The Minister for Public Expenditure and Reform, Michael McGrath TD, today, Wednesday, November 24th, announced details of interim measures to address the impact that the recent price increases in construction materials is having on public works tenders.
Steel and timber products in particular have seen substantial, sustained increases since the middle of last year, and they have been joined in this regard by materials such as insulation and plastics since early in 2021. In addition to this, certain materials are in short supply or have longer delivery times.
Supply chain disruption caused by the pandemic, and, to a lesser extent Brexit, is the root cause of these price increases which are sustained by increased demand driven by the various economic stimulus plans announced globally.
It is not evident yet as to the duration of the prevailing market conditions, the potential for further price increases, or whether prices might return to prior levels.
Since the risk of inflation largely passes to contractors under the public works contracts, contractors are reluctant to commit to a price that may be submitted many months before the works commence with no opportunity to seek additional payment to cover price increases over the construction phase.
Outlining the details, Minister McGrath said:
“I recognise the problems that these exceptional material cost increases are having on public projects at present. I have been working with my officials considering the optimum means to bring greater certainty with respect to future tenders in light of these cost increases.
“I am conscious of the difficulties being experienced by public bodies in progressing their projects due to sustained construction material price increases whilst at the same time I need to safeguard the interests of the taxpayer.
“In response to these challenges and to mitigate potential impacts upon the National Development Plan, I am announcing interim measures to address two aspects of immediate and short-term concern for ‘live’ and ‘future’ public works tenders.
“These measure are intended to engender confidence in the tender, award and operation of public work contracts so that the taxpayer is not paying a premium for price increases that may never materialise whilst accepting the potential for additional payments to contractors in the event that further significant price rises occur”.
The Office of Government Procurement (OGP) is issuing today 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 the 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, interim amendments to the provisions in the public works contracts will be introduced in December which will, within certain parameters, reduce the level of risk of extraordinary price inflation that contractors will have to bear.
(a) address the period between tender submission and award through limited indexation of the tender price,
(b) reduce the fixed price period to 24 months and permit mutual cost recovery within the fixed price period for material price changes in excess of 15%.
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 and the commitments in Housing for All .
The procurement guidance note, revised forms of public works contracts and instructions to tenderers will be available shortly on the Capital Works Management Framework website.
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).
The CWMF provides an integrated set of standard contractual provisions, guidance material, technical templates and procedures, which cover all aspects of the delivery process of a public works project from inception to final project delivery and review to assist contracting authorities in meeting their ongoing procurement requirements.
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. This would only arise where the price of a given material has increased by more than 50%. There are two tests to determine the application of the entitlement; the material must have increased by more than 50% of a) its price at the time of the tender and b) the price of that material in the first business day of the month in which the material is purchased.
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.
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.