Key takeaways
- The near-complete closure of the Strait of Hormuz, through which 20% of global oil supply flows, has pushed up fuel, freight, shipping and insurance costs. In response, many freight providers, building material suppliers and manufacturers have added fuel surcharges.
- Higher fuel, freight and energy costs are feeding into broader construction cost pressures. This is most visible in construction materials and inputs that are linked to crude oil or petrochemical feedstocks, are energy-intensive, or are mostly imported.
- The full effect on construction costs remains uncertain. A short conflict may result in a contained, temporary price increase that unwinds; a longer conflict would raise the risk of broader escalation, procurement disruption and tighter project feasibility.
- Overall, the Middle East conflict should be treated as a live cost‑risk issue rather than a settled escalation outcome.
- Ongoing volatility across both unawarded and active projects reinforces the importance of early cost advice, balanced contractual risk allocation, and disciplined procurement and contingency planning to support informed decision‑making and avoid reactive budget and program shocks.
The impact so far
The Middle East conflict is already driving cost pressures across Australia’s construction industry. Higher oil and gas prices have pushed up fuel costs and the cost of materials connected to energy and petrochemical supply chains.
These cost pressures may remain concentrated in transport and a handful of exposed products. But the longer the conflict continues, the more likely it is to drive general escalation across materials, plant, preliminaries and tender pricing, while causing additional delays and disruptions to supply chains.
The shock arrives as cost pressures are already beginning to intensify across construction markets. RLB’s Q1 2026 Construction Market Update found that building output costs had accelerated in 2025, with escalation expected to rise across most of Australia from 2027, most notably in South East Queensland.
Transport and fuel costs have risen
The near-complete closure of the Strait of Hormuz, through which about 20% of global oil supply flows, has pushed up oil, gas, freight, shipping and insurance costs. Diesel prices are up about 75% to over $3 a litre since the conflict started. Global container shipping rates have increased by about 15% in March (with much larger increases for shipping routes near the Middle East). Fuel shortages have also occurred in some regional areas.
Higher fuel and freight costs have lifted delivery prices for imported goods and locally transported materials. Many freight providers, building material suppliers (such as concrete, steel and sand), and manufacturers have added surcharges over the past few weeks, with fuel charges typically in the 10-25% range. Higher diesel prices have also increased the costs of running plant and equipment such as earthmovers, cranes and other heavy machinery.
Broader input-cost pressure is spreading
Higher fuel, freight and energy costs are feeding into broader construction cost pressures. This is most visible in construction materials and inputs that are linked to crude oil or petrochemical feedstocks, are energy-intensive, or are mostly imported.
Some of the publicised price increases for products and materials include:
- 30% increase for polymer-based products such as plastic pipes and fittings, PVC profiles
- 30-50% increase for bitumen and asphalt
- 10% increase for aluminium cladding and screening
- 5-10% increase for reinforcing steel
What the conflict means for construction projects
For public and private developments, the effects of the Middle East conflict are likely to be felt across both projects in planning and projects already under construction.
Projects yet to be awarded: higher and more volatile costs
Projects that have not yet been awarded are the most immediately exposed. Rising fuel prices, higher freight costs and material price increases are already flowing through supplier pricing. This means early cost plans and budgets may need to be revisited, with greater allowances for volatility and risk than would typically have been required prior to the conflict.
Tendering conditions are becoming more complex
Contractors are increasingly cautious about committing to fixed prices in an uncertain market. As a result, tenders are more likely to include:
- Targeted qualifications for fuel, freight and energy‑intensive materials
- Requests for rise and fall clauses to share price escalation risk
- Narrower definitions of delay and cost relief
- Shorter tender validity periods, reflecting reduced confidence in holding prices over time
These factors can slow procurement and lengthen contract negotiations.
Awarded projects exposed to escalation mechanisms
For projects already under contract, the impact will depend on how risk has been allocated. Where rise and fall clauses apply — particularly for asphalt, concrete or fuel‑sensitive materials — developers may see contract values increase as higher input costs are passed through. This is especially relevant to civil‑heavy works such as car parks and external pavements.
Increased risk of force majeure and contractual claims
Contractors may seek relief through contractual clauses. It should be noted that war and conflict do not automatically trigger force majeure relief. Entitlement depends on precise contract wording, the nature of the impact, and whether performance is genuinely prevented – not merely more expensive. If contractors are unable to obtain relief through other contractual mechanisms, there is an increased likelihood of claims where the conflict can be shown to impede performance — for example through material shortages, freight disruption or fuel supply constraints.
Potential delays to construction programs
Projects already in delivery may face schedule risks where long‑lead items have not yet been procured. Disruptions to global shipping routes, reduced air cargo capacity and higher road freight costs all increase the risk of delayed deliveries. Any future fuel shortages would further compound these risks and could have a material impact on construction programs.
Cost pressure on cost‑plus and managing contractor projects
Projects being delivered under cost‑plus or managing contractor arrangements are particularly exposed where major trade packages remain unawarded. Structural and building services trades — which are both energy‑ and material‑intensive — are likely to experience the greatest upward pressure.
The long-term impact of the conflict is uncertain
The impact of the Middle East conflict on the construction industry will depend on how long the conflict lasts, how quickly shipping routes normalise, whether oil and gas production can ramp up quickly, whether current surcharges unwind or remain in place, and whether cost rises remain concentrated in exposed products or spread across the wider supply chain.
Even if the conflict ends soon, there will be lingering effects. Many increases have already been announced and may take time to unwind, particularly if oil prices don’t fall back to early 2026 levels. In this scenario, the effect may remain concentrated in preliminaries, freight, selected energy-intensive materials and imported equipment.
An extended conflict would likely have a much larger impact on construction costs. If higher freight, energy and petrochemical costs persist, they are more likely to broaden into a wider range of construction inputs.
There is also a broader macroeconomic risk arising from an extended conflict: ongoing higher transport and input costs could lift inflation expectations, prices, wages and potentially interest rates.
Under an extended conflict scenario, higher costs, delays and higher interest rates could combine to make fewer projects feasible, weighing on construction activity.
Navigating uncertainty
Global conflict, energy price volatility and supply‑chain disruption are reshaping construction risk. While these forces sit outside the control of individual projects, developers and builders can take deliberate steps to reduce exposure and protect outcomes.
Re‑establish cost certainty early
In volatile markets, historic benchmarks date quickly. Developers may consider re‑baselining project budgets early, explicitly separating base construction cost from allowances for escalation, contingency and risk. This enhances transparency for investors and boards and can avoid last‑minute funding shocks once tenders are received.
Target procurement to high‑risk packages
Not all elements of a project carry the same exposure. Civil works, concrete, asphalt, steel, façade systems, building services and imported equipment are particularly sensitive to fuel, freight and energy costs. Developers may consider mitigating this risk by:
- Bringing forward procurement of long‑lead or high‑exposure packages
- Securing early works or supply agreements where feasible
- Considering alternative materials or local sourcing where appropriate
This targeted approach can reduce both cost escalation and program uncertainty.
Balance risk allocation in contracts
In uncertain markets, rigid risk transfer often results in higher prices, narrower competition or qualified tenders. Developers and builders can achieve better outcomes by allowing limited, clearly defined risk‑sharing mechanisms, such as targeted rise‑and‑fall clauses for fuel‑linked inputs, rather than paying broad contractor risk premiums. Clear contractual treatment of force majeure, delay and escalation may reduce the likelihood of disputes later.
A balanced risk allocation supports more sustainable pricing and fewer disputes.
Maintain procurement momentum
Shorter tender validity periods reflect contractors’ limited ability to hold pricing. Projects that stall at award risk losing cost certainty. Delay at award can quickly erode any perceived savings achieved during tender. Streamlined approvals, decisive procurement and early engagement with the supply chain are increasingly critical to locking in value.
Strengthen cost governance on cost‑plus and managing contractor models
Where cost‑plus or managing contractor arrangements are used — particularly with unawarded trade packages — discipline is essential. Clear target costs, independent review of subcontract pricing and early‑warning mechanisms may help prevent incremental budget drift as market pressures evolve.
Build program resilience, not just contingency
Rather than relying solely on time float, both developers and builders can reduce delay risk by planning flexibility into construction sequencing, identifying alternative suppliers early and closely tracking logistics‑dependent activities. This approach can improve resilience where shipping routes, air freight capacity or fuel supply may be disrupted.
Move from uncertainty to informed decisions
In today’s volatile market, clients need clarity — which packages are genuinely exposed, which are less sensitive, what is already occurring in the market, and what remains scenario risk. With escalation assumptions now highly uncertain and traditional forecasts based on pre‑conflict conditions, relying on historic allowances alone risks under‑provisioning budgets and contingencies.
Early engagement with RLB enables package‑level exposure analysis, real‑time market insight and informed decisions on contingencies, procurement timing and contract structures — turning volatility into a managed risk rather than a budget surprise.
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