Brendan Smith (Cavan-Monaghan, Fianna Fail)
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235. To ask the Minister for Public Expenditure and Reform the actions he is taking to manage the significant shift in inflationary pressures and supply chain disruptions that are impacting public capital projects; and if he will make a statement on the matter. [56576/22]

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 materials in the construction sector throughout 2021 in the aftermath of the pandemic. 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 the public works contracts for a defined period.

These inflationary provisions have operated reasonably effectively over the years since their introduction, albeit in times of relative price stability. However, the price movements experienced on construction materials since Q2 of 2021 have arisen suddenly and with no warning. In response to this challenge, I have introduced a series of measures to address the risk posed.

In November 2021 the Office of Government Procurement (OGP) issued procurement guidance to assist public bodies in managing the challenges they face 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 reduce the level of risk of extraordinary materials price inflation that contractors 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. However, they do not cater for fuel/energy price increases or supply chain disruption.

While these changes had been expected to bring greater stability to contracting arrangements on projects whose tenders were received after 18 January 2022, sustained feedback from Government Departments and their Agencies that successful delivery of priority projects included in the NDP was being jeopardised by further inflationary pressures associated with the war in Ukraine. Departments have reported issues with fuel costs and supply chain disruption, including reduced competition for public works contracts and challenges relating to projects underway during 2021.

Through extensive engagement with industry and public sector stakeholders involved in the delivery of the National Development Plan 2021-2030(NDP), it is clear that the delivery of many critical public capital projects was being put at risk due to the rapid increases in material and energy prices. For contractors who tendered for projects prior to the onset of these inflationary pressures, this issue was particularly acute. In the interest of safeguarding public projects that are already under construction and to mitigate the risks of significant losses being sustained by contractors, I announced details in May for the introduction of an “Inflation/Supply Chain Delay Co-operation Framework" for those parties engaged under a public works contract.

The Framework facilitates both parties to engage with one another for the purpose of addressing the impacts of this most recent onset of exceptional inflation and supply chain disruption and operates on an ex gratia basis. The Framework sets down the approaches and the parameters within which parties to a public works contract calculate additional costs attributable to material and fuel price fluctuations using price indices published by the Central Statistics Office.

In recognition that neither party is responsible for the global events that have given rise to inflation, it is proposed that the additional inflation costs be apportioned between the parties, with, subject to budgetary constraints, the State bearing up to 70% of the additional inflationary related costs. The Framework applies to payments made from 1 January 2022.

The key provisions of the Inflation Co-operation Framework are:

- It operates from the point at which the parties agree to engage until the project is completed or the parties elect to withdraw by giving notice to the other.

- Given that further inflationary pressures have been building since the beginning of 2022, it provides for the back-payment of a proportion of inflation related costs (on materials and energy) to 1 January 2022 on those contracts which pre-date the introduction of the interim amendments (contracts with a revision date earlier than 7 January 2022).

- The inflation analysis is undertaken using relevant indices published by the Central Statistics Office.

- Going forward, for the duration of the framework, additional inflation costs (for materials and energy) are calculated in a similar manner.

- For more recent contracts (i.e. those that commenced under the amended forms of contract), the framework permits the recovery of costs arising from fluctuations in energy prices.

- And finally, for all contracts currently in progress, where it can be shown that a supply chain disruption that has arisen since 01 January 2022 that has led to a delay in completing the project, contractors will not be held liable to pay liquidated damages for the late delivery of the project.

The use of the framework is voluntary, but participation by the parties is strongly encouraged. It represents a pragmatic and proportionate response to the current challenges caused by inflation that are not within either party’s control.

Guidance, workbook templates and forms of agreement have been published by the Office of Government Procurement and are available on the Capital Works Management Framework website: constructionprocurement.gov.ie/. There is a new dedicated page ‘Details of Inflation/ Supply Chain Delay Co-operation Framework’, which can be accessed directly from the link in the top banner on the website.

The measures available under the Framework strike an important balance between the additional costs incurred by the State to support Contractors engaged on public projects and the State’s ability to deliver the NDP including housing delivery, whilst providing value for money for the taxpayer.

The OGP will be further amending the conditions of the public works contracts so that these measures are incorporated into the contractual framework on a permanent basis.