This is not another force majeure article. The supply-chain related legal exposure that contractors are carrying today—in sanctions risk, specification non-compliance, warranty exposure and regulatory volatility—extends well beyond what even a well-drafted force majeure clause protects.
An engineering, procurement and construction contractor on a gas-fired power plant discovers during commissioning that transformer oil in a critical unit contains Russian-origin naphthenic base oil, which is a prohibited source under Office of Foreign Assets Control sanctions. The contractor didn’t source it. A subsupplier two tiers below made the substitution when disruptions in the Strait of Hormuz tightened the primary supply chain for this specialty product and no one in the purchase-order chain flagged it. The procurement decision is long done and the documentation trail that should have caught it doesn’t exist.
That scenario is specific to power generation, but the exposure is not. Specialty petroleum products, electrical components, solar modules and batteries flow through the same international chokepoints and face the same regulatory regimes on any large industrial or infrastructure project. The supply chain is the common thread—not the project type.
When Substitutions Drive the Exposure
Most contractors have thorough compliance programs at contract award. The legal exposure tends to arise not at the front end, but when supply-chain pressure forces mid-project substitutions and the compliance framework cannot keep pace. Contractors who have managed EPC procurement through volatile conditions recognize this pattern immediately. The project manager’s job at that point is to keep procurement off the critical path and to keep the job moving.
The prime contract in the transformer oil scenario contained OFAC compliance representations and audit rights, and the original purchase orders carried the same terms. But when supply tightened and subcontractors began sourcing from alternative suppliers, the replacement purchase orders adopted the new suppliers’ standard terms and dropped the OFAC representations and audit rights entirely. The contractor had no visibility into the substitution and no contractual mechanism to catch it. No flag, no audit trail, no documentation. This is the flow-down gap: the distance between the compliance framework in the prime contract and the commercial reality of how materials are actually procured.
That gap becomes dangerous because the legal environment around construction materials is moving faster than most governance structures can track. Steel, aluminum, solar modules, batteries and specialty petroleum products sit in the crosshairs of simultaneously active enforcement regimes, e.g., the Uyghur Forced Labor Prevention Act, OFAC sanctions, Section 232 and Section 301 tariffs. A sanctions designation or tariff reclassification can shift in days and will very likely change the legal status of a purchase order that was compliant when it was placed. Compliance programs built around six- or 12-month review cycles are not designed for that volatility.
The exposure extends beyond sanctions. A substituted material that was operationally necessary can generate owner claims for specification non-compliance and warranty breaches that no one anticipated at the time of procurement. Whether or not a substitute satisfies the contract specification is an operational and a legal question, and on a project under pressure the issue is frequently never addressed. Even when the project team is aware of the issue, their subcontractor’s subsupplier may not be.
The Relief Mechanisms Project Teams Miss
Supply-chain disruptions can also trigger relief avenues the project team may not recognize on its own. That is one of the strongest arguments for an ongoing partnership between the in-house legal and project teams. Insurance notice obligations under business interruption and builders risk policies, change-in-law provisions that offer compensation or schedule relief distinct from force majeure, and other contractual mechanisms all require prompt notice and documentation. Even where the project team is effective at implementing operational solutions, where the relationship between legal and the project team is arms-length, these recovery opportunities are frequently missed.
Starting the Conversation
Contractors that manage supply-chain exposure effectively share a common trait: In-house legal and project teams maintain an ongoing dialogue about risk—not just when a problem surfaces, but as a regular part of project execution. “Over-lawyering” procurement kills speed, and every project director knows it. But the alternative isn’t less legal involvement—it’s earlier and more integrated legal involvement so that the framework is already in place when conditions shift.
At the organizational level, the conversation starts with whether the compliance program is built to handle what actually goes wrong. Most programs are tested against the supply chain as it existed at contract award—not against the mid-project substitution scenarios where exposure actually arises. If the program hasn’t been stress-tested against the scenario of a supplier two tiers down changing vendors without notice, it isn’t designed for current conditions. The same question applies to notice infrastructure: Is there a single calendar that maps triggering events and deadlines across the prime contract, relevant insurance policies and key subcontracts? If a supply-chain disruption activates only the project management response and not the full contractual and insurance response, remedies are being left on the table.
At the project level, the diagnostic gets more specific. Effective contractors can identify where material substitutions have occurred on active projects and confirm whether those substitutions were reviewed for sanctions, specification and warranty compliance before the purchase order was placed. They have visibility—through audit rights, supplier certifications or targeted compliance mapping—into what is happening beyond the tier-one supplier. And when a tariff reclassification or sanctions designation hits, a defined protocol already identifies which notice obligations are triggered and to whom.
Supply-chain volatility is not going away. But contractors whose legal and project teams are already talking—before the next disruption, the next reclassification, the next sanctions designatio will be the ones making procurement decisions with their eyes open and their documentation in place.
AUTHOR BIO
Owen Newman
Owen Newman is a construction and energy litigator and international arbitration specialist at Duane Morris LLP in Chicago. After his first seven years of practice, Newman spent six years managing projects and leading P&L operations for Black & Veatch within their power generation group — experience that is the core differentiator of his practice. His practice focuses on construction and energy disputes, EPC contract strategy, and international arbitration. He can be reached at oknewman@duanemorris.com.
