Thursday, 5 May 2022
Nithe i dtosach suíonna - Commencement Matters
I welcome the Minister of State to the House. The Construction Instruction Federation has highlighted the considerable impact hyperinflation is having across the building industry. The Society of Chartered Surveyors Ireland has shown that the annual rate of construction inflation was 13.4% during 2021. Increasing materials and energy prices have been the driving forces behind the increasing costs since early 2021. When there appeared to be a brief decrease in inflation at the end of last year, the war in Ukraine swiftly caused prices to soar again and it is believed the prices will continue to rise throughout this year.
A multitude of issues, including the pandemic, high demand, supply shortages, delivery delays, the long-lasting impacts of Brexit and the war, have led to an increase in materials costs, a shortage of materials and a labour shortage for the construction industry. Ultimately, such inflation increases the possibility of contractors being unable to tender for projects and even in some cases becoming insolvent.
There is a case to be made for an effective price variation clause to be included in all new public works contracts and a mechanism to be applied retrospectively for projects that are under way. No one who signed a contract two or three years ago could have foreseen the level of cost inflation that has taken place in the interim. There are implications for projects already under construction. It may become uneconomical for some contractors involved to complete their work without becoming insolvent. There is a possibility that contractors will be unwilling to tender for public contracts because of this issue.
I will give a few examples of price inflation in construction.The cost of a tonne of rolled steel has risen to €1,500, which is up by €600 since mid-February, an increase of 65%. There has been a 50% rise in the price of rebar, which has jumped from €900 to €1,350 per tonne in just the last four weeks. The cost of copper cable has increased by 31% while certain types of steel are simply no longer available. The cost of some deliveries, particularly of electronic controls and lighting equipment, has increased by up to 100%. These extra costs may have serious implications for future and current public works projects including the national development plan and Housing for All. With regard to the national retrofit scheme, it is estimated that the cost of insulation products has increased by 35% in recent times. That puts a question mark over that entire project.
Apart from the Government-backed schemes under Housing for All, the retrofit scheme and the national development plan, inflation in the cost of building materials has the potential to stall many one-off housing projects, as I mentioned in the House last week. Builders seem to have reached a point at which their budgets simply cannot go any further. Housing associations also need help. They need a bit of flexibility to ensure that contracts are fulfilled and much-needed housing delivered.
I understand the importance of protecting taxpayers' money. It is public money and the Minister of State and the Government have a duty to ensure it is not wasted. However, perhaps some flexibility could be shown as a result of the €2 billion capital underspend in 2020 and 2021 that arose because of the pandemic. That might allow for some space to manoeuvre on price variation clauses. It is clear that something needs to be done in this regard. It is not a question of whether we can afford to do this, but of whether we can afford not to.
I thank Senator Gallagher for raising this issue. It is very important. We can all see the effects of inflation in costs in every part of construction throughout the country. We also want to protect the public capital investment plans we have made and rolled out under Housing for All, Project Ireland 2040 and others. There is to be a great amount of capital expenditure, over €10 billion a year, for the next ten or 11 years. It is important that we get the most out of that funding, stretch it and get the infrastructure delivered.
I am taking this debate on behalf of the Minister for Public Expenditure and Reform, Deputy Michael McGrath. I will outline some issues in response to the Senator's raising of the issue of construction inflation. There have been significant and sustained increases in the prices of a broad range of commonly used materials in the construction sector throughout 2021 in the aftermath of the pandemic. The Senator has outlined some of these. Energy prices also showed marked increases in 2021 and have further escalated in response to the Russian invasion of Ukraine. Both represent significant input costs for construction projects and inflation is a risk that contractors have been expected to bear under capital works management framework public works contracts for a defined period.
These inflationary provisions have operated effectively over the years since their introduction, albeit in times of relative price stability. However, the price movements experienced on construction materials over the past 12 months have arisen suddenly and with no warning. In response to this challenge, the Minister and the Office of Government Procurement, OGP, introduced a series of measures in January of this year to address the risk posed. The OGP issued procurement guidance in November 2021 to assist public bodies in managing the challenges they face in concluding live tenders. With reference to future tenders, the OGP published interim amendments to the provisions in the public works contracts on 7 January 2022. Within certain parameters, these amendments will reduce the level of risk of exceptional materials price inflation that contractors will have to bear, while also enabling the Exchequer to obtain cost reductions should exceptional price reductions occur during the course of the works. The measures are designed to encourage confidence in the tender process and to mitigate overprovision for price inflation in tender prices. However, as the Senator has said, these changes do not fully cater for the fuel and energy price increases and supply chain disruptions which have arisen since the Russian invasion of Ukraine. The pre-existing provisions for inflation contained in the public works contracts published prior to 7 January 2022 continue to apply as these were the terms entered into by the parties.
The OGP has been monitoring the inflation pressures faced by contractors, particularly with respect to the recent sharp increase in energy prices, and is engaging with stakeholders, including industry and public sector contracting authorities. The Minister, Deputy Michael McGrath, recently had a meeting with representatives from the Construction Industry Federation, CIF, at which the issue of contracts that were awarded prior to January 2022 was raised. The CIF advised that contractors who tendered with no knowledge of the inflationary pressures which have arisen since February 2021 are particularly exposed and are not in a position to absorb the increased cost of materials which have, in some cases, more than doubled in price since they submitted their tenders. In addition to its impact on energy prices, the war in Ukraine will further increase the cost of building materials. At the conclusion of the meeting, I understand that the Minister asked his officials in the OGP to prepare options to mitigate the risk posed to projects where contractors can no longer bear the increased cost of materials. In reviewing the options, the Minister will consider the available evidence and the potential impacts they will have on costs and the ability to deliver the wider national development plan while maximising value for money for the taxpayer.
It is vital that public works contracts remain a viable proposition for contractors with whom we partner in the delivery of the plan, whether in respect of housing, roads or any other infrastructure. The Minister is also engaging with key capital spending Departments and bodies to gain their perspective on the issues that are being raised with him. I see that we have a school group with us so I will note that this includes investment in our educational facilities across primary, secondary and third level because, while a large sum has been set aside to be invested, it is very important that all projects can be fulfilled and delivered. We must protect our investment in the infrastructure we want, including schools, hospitals and roads, but we must also help to protect the jobs and companies involved. That is the work the Minister, Deputy McGrath, in involved in. I will be able to update the Senator at an appropriate time in the coming weeks.
I also extend a céad míle fáilte to our visitors. I hope they enjoy their day. I thank the Minister of State very much for the response. He outlined a number of the public projects that are being affected, which include housing projects. We all know that there is a chronic need for housing. As I said earlier, many contractors entered into contracts two to three years ago not knowing what was ahead of them as regards inflation in construction costs. I welcome the fact that the Minister, Deputy Michael McGrath, is looking into this. Coming from the Border area, I know an arrangement has already been implemented in the North based on what is called a procurement advisory notice. I hope something similar could be introduced here in the South. It is working very well in the North and has been well received by everybody. Is the Minister of State aware of a timeframe for the conclusion of the Minister's deliberations and when he will make a statement on this particular issue?
I again thank Senator Gallagher for raising this matter and for clearly putting across the issues that are at play in all of our counties and certainly in the Border region. I will certainly take a look at what he has said is happening across the Border. To be very clear, while this is not my direct area of responsibility, I will raise this matter with the Minister for Public Expenditure and Reform and his Department. He would have liked to be here himself but just could not make it. I acknowledge that what Senator Gallagher is saying is key. We are experiencing very significant increases in construction inflation and challenges as a result of the Covid pandemic and the invasion of Ukraine. As outlined earlier, the Minister's office introduced amendments to the provisions in the public works contracts in January 2022 for future tenders, which should be of assistance. The changes implemented in January have provided a degree of mitigation of material price increases but, as the Senator noted, there are still issues with contracts that were awarded prior to January this year, going back over the last two or three years or more. More recently, specific issues with fuel costs and supply chain disruptions have also been important. The Senator has asked me for a timeline. I cannot provide one just yet but the Minister is considering the options available to address the ongoing increases in construction inflation and I have no doubt that he will make those decisions quite quickly. I will ask him to come back to the Senator as quickly as he possibly can or we could also have another discussion on the issue here in the House. The Senator will receive a formal response from the Minister very soon.