Ormuz, Energy and Construction: Lessons for Contracts and Projects

The crisis in Iran and tensions in the Strait of Hormuz once again show that geopolitical risk can no longer be treated as a factor external to a project.

Its impact extends beyond oil prices. It affects energy, transport, maritime logistics, petroleum-derived materials and, ultimately, the actual cost of delivering construction projects.

According to an ANCI report, the crisis in Iran is already affecting construction costs: energy costs have risen by 47%, bituminous materials by 52%, and road pavement rehabilitation projects face cost overruns of up to 25–30%.

The problem is not simply that costs are rising. The real problem is that they rise after a contract has been awarded, when many critical decisions have already been made: price, scope, contract terms, suppliers and schedule.

Lessons for public procurement

The first lesson is that public contracts cannot rely solely on exceptional measures when price crises occur. If volatility in energy, logistics and materials is becoming structural, price adjustment mechanisms need to be more responsive, automatic and aligned with actual construction costs.

The second is that some contracts are especially exposed. These include short-duration works, road pavement rehabilitation, asphalt works and contracts that rely heavily on petroleum-derived products. By their nature, these contracts often have less room to absorb cost overruns and may fall outside standard price adjustment mechanisms.

The third is that transferring all market risk to the contractor may appear efficient during tendering, but it can create problems during delivery: claims, delays, reduced quality, renegotiations or even work stoppages.

In public construction, the goal should not be merely to award the contract at the lowest price. It should also be to ensure that the contract remains viable when market conditions change dramatically.

When risk becomes part of the project

This lesson applies beyond public construction. It matters for any capital-intensive project in construction, mining, energy or infrastructure.

Geopolitical risk needs to be incorporated from the estimating and contracting stages. Listing it in a risk register is not enough. It must inform the contracting strategy, procurement model, cost assumptions, sensitivity analyses and contingency reserves.

Although the report does not provide mining-specific data, it does show significant cost increases for types of work that are comparable in their reliance on machinery, energy, transport and earthmoving. For example, port platforms and fill works show an estimated 17% increase. This offers a useful reference point for understanding the potential exposure of certain work packages in mining, industrial and heavy infrastructure projects.

Many projects still use a contingency of around 10% of construction costs, excluding owner’s costs, as a benchmark. But amid high volatility in energy, logistics and materials, that figure may be insufficient unless it is based on a proper risk analysis.

The principle is simple: the greater the exposure to risk, the larger the contingency reserve should be.

This means moving beyond automatic percentages towards well-founded scenarios that account for changes in energy prices, critical materials, transport, exchange rates, lead times, supplier concentration, engineering maturity and the contract’s capacity to absorb cost increases.

Volatility can no longer be treated as an exception. In some sectors, it is part of the normal project delivery environment.

Projects therefore need stronger contracting strategies, more realistic contingency reserves and price adjustment mechanisms that protect financial viability without bringing delivery to a halt.

When geopolitics affects the cost of construction, it stops being an international headline and becomes a central project management issue. Applying international risk management best practices early is no longer just a matter of methodology: it is critical to protecting the financial, contractual and operational viability of projects.

Contact Leapman S.L to learn how we apply our risk management expertise to capital-intensive projects in mining, industry and infrastructure, from the early stages through to delivery.