Further changes announced by the OGP to assist with inflation issues in Irish public works contracts

Key Contacts: Angelyn Rowan – Partner  |  Kerri Crossen – Partner Patrick Kane – Senior Associate

Contractors and employers have struggled to deal with the issue of materials inflation over the last 18 months. This issue is exacerbated on public works contracts, where public bodies and contractors are typically restricted from amending the contract or increasing the lump sum payable save in very limited circumstances. As we previously addressed in our January article, the Department of Public Expenditure and Reform (the “Department”) attempted to address these issues in November last year and in January of this year – prior to the war in Ukraine which has worsened the inflationary pressures experienced last year and had knock-on effects upon the supply chain. However, the proposed changes did not address the issues on existing projects and focused on new tender procedures for the award of future contracts.

Following discussions with Irish public bodies and contractors, the Department has announced a voluntary inflation cooperation framework (the “Framework”) to allow public bodies to risk-share with contractors on existing projects and absorb up to 70% of the “additional inflationary related costs” incurred by contractors.

The key elements of the Inflation cooperation framework (the “Framework”) are as follows:

  • The State will bear the majority of “additional inflationary related costs” incurred on projects that commenced prior to 1 January 2022 – these projects were not addressed by the interim measures announced in January;
  • The State will allow for the recovery of increased costs in energy and fuel in all contracts (even those commencing after 1 January 2022) – this is recoverable for the first time under the most common price variation clause used in Irish public works contracts;
  • The State will allow for backdated claims (from 1 January 2022) from contractors for inflationary increases, with 50% paid up-front to the contractor and the remainder “apportioned over future payments”; and
  • The State will waive liquidated damages otherwise payable by the contractor if unavoidable delays arose due to supply chain disruption. (At present, supply chain disruption does not constitute a delay event or compensation event under the Irish public works contract).

Any amendments that allow public bodies the ability to risk-share with contractors should be welcomed to ensure projects remain viable. However, we note a number of issues that we hope will be addressed by the documents and guidance published “shortly” by the Office of Government Procurement:

  • Contractors that have tendered for contracts since January 2022 will not be entitled to further recovery of materials inflation – they will only be entitled to recover increased costs via the existing tender inflation and price variation clauses (please see our previous article for more information), plus a degree of inflation for increased energy/fuel increases and relief from liquidated damages for supply chain delays. Certain contractors have raised concerns that even the January 2022 measures do not adequately address the inflation issues faced by the industry and a greater degree of risk sharing needs to take place between contractors and public bodies;
  • It is not yet clear whether public bodies, if they opt into the Framework, will be liable for up to 70% of the additional costs or 70% of the additional costs. It is also not clear what the baseline of the relevant price will be – Price Variation Clause 1 calculates the price based upon average pricing available in the market, rather than the tenderer’s pricing document submitted as part of its tender;
  • We note that ”the inflation analysis will be undertaken using relevant indices published by the Central Statistics Office”. It is not clear whether the indices used will be based upon the All Materials index – currently used in the tender inflation indexation formula – or the sub-indices (for insulation, steel, etc.) of the All Materials index used for Price Variation Clause 2;
  • We understand some concerns exist regarding the usage of the CSO indices, and that certain sub-indices of the all materials index do not reflect the actual costs for more specialist materials used on larger projects (such as specialist insulation); and
  • We note that no reference is made to the public procurement obligations of public bodies engaged in these projects. Public bodies should obtain procurement advice before entering the Framework. Any modification to the terms of existing public works contracts will have to be considered under Regulation 72 of European Union (Award of Public Authority Contracts) Regulations 2016.

Whilst some of the detail will need to be teased out when the Framework is published, the construction industry will likely welcome the OGP’s attempts to address these issues. Recent media reports have indicated that some contractors are reluctant to participate in Irish public works tenders due to the onerous provisions of the public works contract, and it is worth considering whether the public works contract requires further reform to ensure public bodies obtain value for money from a diverse range of contractors in a competitive tendering environment.  To ensure continued delivery of the National Development Plan and the ambitious targets that need to be met in particular in the housing, health and transport sectors, action is needed urgently.

 

For more information in relation to this article, please contact Angelyn Rowan, Kerri Crossen or Patrick Kane.

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Peter Crawford

Peter Crawford

It is with great sadness that we announce the unexpected and tragic passing of our colleague and dear friend Peter Crawford. Peter was with the firm for almost ten years, joining as an intern and most recently becoming a senior associate. He was an excellent lawyer...

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