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Construction price inflation – Will there be some relief for contractors?


Friday, November 26, 2021

On 24 November 2021, the Minister for Public Expenditure and Reform Michael McGrath published a guidance note announcing “interim measures” to address the increase in construction materials costs faced by tenderers in public works contracts. Our previous article on the issue (available here) addresses the reasons behind the increase in costs faced by contractors which have been widely reported on in recent weeks and months. Contracting authorities and contractors have been grappling with this issue and it is good to see that guidance has been issued to work towards addressing it.

Two key issues in public works tenders have been identified with the current construction price inflation:

  • The invitation to tender template provided as part of the Government Construction Contracts Committee Public Works Contract suite does not permit any degree of inflation increase between tender submission and the issuing of a letter of acceptance; and
  • The risk of cost inflation largely passes to the contractor under the Public Works Contract, with the contractor taking the risk of cost inflation for the first 30 months in most instances.

The guidance note (available here) categorises three different situations:

  • Tenders have been received but a contract is yet to be awarded;
  • Tenders are live and the deadline for receipt of tenders has not yet passed;
  • Where contracting authorities have not yet started their tender procedure.

1. Tenders received but no contract yet awarded

Contracting authorities are advised to review these projects at tender stage to ascertain which have the greatest exposure to inflation, and suggests that a revised cost estimate should be prepared for those identified as high risk, in order to determine the likely cost increase.

Where changes to scope, design etc. are required to retain the projects within budget, contracting authorities must consider the impact of this and how such changes might operate within the context of public procurement provisions. (It is also worth noting the provisions of Guidance Note 2.3 of the Capital Works Management Framework regarding value engineering exercises and the omission of essential items from the scope of works.)

The guidance note suggests that further risks arising from price movements and their dynamic nature must be considered and addressed by the contracting authority.

The note outlines two particular scenarios which should be considered by the contracting authority;

a) Where tenderers have not been advised of the outcome, the contracting authority may seek clarification from all participating tenderers seeking confirmation that they are aware of implications of price increases on their tender and the provisions of the public works contract relating to price inflation, and seek written confirmation that they are prepared to stand by their tendered sum.

Where all tenderers are willing to do so, contracting authorities may proceed with the evaluation process. If “one or more” of the Tenderers indicate they cannot stand over their tender sum, it may be possible to invite Tenderers to re-submit, taking into account material price increases.

b) Where tenderers have been notified of the outcome of the tender, the note suggests that only the successful tenderer be requested to clarify their awareness of the implications, as above, and again seek written confirmation that the tenderer will stand over their tendered sum. Where such confirmation can be given, the contracting authority may proceed, but where it cannot be ascertained, it is recommended that the contracting authority seek expert advice.

2. Tenders have been requested but the tender deadline has not passed

Contracting authorities should carry out a review similar to the above so as to determine the exposure of the project to material price increases, and must consider whether this is acceptable in accordance with the budget and programme. It is noted that uncertainty in respect of future prices is a key concern of tenderers – particularly if the construction period is expected to exceed 12 months. The information note specifically suggests that contracting authorities consider the proposed “interim amendments” set to come into force in December 2021 in deciding whether to proceed with their tender.

3. Tenders have not yet commenced

Contracting authorities are advised to consider the potential impact of the material price increases on their budget, as well as the impact of increased delivery periods on the programme.

Importantly, the information note indicates a series of “interim amendments” to the GCCC public works contract suite, set to be “published by the middle of December 2021” as follows:

  • The introduction of an indexed price adjustment mechanism in the Instructions to Tenderers for certain forms of public works contract which will apply to the materials element of the tendered sum prior to the award of contract;
  • The reduction of the fixed price period (Base Date) in forms PW-CF1 – PW-CF5. The Base Date for PV1 and PV2 will be reduced to 24 months from date of contract award;
  • The revision of clauses PV1 and PV2 in the public works contract suite regarding exceptional material price increases to reduce the threshold to 15%.

Further amendments may be introduced following a period of consultation on the proposed changes.

Commentary

The increase in construction materials is causing significant issues across both public and private sector projects. In our experience employers and contractors on private sector projects are in some cases working together to mitigate the effects of these increases. However, the inflexibility of the form of public works contract and the rules of public procurement constrain the ability of contracting authorities to share this risk. It is somewhat disappointing that the information note does not address in more detail the scenario which countless contracting authorities currently face – where tenderers are unable to stand over the prices submitted as part of their tenders – but the proposed interim measures for future tenders should be welcomed (together with the promise of a future consultation on changes to the public works contract in Q1 2022).

It is also notable that unlike the Covid measures that were introduced to deal with the impact of Covid-19 and increased costs, there is no proposal to address issues arising on existing public works contracts.

Contracting authorities in particular should note that the information note stresses on numerous occasions that “expert procurement advice” should be sought. Any agreement with tenderers to accommodate inflationary changes (during the course of a tender procedure or during the course of a contract) will need to be considered with care, given the possibility of a challenge from a disgruntled tenderer for a breach of the principles of transparency and equal treatment. The consultation proposed will assist with identifying some of the risks that could arise and mitigating these in the updated public works contract suite.

 

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

 


Author

Kerri Crossen

PARTNER


Angelyn Rowan

PARTNER

Patrick Kane

SENIOR ASSOCIATE

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