Michael McGrath (Cork South Central, Fianna Fail)
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Government policy (through Circular 33/06) requires all public works projects that are delivered under the Exchequer-funded element of the National Development Plan to be procured in accordance with the provisions laid down in the Capital Works Management Framework (CWMF). Public works contracts are fixed price contracts, which are to be comprehensively defined prior to tender. The contractor prices for the risk of increases in the cost of labour, materials and certain changes in law for the periods specified.

The provisions for inflation under a public works contract with a value in excess of €1m are as follows:

- The price remains fixed for a defined period, typically 30 months from the date of the award of the contract.

- After the expiry of the fixed price period, the contractor may recover the excess percentage above a 10% threshold on price increases that arise at the end of the fixed price period.

- Conversely, where the price of materials has decreased the Employer obtains the benefit of a reduction in the contract sum to the value of the percentage in excess of 10% for materials purchased after the fixed price period has expired.

- Where material price increases occur within the fixed-price period, there is a mechanism for adjusting the contract sum for hyperinflation in material costs. The increased costs above a 50% threshold in any one month may be recovered.

For projects with a value less than €1m there is no adjustment for price inflation because they are used on straightforward projects of short duration.

With the exception of occasional spikes due primarily to movements in key commodities, the price of construction materials has been reasonably predictable for almost a generation.

Significant increases in construction material prices have arisen suddenly since the beginning of this year. There are two main reasons:

1. Material shortages due to the disruption to supply chains; to manufacturing and logistics that has arisen since the onset of the pandemic;

2. Global economies are re-opening resulting in a sudden increase in demand.

Where price increases (or decreases) are consistent, they can be factored into the price. What differentiates the current situation is the uncertainty with respect to the intensity, duration and scale of the price movements.

Not all construction materials are displaying the same rate of increase, typically building projects are impacted to a greater extent than civil engineering projects due to the range of materials that are currently showing significant increases.

The Office of Government Procurement (OGP) is currently considering the optimum means to bring greater certainty with respect to future tenders in light of this uncertainty.