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Changes to Irish public works contracts to address construction materials price inflation


Wednesday, January 12, 2022

On 7 January 2022, the Office of Government Procurement (the “OGP”) issued a suite of interim amendments to the Capital Works Management Framework (“CWMF”) which seek to address the current issues and risks relating to the price inflation of construction materials in public works contracts (“PWC”), as addressed in our previous article. These amendments are particularly noteworthy as in some cases, the contract amendments will have a limited retroactive effect and will apply to live tender processes where tenders are due to be received by 18 January 2022 or later.

These interim amendments should be read in conjunction with previous guidance published by the OGP on 24 November 2021 (available here) when considering tenders that have not yet commenced, which made reference to these interim amendments. You can read our review of this guidance here.

The amendments by the OGP fall into two categories:

  • amendments to the form of Instructions to Tenders for PW-CF1 to PW-CF6, which includes for the first time an indexation mechanism applicable to the successful tenderer; and
  • amendments to the price variation clauses in PW-CF1 to PW-CF5, which shorten the fixed price period for contracts and reduce the change in price threshold for variations to the Contract Sum.

Limited indexation of the successful tenderer’s tender

This measure applies to PW-CF1 to PW-CF6 (inclusive) and aims to address the risk of construction material inflation which may occur between the Designated Date and the date the contract is entered into (i.e. the date of the issue of the Letter of Acceptance to the successful tenderer).

A formula has been introduced in the Instructions to Tenderers to determine the extent of any increase that will apply where the price of construction materials, as measured by relative movements in a specified index, has increased above a specified threshold. The specified index in this context is the index for the “All Materials” category in Table 3 of the Statistical Release for the Wholesale Price Index, published monthly by the Central Statistics Office (the “Index”).

The form of amendment differs depending on the form of contract used:

  • PW-CF1 to PW-CF5: the formula defines an “Applicable Factor (Contractor)” that will adjust each interim payment to the main contractor, and where there are named specialists in the contract, novated or reserved, a separate “Applicable Factor (Specialist)” will apply to their payments; and
  • PW-CF6: the formula determines the adjustment to apply to the successful tenderer’s tendered price to arrive at the final tendered price for the contract.

It is confirmed that in each of these approaches, an adjustment will not result in a reduction in the successful tenderer’s Contract Sum (but can be adjusted during the term of the contract in accordance with PV1 and PV2 where applicable).

The Contracting Authority will indicate within the Letter to Successful Tenderer the adjustment to the tendered Contract Sum. Where the Index is then updated within the period prior to the issue of the Letter of Acceptance (i.e., when the contract is actually formed), the relevant formula will be applied, and a new notification will be issued to the successful Tenderer to reflect the revised figures relating to the contract.

Contracting authorities should note that these amendments will have knock-on effects on the Forms of Tender and Schedule, Notification Letters and Model Form 1.20[1], and updated versions of these documents have been published by the OGP on the GCCC website.

Amendment to PV1 and PV2

This measure applies to PW-CF1 to PW-CF5 (inclusive). The duration of the fixed price period for both PV1 and PV2 is now 24 months (reduced from 30 months), which commences on the Tender Inflation Indexation Date – that being the last day of the month in the most recently published version of the Index is published at the Contract Date.

A further amendment to PV1 and PV2 relates to the adjustment to the Contract Sum for materials price inflation or deflation during the fixed price period. The Contract Sum will be increased/decreased where the price of a material has increased/decreased by greater than 15% of the price of the material on the Tender Inflation Indexation Date (reduced from 50%) at any time during the term. The possibility therefore of a contractor claiming ‘hyperinflation’ during the fixed price period has therefore increased considerably given that the threshold to be met (a 15% increase) is now significantly lower than was previously the case.

We note that the existing provision of PV1.1.3 allowing for an increase/decrease in the Contract Sum where the price of a material increases/decreases by more than 10% after the expiry of the fixed price period is unamended. (A double counting mechanism has also been included within PV1.1.3).

Implementation of the Amendments

The OGP publication has provided a summary of the amendments and guidance to accessing the specified index in order to assist with the efficient implementation of these amendments.

The publication also stipulates that where the standard forms of Instructions to Tenderers for PW-CF1 – PW-CF5 are in use, that the amended forms of contracts will apply to tenders due to be received from 18 January 2022 onwards. We note that while the standard form of contract for PW-CF6 is not affected by the amendments, the Instructions to Tenderers for PW-CF6 (together with the relevant ancillary documents) has been updated.

Commentary

These amendments should assist in addressing concerns shared by both contracting authorities and contractors regarding uncertainty surrounding construction materials price fluctuations. The amendments operate to address the two key issues– the inability to permit any degree of inflation increase between tender submission and contract formation, and the perceived onerous risks being undertaken by contractors under the PWC in the current environment where the prices for certain construction materials have increased dramatically.

These amendments have a limited retroactive effect and do not provide any assistance to contracting authorities that receive tenders prior to 18 January 2022. Many contracting authorities may still be facing the difficult situation where a successful tenderer can no longer stand over its price submitted in a 2021 tender process. In these cases, contracting authorities should obtain legal advice on their options.

The reduction in the fixed price period should be welcomed by all parties as it could allow for greater value for money in public projects – contractors can price tenders more competitively on the basis that the inflation risk is shared – whilst providing contractors with some protection against substantial price inflation. However, it is worth noting that PV1 and PV2 are not “upwards-only” clauses – contracting authorities should pay particular attention during contracts to the cost of materials and their rights under PV1 to a reduction in the Contract Sum in particular circumstances.

Finally, contracting authorities should note, in particular, that they may have to issue a revised Letter to Successful Tenderer where an updated version of the Index is published in the period prior to issue of the Letter of Acceptance.

[1] (Notification to named Specialists of amounts included in Main Contract Payment Certificate for named Specialist works)

 

For further information or advice, please contact our Construction or Procurement teams.


Author

Angelyn Rowan

PARTNER


Kerri Crossen

PARTNER

Patrick Kane

SENIOR ASSOCIATE

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