Managing fuel-driven cost and delay risk under NZS construction contracts

Global instability in the Middle East is contributing to volatility in fuel markets. For New Zealand construction projects, that volatility is likely to translate quickly into higher transport and material costs, and pressure on supply chains. There is also the potential (in more severe scenarios) for Government intervention to manage fuel demand.

In this article, we consider the potential implications for construction sector participants under the NZS suite of contracts, using the Government’s Fuel Response Plan 2026. The Plan is the appropriate framework to think about how disruption may evolve and how contractual risk and entitlement may shift between parties over time.

We address the issue in two parts:

• a “now” problem: what projects may experience under phases 1 and 2 of the Plan, where the primary impact is price escalation and potentially emerging supply constraints; and
• a “tomorrow” problem: what may change under phases 3 and 4, where regulatory intervention (including changes in law) may become the dominant driver of project impacts and contractual entitlements.

 

Phases 1 and 2: the “now” problem – price escalation and potential supply impacts

Under phases 1 and 2 of the Fuel Response Plan, the key issue for projects is likely to be fuel price escalation and the resulting increase in the cost of materials (and potentially transport and logistics).

Contract type will be critical

How fuel and material cost escalation is addressed under the NZS suite of contracts will first depend on the type of pricing arrangement adopted, for example:

• lump sum / fixed price contracts; and
• cost reimbursement contracts.

Cost reimbursement contracts are generally better placed to accommodate increasing input costs (subject to the specific reimbursement and notice provisions agreed).

Lump sum and measure and value: is there a cost fluctuation mechanism?

In a lump sum contract (and, in many cases, a measure and value contract), a key question is whether the parties have agreed a cost fluctuation mechanism or a bespoke entitlement to address escalation. This might include:

• the cost fluctuation mechanism in Appendix A of the NZS contracts, which contemplates quarterly adjustments using agreed cost indices; or
• an alternative, project-specific mechanism.

If there are no cost fluctuation provisions (and no bespoke entitlement provisions), then under a lump sum arrangement based on the NZS suite, the legal risk of market-driven price escalation will generally sit with the Contractor.

Materials shortages and longer lead times: time impacts may arise

To the extent that phases 1 and 2 result in material shortages or increased lead times, Contractors may have grounds to seek an extension of time (EOT) for completion. However, the Contractor would be unlikely to be entitled to time-related costs.

Parties should also ensure they:

• use the early warning provisions under the NZS contracts; and
• comply with any agreed time bars under the EOT regime.

Commercial solutions may be explored outside strict contract entitlements

Even where the legal risk position is clear, we expect many Principals and Contractors will consider commercially-driven solutions, particularly where escalation risk threatens project viability. Each project will be different, and outcomes are likely to be negotiated on a case-by-case basis.

 

Phases 3 and 4: the “tomorrow” problem — change in law and potential suspension

Phases 3 and 4 would likely have materially different impacts. Under the standard NZS contracts, regulations made under (or amendments to) the Petroleum Demand Restraint Act 1981 are likely to constitute a change in law. That may entitle the Contractor to a variation to the extent the change increases the Contractor’s costs of performing the works.

Potential consequences if phases 3 or 4 are triggered

If the Government moves to phases 3 or 4, one outcome may be project delay. In that scenario, the Contractor may have entitlements including:

• an EOT for resulting delays; and
• recovery of associated costs, potentially including reasonable demobilisation and remobilisation costs, where properly evidenced.

Suspension of the works may also trigger entitlement

If it becomes necessary to suspend the contract works due to the impacts of a change in law, that suspension would likely trigger an entitlement to a variation, as it would not be attributable to Contractor default.

Assessment will be detail-driven

As with any unforeseen event, the position under the contract will turn on the detail. The Engineer (acting fairly and impartially) will need to assess claims carefully, including:

• whether the requirements for a variation or EOT have been met; and
• whether notice requirements have been complied with.

As with phases 1 and 2, we expect many outcomes will ultimately be negotiated commercially on a project-by-project basis.

 

Conclusion

At this stage, it is almost impossible to predict how fuel market disruption associated with the Middle East conflict will develop. The NZS suite provides a structured framework for addressing likely project impacts across different scenarios. However, in addition to considering contractual entitlements, parties should communicate early and openly to minimise surprises and support project continuity. Contractors should also be thinking about the early warning provisions in the NZS suite.

If you would like to discuss how these issues may apply to a specific project or contract, our team can assist as this unprecedented situation evolves.