcome will usually depend on the contract wording, project records, and the quality of contemporaneous evidence.
14. Practical Considerations Going Forward
The current conflict highlights the importance of proper risk allocation in construction contracts.
Moving forward, parties are likely to pay closer attention to provisions relating to:
- price fluctuation;
- force majeure;
- extension of time;
- loss and expense;
- variation valuation;
- change in law;
- suspension and termination rights; and
- dispute resolution procedures.
Contractors may become more cautious about accepting fixed-price contracts without fluctuation protection, while employers may seek stricter claim procedures and stronger safeguards against unsupported escalation claims
15. Conclusion
The impact of global conflict on the construction industry extends beyond rising material prices. Delays, supply chain disruption, financing pressure, and cash flow difficulties may create significant commercial and legal challenges for both contractors and employers in Malaysia.
While contractors face shrinking profit margins and delay exposure, employers must also manage project delays, contractor instability, and increasing disputes. Nevertheless, under most construction contracts, increased costs alone will not automatically entitle a contractor to additional payment unless the contract expressly provides for it.
Ultimately, the parties’ rights and obligations will depend on the contract terms, proper documentation, and compliance with contractual procedures. In uncertain market conditions, careful contract administration and early risk management remain essential.
General Disputes Resolution and Construction Division
General Disputes Resolution and Construction Division
General Disputes Resolution and Construction Division
This article is prepared and published by
Messrs. Ben Lee & Sharen
Advocates & Solicitors