John Cummins (Fine Gael)
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I thank the Minister of State at the Department of Housing, Local Government and Heritage, Deputy Noonan, for coming to the House to address this very important Commencement matter dealing with the exceptional costs and materials inflation which has occurred within the construction sector and its impact on public works contracts, particularly social and affordable housing projects.

It has been well documented that as economies reopened in the aftermath of the Covid-19 pandemic, significant inflation coupled with shortages in the supply of particular construction materials was experienced by the sector. The Russian invasion of Ukraine has exacerbated these pressures considerably. We have also seen significant increases in energy prices which are driving even further price increases and leading to great uncertainty around the delivery periods for certain construction materials.According to the main indices for building and construction materials, the significant movements in timber and steel prices experienced in 2020 have accelerated even further and broadened to include other materials such as plastics, insulation and electrical and plumbing fittings. The breadth of the price increases is in excess of anything experienced in the past decade and they continue to fluctuate almost weekly. The all-materials category of the detailed wholesale price indices for building and construction materials saw a 16.9% increase in the 12 months to the end of March 2022, with some subcategories such as structural steel and rough timber experiencing increases of 64.1% and 46.3%, respectively. As we know, energy prices showed marked increases in the latter half of 2021 and since January, they have increased even further. This has a direct impact on costs in the construction sector, particularly for those projects with a significant reliance on heavy machinery, while higher energy costs have an indirect impact through the increased costs of manufacturing and transporting materials, which is driving even further price inflation.

I acknowledge that as a consequence of the challenges experienced during 2021, amendments to address further price volatility were announced by the Government in November of last year but that these applied only to new contracts. The amendments did not address energy price volatility, the delays caused by supply chain disruption or inflation in respect of new materials that has occurred since then. They did not apply to projects that are currently on site. As a result, as the Minister of State will be aware, many housing projects throughout the country will come in at a cost well above that in the fixed-price contract, which was signed before the project got under way, through no fault of the developer. Many developers simply cannot afford to risk sustaining significant losses, so some builders have downed tools and withdrawn from sites, which, obviously, we do not want to see at a time of acute housing need. This is an area on which I have been calling for significant action over a sustained period, so I was delighted yesterday to see our Government colleague, the Minister for Public Expenditure and Reform, announce the introduction of a new inflation co-operation framework for those parties currently engaged in public works contracts. I understand it is intended the framework will operate on the basis that the State will burden-share the inflationary costs on a 70:30 basis with a developer after both parties have carried out an open-book exercise detailing the additional costs being experienced to bring the project through to completion.

I am sure the Minister of State will expand on that in his reply. In addition, he might explain what was announced yesterday and touch on how the 70:30 figure was arrived at and why it was not 60:40, for example, or 80:20 in order that I can understand the thinking of the Department.

Malcolm Noonan (Carlow-Kilkenny, Green Party)
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I welcome the pupils to the Visitors Gallery. It is always fantastic when students come to the Houses and see how our democracy works, so they are very welcome.

A key priority for the Government is that everybody should have access to sustainable, good-quality housing for purchase or rent at an affordable price, built to a high standard, located close to essential services and offering a high quality of life. The Government plans to increase the supply of housing to an average of 33,000 units per year over the next decade. This includes the delivery of 90,000 social homes, 36,000 affordable purchase homes and 18,000 cost-rental homes by 2030. Housing for All is supported by an investment package of more than €4 billion per annum.

One key challenge being faced during 2022 relates to the significant level of construction inflation, which has led to delays in some projects because contractors face difficulty in meeting contracted prices. The Minister for Housing, Local Government and Heritage and departmental officials have been working closely with stakeholders, including the local authorities, approved housing bodies and construction industry representatives, and there is clear evidence of the impact inflation is having on public housing projects, as the Senator outlined. The Minister has been engaging on this matter with the Minister for Public Expenditure and Reform, who has responsibility for public procurement policy.

In January, the Office of Government Procurement, which is under the latter Minister’s remit, introduced measures applying to new public works contracts. Under these arrangements, the fixed-price period for public works contracts was reduced to 24 months and mutual cost recovery is permitted within the fixed-price period for material price changes in excess of 15%. Provision was also made for the indexation of the materials element of the tender sum from the point at which the tender was submitted to the award of the contract. In the interests of further safeguarding public projects already under construction and to mitigate the risks of significant losses being sustained by contractors, the Minister for Public Expenditure and Reform yesterday announced further measures to address the impact of construction material inflation on public work projects. This includes the introduction of an inflation co-operation framework, which the Senator referenced, for those parties engaged under a public works contract, including public housing. This framework will facilitate both parties to engage with each other for the purpose of addressing the impacts of the most recent onset of exceptional inflation and supply chain disruption, and will operate on an ex gratia basis. The framework will set down the approaches and parameters within which the parties to a public works contract circulate additional costs attributable to material and fuel price fluctuations, using price indices published by the Central Statistics Office, CSO.

In recognition that neither party is responsible for the global events that have given rise to this inflation, it is proposed, subject to budgetary constraints, that the additional inflation costs will be apportioned between the parties, with the State bearing up to 70% of the additional inflationary-related costs. The framework will apply to payments made from 1 January 2022. The Department will work closely with our delivery partners to support the implementation of this framework.

I do not have details on the rationale as to why the ratio was set at 70:30 and not 80:20, although we can revert to the Senator with that response.

Eugene Murphy (Fianna Fail)
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I too extend a céad míle fáilte to the students from St. Mary's Primary School, Mullingar. I whizzed up the bypass by them at 5.30 a.m. today and little did I know they would be coming here. I understand Mr. Scally and Mrs. Bolger are here with them. I hope they all enjoy their visit to the Seanad. On behalf of all the Members, the Minister of State, the ushers and all the other staff, I hope they have a nice day. By the way, the Chamber is usually fuller than it is now, but this is an item of business in which Senators deal with individual issues, which is why there is such a small crowd.

John Cummins (Fine Gael)
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I welcome the students to the House. I thank the Minister of State for his reply. If he could correspond with me in respect of the rationale, I would appreciate that. The inflation co-operation agreement announced yesterday is a significant and very welcome move by the Government to address this issue, which has been raised by the sector for a considerable period. I welcome the fact it is to be backdated to the start of January this year, given there has been a significant level of inflation within the sector over that period, which was one of the other points I wanted to address.

Another matter on which if the Minister of State does not have an answer to hand, he might let me know at another point, relates to who will be responsible for carrying out the assessment. I acknowledge it will be indexed to the CSO in terms of the main indices and the inflation that will have been recorded by that office, but in the case of housing projects, whether social or affordable, will individual local authorities carry out that open-book assessment with the developer or will there be national oversight of the assessments?

I welcome the moves made by the Government, which are very significant. They will ensure that much-needed housing projects will continue to be delivered throughout the country.

Malcolm Noonan (Carlow-Kilkenny, Green Party)
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I thank the Senator and commend him on consistently raising this issue in the House, which has been important. There was a debate last night in the Dáil on housing affordability, at which one side of the House argued we were subsidising too much for the construction sector while others maintained we were not doing enough. The Government is trying to strike a balance and that is what we have done here. We have acted swiftly given global events that have been outside our control, with construction costs increasing even before the war in Ukraine. We have a significant challenge on our hands and are responding as we go.

The Senator asked me how we arrived at the proportion of 70:30 and who will be responsible for carrying out the assessment. I do not have that information to hand but I will revert to him in due course with a response. I reiterate we recognise the considerable challenges facing the construction sector and the fact developers have managed to absorb those costs insofar as they can. There is no doubt we want to work together to deliver on Housing for All and to deliver sustainable housing for communities, which is why this intervention was vital.

I again thank the Senator for his contribution to the matter.