Mr. Tom Parlon:

On behalf of the Construction Industry Federation, CIF, I thank the members for the opportunity to come before the committee and address this extremely important matter that will have a major implications for the delivery of construction projects for the foreseeable future. I am accompanied by my colleague Mr. Paul Sheridan, who is the director of main contracting.

This is what we are really talking about. The issues we are highlighting represent the difference between an industry functioning efficiently and one becoming logjammed. It is the difference between public projects being delivered in line with Government expectations or one where many contractors are unable to tender due to price volatility. The CIF has been warning about the issues around the public works contracts for quite some time, and the problems we are talking about today are not new. What is new is how those problems are now manifesting.

The level of hyperinflation that has seen construction material costs skyrocket in recent weeks has made clear to everyone the scale of the flaws that have been built into the public works contracts. The situation in Ukraine may be what has brought these matters into focus but there is no doubt the current system has long been unable to manage the impact of inflation, supply chain disruption and other industry-recognised risks. This was obvious to anyone following the industry on the back of Brexit and the pandemic. It should not have taken the impact of a war for badly needed reforms to take place.

Pricing inflation is one of the most challenging risks impacting contractors. There is an unwarranted assumption that contractors are better placed to manage this form of uncapped risk - and it is effectively uncapped - for the duration of the project due to their relationships with suppliers. Unfortunately, that is just not credible. No contractor in the world is able to avoid price rises when we are witnessing hyperinflation of this scale. For example, in recent weeks we have seen the price of rolled steel rising by 66%; a 50% jump in rebar prices, going from €900 per tonne to €1,350; cables comprising mainly copper up by 31% to €8,642 per tonne; and delivery times being doubled for air conditioning units, electronic controls and lighting equipment.

These examples are just the tip of the iceberg. The reality is most construction materials are now seeing significant jumps in price, and that is why is it so concerning that public clients often approach risk management by transferring as much of that risk as possible to contractors and the supply chain. Driven by a lack of technical understanding, this leads to plans that fail to forecast the full nature of risks, and that will have a material impact on a project's time and cost. It is not just the industry that can see these problems. The Government and the Office for Government Procurement recognise the issues and have committed to reform.

Interestingly, in 2019 the Office for Government Procurement stated that, under the public works contract, risk transfer is not operating satisfactorily because the market is not pricing risk and formal dispute mechanisms were being triggered early arising from the notification requirements built into the contract. It also indicated there is a poor definition of works requirements due to the poorly resourced design teams. These flaws have been affecting the industry and the delivery of public projects for quite some time. Not only is the flaw built into the process but public clients are taking full advantage of these weaknesses. The transactional operating model they have adopted drives price assumptions and the allocation of risk before contractors and the supply chain even get involved. That means public works contracts present open-ended risk to the contractor, which they have no ability to measure and cost thanks to a competitive lowest tender process.

It is well documented that margins in the construction industry are tight. As the committee has seen in our supplementary materials, the CIF recently commissioned a report on public tendering practices and their impact on delivering value. That report, conducted by Idiro Analytics, found that the average margin for public contracts was 3.8%. When materials costs are soaring at the rates we have already outlined, that margin does not stand a chance. The CIF believes allocating and managing risk is one of the biggest contributing factors that prevents firms from making the sustainable margins needed to invest in their businesses and the wider sector. Poor risk allocation between clients and contractors prevents construction projects from being procured and delivered successfully.

When challenges arise in public projects, this means the commercial agreements leave little room or budget for putting things right. These challenges are further exacerbated by the focus public procurers in Ireland place on the lowest price tenders. That outlook means risk does not get adequately priced. The simple solution here is for more emphasis to be placed on quality in the award of tenders, backed by the use of quality and price ratios.

If Ireland adopted international standard forms of contract, such as the new engineering contract, NEC, or the International Federation of Consulting Engineers, FIDIC, contract, all these issues could be addressed. These contracts are built to encourage collaboration and the equitable allocation of price variation risk. Contracts of this nature make more sense for the Government, the industry and the taxpayer. By capping the level of risk applied to contractors, it enhances project outcomes, avoids delays or disputes and delivers better value for the taxpayer. Implementing such a system will also help kick the habit of squeezing costs to save money in the short term. More intelligent procurement, putting contractors on a stable footing and unlocking investment throughout the supply chain will speed up the transformation of the industry that business, government and the public wants to see. These outcomes are diametrically contrasted to the scenarios delivered through the current public works contracts in Ireland. As an illustration of how out of step we are with international standards, it is worth noting that international contractors will not price work in Ireland based on the public works contracts.

Better risk management will lead to many more projects being delivered on time and to budget, creating fewer disagreements ending in legal action and greater trust between businesses. It is the industry’s view that this reform process represents a badly needed opportunity. For that opportunity to be grasped, significant changes will need to be made to the public works contracts. Specifically, we believe the contracts and process should be changed to adopt the more modern, flexible approach contained in the NEC or FIDIC contracts, promote early and continuing engagement and a collaborative environment between clients and contractors, and provide a clear and complete project description where risks are identified and explained. The process should also minimise the use of price-only criteria and encourage accurate, fair and clear use of multi-criteria awards. We should promote multistage procurement processes and identify and penalise below-cost bidding or abnormally low tenders.

Until these changes are implemented, the current public works contracts will continue to create an adversarial environment that is prejudicial to good project management and wasteful of taxpayers' money. Nobody is happy with the current system and this is the Government's chance to create one that really works. I thank the committee.