Next phase of Middle East conflict could be the death knell of many developers

In the early weeks of the conflict in the Persian Gulf, the construction industry’s first reflex was to instinctively look at diesel. While this concern was immediate and legitimate, fuel was only the opening act.

We are now moving onto the second act, which is a far more consequential phase of this shock. The conflict in the Middle East is no longer just a freight problem.

It is beginning to reshape the underlying economics of construction delivery in Australia at precisely the moment when the industry can least afford it.

Paper-thin margins under further pressure

Development feasibilities were already under pressure well before the conflict in the Middle East. Margins were compressed to a point where many developers were shelving projects and waiting for the market to turn.

Contractors were not in a much better position.

Insolvency rates had been climbing for two years. The combination of rising labour and material costs and the fall in productivity had pushed many builders over the edge. The ones still standing were, in many cases, surviving rather than thriving.

Now layer on top of that: elevated oil prices, rising freight surcharges, extended shipping lead times and the beginning of material cost repricing.

Altus Group’s Q1 market view put residential construction escalation for 2026 at 5 to 9 per cent before any conflict premium was applied. A medium-impact scenario, assuming some de-escalation, pushes that figure above 7.5 to 11 per cent. A prolonged conflict scenario takes it beyond 12.5 per cent.

In a market where feasibility margins were already paper-thin, even the base case can be the difference between a project proceeding or being shelved indefinitely.

The quiet impact on material production

Much of the early conflict commentary focused on transport; ships taking longer, containers in short supply, freight rates spiking.

There is a parallel story that has received far less attention: the impact of elevated fuel costs on the production of construction materials themselves.

Fuel is not just what moves materials. It is what makes them.

Consider the energy intensity of the materials that form the backbone of Australian construction:

• Steel: Blast furnaces and rolling mills run on energy; when fuel prices rise, steel follows — wherever it’s made.
• Aluminium: The most power-hungry material in construction, and the Middle East is a key regional producer.
• Cement and concrete: Every cubic metre carries an embedded fuel cost that compounds across an entire project program.
• Copper: Disrupted Gulf sulphur supply has already cut production rates, pushing costs into electrical and services trades.
• Glass, bricks, tiles, insulation and engineered timber: All energy-intensive to make.

The ripple-effect is broad.

What work will actually go forward?

Here is the question that every developer is asking right now: in this environment, what will actually get built?

Contractors are not passive participants in this decision.

Faced with market-wide uncertainty, rising input costs and the spectre of further insolvencies, they will make rational decisions about which projects they pursue.

The pipeline of work that gets priced and built will increasingly be determined not by developer intent but by contractor appetite.

The most desirable work, such as government-backed projects with reasonable risk allocation, those with institutional backing, and data centres and utilities, will continue to attract competitive interest.

Contractors need revenue to keep their doors open. In a tight market, they will selectively pursue the work that offers the best combination of margin, payment certainty and manageable risk.

Speculative private development, complex mixed-use projects and high-rise residential with thin feasibilities are the jobs that will struggle to attract quality contractors, or any contractors at all.

The tender returns for this class of work will either be too high to be feasible or too low to attract a contractor willing to take the work at any price.

That second scenario is, in some ways, the more dangerous one.

The race to the bottom

When volume falls, margins compress, and desperation enters the market, a class of tenderer emerges that will price below cost to secure revenue - betting on variations, hoping conditions change, or simply preferring a slow death to no work at all.

For clients, the cheapest tender can look like a win. In the current environment, it should look like a red flag.

The structural conditions for a race to the bottom are present.

Developer pipelines are constrained. New project starts are declining. The pool of available work is shrinking.

Into that environment, contractors under financial pressure will tender aggressively - too aggressively.

Clients who select on price alone, without adequate scrutiny of the contractor’s financial health, supply chain relationships and delivery track record, are setting themselves up for the very outcomes they are trying to avoid: non-complying works, high level of defects, cost overruns, program delays, mid-project insolvencies and the cascading failures that follow when a head contractor goes under.

Where does this leave the market?

The projects that will be built successfully over the next 12 to 18 months will be the ones where clients accepted that certainty costs money, where realistic contingencies were established before tenders went out, where contractors were selected for capability, risks are appropriately allocated, and financial health is prioritised over lowest price, and where payment terms reflect a shared interest in project success rather than a transfer of risk down the chain.

The immediate shock of rising diesel and freight costs was palpable.

The longer-duration risk - material repricing, contractor selection distortions, feasibility failure and the quiet culling of the project pipeline - is more diffuse, but more consequential.