Middle East conflict: Implications for Australian construction costs

Middle East conflict hits Australian construction costs

The escalation of conflict in the Middle East is beginning to materially impact the Australian construction sector, primarily through fuel price volatility, supply chain disruption and increased contractor risk pricing.

While construction cost escalation had shown signs of stabilisation in late 2025, current geopolitical developments are reversing this trend. Early indicators across projects, contractor behaviour and supply markets suggest a shift towards heightened uncertainty, reduced price certainty and increased commercial risk allocation.

This article outlines observed market responses, emerging cost pressures and potential pricing scenarios to help stakeholders navigate the evolving environment.

Fuel as a primary cost drive

Fuel is the most critical transmission mechanism for cost escalation across the construction sector. Its impact extends across transport and logistics, material production (energy-intensive processes such as cement and steel), site operations and plant usage. The current environment demonstrates that fuel does not just move vehicles, it moves every component of the construction industry. As fuel prices rise, the effect cascades through the entire project lifecycle, amplifying overall cost pressures. Energy prices, particularly gas, are closely tied to fuel costs - and as a result, there could be upward pressure on electricity costs across the board.

Market observations

General

Our clients are responding cautiously as capital expenditure programs are reduced or deferred. In some cases, we have seen major projects placed on “long-term hold” with immediate effect as increased scrutiny is applied to project feasibility and timing. This reflects broader concerns about cost predictability and macroeconomic stability.

Equally, the insurance sector is experiencing parallel impacts that are transferable to construction. Fixed-rate contracts and service level agreements are increasingly difficult to sustain, with cost volatility undermining long-term pricing assumptions. Policies established 12-24 months ago may not reflect true rebuild costs, creating a gap between insured value and actual exposure.

Contractor and subcontractor positioning

Contractors are actively adjusting their commercial approach, with major contractors (including Tier 1 and Tier 2 builders) flagging potential cost increases on current and upcoming projects. We see a clear unwillingness to hold fixed prices, particularly under lump-sum arrangements, as subcontractors become increasingly risk-averse in response to input cost volatility.

In these early phases, we have seen a movement away from lump-sum pricing toward cost-plus or hybrid models, an increased reliance on short tender validity periods (as low as 15 days), and requests for material escalation clauses now becoming standard practice. These changes indicate a market-wide repricing of risk.

Supply chain and material impacts

Diesel prices continue to increase nationally (exceeding $3.25/L, as of 30 March 2026) and pressures are emerging with early signs of fuel shortages, exacerbated in some cases by panic buying.

We have already seen significant pricing uplifts on PVC, concrete, plumbing (services) and trades. Concerns also exist around furniture, fixtures and equipment, particularly items sourced from Europe. Lead times for major equipment, such as transformers and generators, are also of concern. Pre-conflict price hikes for copper will also need to be monitored closely. Suppliers are beginning to issue formal notices of price increases, driven by fuel and freight costs, energy price volatility and shipping disruptions.

Key risks to projects

The current environment introduces critical risks, including: cost uncertainty impacting feasibility and funding decisions; contractual risk imbalance between clients and contractors; supply chain disruption, particularly for imported materials; reduced competition in tendering due to risk aversion; and program delays driven by procurement and pricing uncertainty. Rising costs and tightening margins increase the risk of contractor insolvencies - project owners should closely monitor contractor financial health to safeguard project continuity and delivery.

Pricing scenarios

Potential conflict de-escalation

If tensions in the Middle East ease, diesel prices may stabilise or decline through the medium term. Global supply increases and weaker demand from markets like China and Europe may suppress oil prices. Implications for construction may include reduced transport and logistics costs, lower concrete and material delivery costs, improved pricing certainty, and greater willingness to re-engage in lump sum contracting.

Prolonged or escalating conflict

If conflict intensifies or key supply routes, notably the Strait of Hormuz and Red Sea, are disrupted oil prices could increase by an estimated 25–30%. Any temporary Government intervention on fuel prices may be partially offset by market forces. The implications for construction may include: freight and haulage cost escalation by an estimated 10–20%, with flow-on increases in asphalt and bitumen pricing; renewed escalation in energy-intensive materials (cement, bricks and steel); a continued shift away from fixed-price contracting; and increased project delays and viability challenges.

Emerging industry responses

Commercial and contractual strategy

We are seeing material escalation clauses increasingly adopted as standard practice in response to volatility. Other strategies being pursued include allowing flexibility in contracts where volatility is evident, and alternative procurement models (such as staged pricing or cost-plus elements).

Cost planning and risk management

Regular reviews of cost plans and escalation assumptions, and close monitoring of fuel and oil market movements. Some stakeholders are exploring hedging strategies for fuel-intensive projects extending beyond 2026.

Collaboration and early engagement

Early engagement between clients, contractors, insurers and consultants can improve transparency around pricing assumptions and risks, and align stakeholders on risk-sharing mechanisms.

Monitoring during delivery

Rigorously assess progress claims, exercise caution around variations and offsite payments, and closely monitor contractor financial health and cost-to-complete positions to protect against the risk of mid-project failure.

Conclusion

The Middle East conflict is already influencing the Australian construction market through fuel-driven cost escalation and increased uncertainty. While the full extent of impact will depend on how geopolitical conditions evolve, early indicators suggest there may be a more volatile and risk-sensitive environment. Projects that proactively adapt – through flexible contracting, robust cost planning and early stakeholder engagement – may be better positioned to navigate the challenges ahead.

Altus Group’s current view, based on market observations and assumptions of potential escalation ranges relevant to the conflict:

Note: These ranges are indicative only and based on current market observations and assumptions, which are subject to change. For project-specific guidance, we recommend consulting directly with our team.

Disclaimer

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice or services of Altus Group, its affiliates and its related entities (collectively “Altus Group”). You should not act upon the information contained in this publication without obtaining specific professional advice.

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