How businesses can address geopolitical supply chain risks

Geopolitical tensions continue to expose the fragility of the global supply chain, causing delays and adding costs to UK construction projects. Recent tariffs on key construction materials and the closure of the Strait of Hormuz continue to disrupt the industry.

But what can companies do to protect themselves from the potential impacts of circumstances that are far beyond their control?

Tariff trauma

Construction companies must adopt a proactive and strategic approach to managing geopolitical volatility, embedding risk awareness at the highest levels of decision-making, a report from business insurer QBE advised last year.

According to Trade tensions and the construction sector: Navigating supply chain disruption, developed in partnership with Control Risks, tariffs on materials such as steel, aluminium, timber and copper inflated input costs and delayed projects in North America and Europe.

“Proactively engaging with insurers and leveraging specialist solutions will help construction firms manage project continuity and financial stability in the face of some uncertainty,” says Neil Fleming, UK Construction & Engineering Portfolio Manager at QBE.

The shipping forecast

The closure of the Strait of Hormuz, combined with the Houthi disruption to the Bab al-Mandeb Strait, effectively shut down all access to the Persian Gulf, earlier this year, as well as short-route passages between the Indian Ocean and the Mediterranean Sea. Passages via the Cape of Good Hope became the only viable alternative for UK-bound cargo from the region.

The consequences for the construction industry were immediate. The late arrival and shortage of materials – such as structural steel, copper, tiles, cladding, and mechanical and electrical equipment from India, China and the Middle East – disrupted both the supply chain and the delivery programme of any affected project.

“War and geopolitical instability, whether nearby or on another continent, will almost always cause disruption. It must be recognised that the supply chain begins with overseas procurement and ends only once the contractor has handed over the completed works free of defects,” advises law firm Hill Dickinson.

What it means for business

The law firm states that due to conflict in the Strait, UK construction faces:

• Delays of 10 to 14 days per voyage;
• Freight cost increases of 25% to 35% borne directly by Free On Board buyers or priced into future Cost, Insurance and Freight contracts;
• The risk of cargo being discharged at an alternative port under a war risks clause; Insurance gaps where sellers’ cover proves inadequate for the expanded listed areas;
• Knock-on programme disruption as dependent trades are unable to proceed without the delayed materials.

How to protect yourself

Construction materials travel thousands of miles by sea under contracts governed by charterparties, bills of lading and war risk clauses not typically allowed for in the supply chain pricing and programming of construction projects. Understanding that framework is the first step towards managing the risk.

Contractors should routinely seek a more robust definition of force majeure FM to permit the granting of an extension of time under the JCT contract and so avoid liability for liquidated damages for project delays, advises Hill Dickinson.

Equally, the employer will want contractual flexibility to re-sequence works or source alternative materials if continuing delay threatens the programme.

Safeguarding a project and protecting all parties’ best interests through an understanding of the shipping law framework and careful contractual drafting is essential in a world of unpredictable geopolitical risk.