Key Contacts: Hugh Cummins – Partner  |   Patrick Kane – Senior Associate

On 3 July 2023 the Irish Government announced significant changes to the forms of Public Works Contract to address a number of issues faced by contractors in recent years, including materials price inflation.

This has been done by revising the price variation clauses and providing for greater risk-sharing by including – for the first time – a liability cap in the public works contract. These reforms are part of the Government’s goal to enhance project delivery under the National Development Plan (on which our article can be viewed here).

This article covers the key contractual amendments proposed to the Public Works Contract. We will address the recent announcements regarding Building Information Modelling (“BIM”) requirements, the proposed adoption of the International Construction Management Standard (“ICMS”) and broader updates to the tender documentation provided as part of the Capital Works Management Framework in an upcoming article.

A simplified approach to price variation

The changes announced to the price variation clauses reflect the Irish Government’s latest attempt to address the inflation issues experienced by contractors and contracting authorities in recent years. The PW-CF1 to PW-CF6 suite of contracts will now include a price variation clause that tracks the relevant CSO Wholesale Price Indices for fuel and materials and, importantly, scraps the “fixed price period” for fuel and materials. Contractors will be able to recover a degree of increased costs from the first day of the contract if fuel and materials prices continue to increase. This marks the removal of the default PV1 “proven cost” option and instead constitutes a simplified approach inspired by the existing PV2 “formula fluctuation” variation clause.

Contractors will still be required to bear the risk of fluctuations in the price of labour under PW-CF1 to PW-CF5, but this time period is reduced to 2 years from the Designated Date and will be calculated by reference to the changes in rates of the Sectoral Employment Orders made after this 2-year period expires. This does not apply to PW-CF6, where contractors bear all risk regarding labour prices.

Contracting authorities will now be required as part of their Form of Tender and Schedule (“FTS”) to specify the threshold (a figure between 3% and 10%) of inflation that will be borne by a contractor. Once that threshold is met, the price variation clause will apply. If a contracting authority is using the PW-CF5 or the PW-CF6 form of contract, it will have the ability to use the “All Materials” category of Table 3 of the Wholesale Price Indices as a simpler adjustment to the Contract Sum for fluctuations in material prices rather than the various indices for each material provided in Table 3.

Finally, the interim measures of the Inflation/Supply Chain Delay Co-Operation Framework Agreement(1) (the “Inflation Framework“) and the indexation of tenders between tender submission and the Letter of Acceptance will not apply to contracts governed by the new provisions above. Our earlier article provides more detail on these interim measures.

The inclusion of liability caps

In what is perhaps one of the most significant changes to the public works contracts in recent years, PW-CF1 to PW-CF8 will now include a financial liability cap for the benefit of contractors. Under these caps the contractor’s liability to the employer arising out of or under the contract will be limited to a monetary amount specified in the FTS (subject to certain exclusions – more on which below). If the contracting authority does not specify a liability cap in the FTS, the Schedule will provide a default liability cap which shall be equal to 100% of the Contract Sum.

It is critical that contracting authorities properly consider the liability cap proposed within the FTS and do not rely upon the default 100% figure. As per the Information Note accompanying the announcement of the revisions, in considering a suitable liability cap a contracting authority should conduct “a considered assessment of the potential risks associated with the contract, combined with consideration of factors that may influence value for money in the tender process in relation to the value of the project”.

This assessment should take place at the start of the preparation of the tender documents and should not be a last minute consideration for contracting authorities. We understand that a new Guidance Note will be published to assist contracting authorities with this assessment, but the existing Guidance Note 1.6.4 (covering liability caps in the Conditions of Engagement) sets out a number of key considerations for contracting authorities to consider in conjunction with their insurance advisers, professional team and (in some cases) the State Claims Agency.

It should be noted that the proposed liability cap contains a number of exclusions, such as liability arising as a result of death, personal injury or illness, wilful default or gross negligence. Whilst at the time of writing the publication of the updated forms of contract and FTS is awaited, it is worth noting that wilful default and gross negligence are not terms of art under Irish law(2) and will be subject to the same rules of contractual interpretation as any other clause in the contract.

Phased implementation (and publication) of revised terms

The Information Note has indicated the following publication schedule for the revised documents. On the basis that the applicable form of contract is the version available on the Capital Works Management Framework website 10 days prior to the tender deadline, we have specified the date from which we expect the contracts to apply:

Document Estimated Publication Date Estimated Applicable Date
PW-CF1 to PW-CF5 17 July 2023 27 July
PW-CF6 to PW-CF8 19 July 2023 29 July
Updated SAQs 25 July 2023 n/a

 

Contracting authorities should note that they must reissue the ITT and the FTS if they have a live tender with a tender deadline after the relevant estimated applicable date specified above. The Information Note also recommends that a contracting authority should consider whether the tender deadline should be extended to allow tenderers the time to complete the revised documents, but there is no obligation to do so. If a tenderer is participating in a tender process with a tender deadline after the estimated applicable date, it should raise a clarification via eTenders as soon as practicable to confirm that the tender documents will be reissued. If the documents are not reissued prior to the tender deadline, they may not receive the benefit of the new price variation clause or the liability cap.

Commentary

Whilst the devil is inevitably in the detail, on the face of it these changes should be welcomed by contracting authorities and construction contractors alike. The reforms should allow contracting authorities to accept a greater portion of the risk on a particular project in exchange for obtaining wider interest from contractors who may otherwise be averse to tendering for public projects with uncapped liability and relative inflationary inflexibility. A wider pool of tenderers could potentially result in enhanced competition and greater value for money.

These changes do not solve all of the issues that contractors may have with the Capital Works Management Framework and it remains to be seen whether the reforms will enhance competition and provide increased value for money, but the cautious welcome from the CIF suggests that contractors that have avoided public work may look once again at future public opportunities.

Finally, these changes will require greater resources from contracting authorities (and their professional teams) – not just as part of the tender process but also as part of the lifecycle of projects as the inflation adjustment provisions will require increased oversight and administration.

 

(1) We understand a new voluntary “Supply Chain Co-Operation Framework Agreement” will be provided for parties to use, to allow for ex gratia extensions of time.
(2) Both terms have however been considered by the Supreme Court in ICDL GCC Foundation FZ-LLC & anor -v- European Computer Driving Licence Foundation Ltd (2012 IESC 55).