Michael McGrath (Cork South Central, Fianna Fail)
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There have been significant and sustained increases in the prices of a broad range of commonly used goods and materials in the construction sector. Commencing with steel and timber in the second half of 2020, inflationary pressures broadened out to impact a range of other commonly used materials throughout 2021. Not all materials are experiencing price increases but the breath of increases and the range of materials impacted has not been experienced in well over a decade.

It is important to note that not all projects are impacted to the same degree. That will depend on whether the range of materials specified are subject to price increases in excess of the normal or anticipated level of inflation for that material, whether the contractor has agreed fixed prices with their suppliers in advance of the increases or whether the contractor was in a position to stockpile the necessary materials.

In addition to price inflation, there is a shortage of certain materials and longer delivery periods. These increases and shortages are predominantly associated with disruption to global supply chains from the onset of the pandemic, rising energy and transportation costs, Brexit trade disruption and increased demand driven by stimulus packages announced globally. It is not evident yet as to the duration of these market conditions, the potential for further volatility or price increases, or whether prices might return to prior levels.

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.

Whilst the provisions contained in the public works contracts dealing with price inflation have operated to deal with inflationary pressures over the years since their introduction, the price movements experienced on construction materials over the past 12 months have arisen suddenly and with no warning. In response to this challenge, I announced a series of measures in November to address the risks posed.

The Office of Government Procurement (OGP) issued procurement guidance to assist public bodies in managing the challenges they face concluding ‘live’ tenders in light of the significant price increases that have arisen since tenders were submitted. This guidance is aimed at contracting authorities who have invited or received tenders and covers the following situations:

1. Where tenders have been received but a Contract is yet to be awarded,
2. Those live tenders where the deadline for receipt of tenders has not passed; and
3. Tenders that are yet to commence.

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 extraordinary 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 against the over-provision for price inflation in tender prices. This is achieved by addressing the risk of price inflation in the period between tender submission and award through the introduction of limited indexation of the tender price. The fixed price period has been reduced to 24 months from the date of contract award. Mutual cost recovery within the fixed price period is now permitted for material price changes in excess of 15%.

With respect to contracts that have been awarded prior to the introduction of these measures on 7 January 2022, the pre-existing provisions for inflation contained in the public works contracts published prior to that date continue to apply as these were the terms entered into by the parties.

Further amendments on price inflation will be developed for consultation with stakeholders in 2022, which will form part of the ongoing Capital Works Management Framework review.