A. INTRODUCTION

The on-going conflict in the Middle East has created uncertainty across multiple industries and the construction industry is no exception. Whilst the conflict may be geographically distant from Malaysia, its effect can still be felt through rising fuel prices, increased material and transportation costs, supply chain disruption, posing significant legal and contractual risks.

For those involved in construction projects, these raise immediate and practical questions. Who bears the risk of inability to perform contract due to this conflict? Who bears the risk of rising costs? Can a contractor claim additional time or money? When does disruption amount to force majeure, and when is it merely a case of performance becoming more expensive?

This article aims to discuss amongst others:

1. how the ongoing Middle East conflict may affect construction projects;
2. the common consequences of such conflict, including rising costs, supply chain disruption, and difficulty in performance; and
3. the main contractual and legal avenues available to contractors and employers facing those difficulties, including force majeure, extension of time, variation, change in law, and frustration.

Ultimately, the answer will depend primarily on the wording of the construction contract. In most cases, the contract remains the key document for allocating risk between the parties.

B. PRICE FLUCTUATION – WHO BEARS THE RISK?

The most predictable of queries being asked from both contractors and employers are “How do we claim for the price fluctuation” or “we have received numerous claims for price hike of materials from contractors are we liable to pay” now that prices of materials have taken a sharp hike in price.

Under most Malaysian standard form construction contracts, the general position is that the contractor bears the risk of price escalation unless the contract expressly provides otherwise or the government provides a statutory relief to aid contractors on this issue. The position under common standard forms may broadly be summarized as follows:

PAM Contract (2006/2018):

• Refer to Clause 13 – The Contract Sum is fixed and can only be adjusted strictly in accordance with the express provisions of the contract. Errors in pricing must be corrected before execution, without altering the overall Contract Sum.

IEM Forms (1989/2011/2017):

• Refer to Clause 53 – The Contract Sum is not subject to adjustment for increases or decreases in labour, material, or other costs after the tender date, except where changes arise from variations.

PWD 203/203A (Rev 1/2010):

• Refer to Clause 30 – Price fluctuation adjustments are only allowed if specific fluctuation provisions are expressly included in the contract. Where applicable, adjustments are reflected through interim payments and incorporated into the final Contract Sum. 

AIAC Standard Form of Contract (2024):

• Refer to Clause 13 – If parties have entered into a lump sum contract, the Contract Sum is fixed and can only be adjusted strictly in accordance with the express provisions of the contract.

FIDIC Red Book (and related forms):

• Refer to Clause 13.7 and 13.8 – Price escalation is addressed through Clause 13.7 (change in legislation) and Clause 13.8 (changes in cost) where it allows adjustment of the Contract Price for increases in labour, materials, and other costs after the Base Date. However, this provision can only be operated where the contract incorporates a price adjustment formula and cost indices.

Thus, under most standard forms of contract, subject to variations and/or any other contractual provisions stipulated therein, contract sum is not to be adjusted under any circumstances. Any increase in material price in construction is to be absorbed by the contractor.

C. CONTRACTORS’ LENS: WHAT AVENUES ARE AVAILABLE?

Even where the contractor bears the general risk of price escalation, there may still be other contractual or legal avenues that can be explored to deal with the predicament faced by contractors on absorbing the fluctuating costs of materials.

I. Force Majeure

Contractors may attempt to rely on force majeure provisions, particularly in light of the global supply disruptions caused by the war in the middle east. Since force majeure forms part of the risk allocation under a construction contract, emphasis must be given to the contractual wordings of the same as the impacts of such clause, may often vary depending on the forms of contract.

Reference should be given to the Singaporean decision of Magenta Resources (S) Pte. Ltd. v China Resources (S) Pte. Ltd. [1996] 3 SLR 62 where Rajendran, J observed that force majeure is simply a label for contractual terms dealing with events beyond the parties’ control. Whether force majeure applies, and what relief follows, depends on the terms of the contract itself:

“What is referred to as force majeure in our law (as opposed to French law from which that term originates) is really no more than a convenient way of referring to contractual terms that the parties have agreed upon to deal with situations that might arise, over which the parties have little or no control, that might impede or obstruct the performance of the contact. There can, therefore, be no general rule as to what constitutes a situation of force majeure. Whether such a (force majeure) situation arises, and, where it does arise, the rights and obligations that follow, would all depend on what the parties, in their contract, have provided for.”

A typical force majeure clause includes a list of triggering events that could excuse performance. Whether these disruptions will constitute a valid force majeure event depends entirely on the language of the particular contract. Common triggering events such as “acts of war,” “government actions,” “embargoes,” “civil unrest” and “acts of terrorism” may capture Iran-related disruptions.

Key examples from local and international standard form contracts:

PAM Contract (2006/2018) and IEM Contracts:

• Refer to “Force Majeure” provision– does not provide expressly that “war” give rises to a force majeure event. Thus, contractors may not seek relief arising from the same under the PAM Contract. However, should there be any effects arising from governmental regulations and/or changes in law, then the same may lend assistance to contractors to seek relief under the force majeure provision.

PWD 203/203A (Rev 1/2010) and AIAC Standard Form Contract:

• Refer to “Force Majeure” provision– does expressly provide that “war” (whether war be declared or not), give rises to a force majeure event. Further, under AIAC, the contractor bears the burden to prove that (a) the said event is beyond party’s control, not reasonably foreseeable at the contract date; (iii) not reasonably avoidable; and (iv) not substantially attributable to the other party. 

FIDIC Red Book (and related forms):

• Force majeure under FIDIC does similarly cover Wars, To succeed, similar to the AIAC Contract, the invoking party must satisfy a four-limb test: the event must be (i) beyond its control; (ii) not reasonably foreseeable at the contract date; (iii) not reasonably avoidable; and (iv) not substantially attributable to the other party.

Further, based on the jurisprudence in Malaysia, force majeure events must generally concern events that prevent or delay performance — not events that merely make performance more expensive and/or burdensome. Key examples of this can be seen through the table below.

In other words, the mere existence of a war does not automatically excuse non-performance. The real question is whether the conflict has actually prevented contractual performance in the manner contemplated by the contract.

II. Extension of Time & Loss and Expense

Even if a force majeure event has occurred and that has prevented or delayed the performance of the work, this does not, in itself, automatically entitle the contractor to an extension of time.

In most standard form construction contracts (such as the PAM, PWD and AIAC), the contractor must still comply with the contractual machinery governing claims. These usually include:

(a) issuing notice within the time prescribed by the contract ;

(b) providing sufficient details of the delaying event;

(c) establishing causation; and

(d) demonstrating that the event affected the critical path or delayed completion.

The combined effect of these requirements is that force majeure operates within a structured contractual framework, not as a free-standing remedy.

In most standard form contracts, force majeure is treated as a neutral event. It is not caused by the employer or the contractor. For that reason, the usual contractual response is to grant the contractor an extension of time so that it is not penalized for delay. However, the contractor will not ordinarily be entitled to recover additional costs arising from the event.

By contrast, entitlement to loss and expense is generally reserved for situations where the delay is attributable to the employer—such as variations, late instructions, or failure to provide access to the site. A review of the loss and expense provisions under these standard forms makes this clear: they are designed to compensate the contractor for employer-caused delays, not for delays arising from neutral or external events.

Accordingly, even where a contractor successfully establishes that a force majeure event has impacted the works, this does not automatically open the door to cost recovery. Unless the contract expressly provides otherwise (for example, through fluctuation clauses or specific risk allocation provisions), the contractor will typically bear the financial consequences of such neutral events.

III. Variation Claims

Where the employer issues instructions for, amongst others, additional work, alteration of the scope, design, or method of construction, contractors may argue that these changes and/or instructions justify additional payment as they constitute variation works.  However, variation clauses are not intended to operate as a general mechanism for recovering price escalation.

Under most standard form contracts, where the varied works are of similar character and carried out under similar conditions to the original works, the existing contract rates will usually continue to apply. Only where the varied works are materially different in character, or carried out under materially different conditions, is there greater scope for valuation based on prevailing or market rates.

Key examples from local and international standard form contracts:

PAM Contract (2006/2018), IEM, PWD, AIAC & FIDIC:

• Where the works for variation works are of similar character and/or executed under similar conditions, contractor is to adopt rates and prices in the contract which were quoted at the inception of the contract prior the ongoing price hike.
• Only when work instructed is not of similar character, valuation shall be at the prevailing market rate.

Thus, where the scope of the variation works is similar to the works originally contemplated under the contract, employers may still insist the contractor claim based on material prices that were quoted at the inception of the contract notwithstanding the price hike occasioned by the war.

IV. Change In Law / Governmental Initiatives

Contractors may also seek to rely on “change in law” provisions where geopolitical developments give rise to regulatory or policy changes that impact the cost of construction materials. In principle, such clauses are intended to allocate the financial consequences of legislative or regulatory shifts that occur after the contract has been entered into.

However, a distinction must be drawn between market-driven price increases and actual legal or regulatory change.

A rise in fuel or material costs caused by global conflict, market uncertainty, or supply chain pressure is not, by itself, a change in law. To rely successfully on this type of clause, the contractor will generally need to point to a specific legal, regulatory, or governmental measure that came into force after the contract date and directly affected the project.

To date, there has been any legislative or regulatory change in Malaysia specifically aimed at allowing contractors to recover increased material costs arising from global events such as the Middle East conflict.

In the absence of a clear and identifiable change in law, increases in fuel prices or construction material costs—however significant—will generally be treated as part of the contractor’s commercial risk. Market volatility, supply chain disruption, and geopolitical tensions, without more, do not constitute a legal basis for cost recovery under standard construction contracts.

V. Doctrine of Frustration

In more extreme and dire situations, contractors may argue that the project has become commercially unviable due to exceptional cost increases. Under Malaysian law, however, the doctrine of frustration is applied narrowly. A contract will only be frustrated where performance becomes impossible, not merely more expensive or less profitable.

As such, arguments based on economic hardship or increased cost rarely succeed in construction disputes. However, that said, where a project has become commercially strained for both parties, it may be pragmatic to consider a mutual termination or negotiated exit. While not a legal entitlement, such an approach can be commercially beneficial, allowing both employer and contractor to avoid prolonged disputes, escalating costs, and project delays.

In these circumstances, parties may explore:

• an agreed termination with a structured settlement of outstanding payments.
• demobilisation arrangements and cost-sharing mechanisms; and
• a clean contractual exit that preserves the parties’ commercial relationship.

Ultimately, while the law may not provide relief for economic hardship, commercial solutions—such as mutual termination—can often achieve a more efficient and less contentious outcome than strict reliance on legal remedies.

D. Key Practical Lessons for Contractors and Employers

The recent cost escalation pressures and geopolitical disruptions highlight a number of important practical lessons for both contractors and employers operating under Malaysian construction contracts.

Lessons for the Contractor

1. Cost escalation alone does not give entitlement – Rising material or fuel prices are generally a contractor’s risk unless expressly provided otherwise.
2. Understand the provision force majeure under your contract – typically provides time relief only, not recovery of increased costs.
3. Use variation claims carefully – subject to the terms of the contract, market rates apply only where work is not of similar character not as a workaround for price increases.
4. Maintain proper records – Keep detailed documentation (costs, delays, correspondence) to substantiate claims.

Lessons for the Employer

1. Preserve the fixed-price position – Ensure that the Contract Sum is only adjusted where expressly permitted under the contract.
2. Control variations strictly – Issue formal written instructions and avoid informal directions that may lead to unintended claims.
3. Assess nature of variation works – Substantial or different works may be valued at market rates, increasing cost exposure.
4. Enforce notice requirements – Require contractors to comply strictly with contractual procedures before entertaining claims.
5. Scrutinise delay and cost claims – Ensure claims are supported by proper causation and evidence, not general market conditions.
6. Consider mutual walk-away exit plans – Retaining a financially distressed contractor often compounds delays, costs, and disputes—whereas a clean, structured exit allows for timely replacement and mitigates further risk.

Shared Takeaway

While strict enforcement of contractual rights remains the first line of defense, both parties should recognise that a purely rigid approach may not always yield the best outcome in times of widespread disruption.

A more effective strategy often lies in adopting a pragmatic, mutually beneficial approach, where both employer and contractor are prepared to engage to a degree of give-and-take.

In appropriate cases, employers may consider providing measured support—whether through adjustments to sequencing, procurement coordination, or other commercial arrangements—to enable contractors to complete the works. Such cooperation can help avoid delays, disputes, and project failure.

Ultimately, the success of the project benefits all parties. A collaborative approach, balanced with proper contractual discipline, is often the most commercially sensible way forward in managing the challenges posed by global disruptions.

E. CONCLUDING THOUGHTS

There’s no doubt that the construction industry is poised to face significant challenges. In light of a potential economic downturn, industry players must act proactively. This begins with strengthening project management frameworks to ensure resilience and continuity, enabling construction firms to stay afloat amid increasing uncertainty.

A critical first step is a thorough review of existing contracts. Parties must understand the scope, limitations, and potential pitfalls within their agreements, particularly in areas such as force majeure, delay provisions, and cost escalation clauses. This understanding allows stakeholders to strategically navigate risks and identify avenues to mitigate disruptions

The mindset of treating a contract as a mere formality, something to be shelved once the deal is signed—must be firmly abandoned. Both employers and contractors must therefore remain consistently and proactively contractually vigilant. This means actively engaging with the contract, monitoring compliance, anticipating risks, and responding strategically to evolving circumstances. In an increasingly volatile environment, those who treat the contract as a dynamic management tool—rather than a document of convenience—will be far better positioned to navigate uncertainty and safeguard project success.

This article is intended for general information only and does not constitute legal advice. The issues discussed above are necessarily broad in nature, and the position in any particular case will depend on the specific facts, contractual terms, and applicable law. Parties facing difficulties arising from the ongoing conflict or related disruptions should seek specific legal advice before taking any action.

Should you require advice on how the ongoing conflict or related supply chain and cost disruptions may affect your construction project or contractual rights, please do not hesitate to contact us.