RDJ Partner Alison Bearpark and Consultant Denise Kennedy were joined by guest speakers Ronan McGee, Director at Duke McCaffrey Consulting and Seamus Duggan, Joint Managing Director at Duggan Brothers (Contractors) Limited to discuss rising costs in the construction industry and risk allocation in public and private sector contracts. We have provided 6 key takeaways from the event below.
- Price inflation. The Society of Chartered
Surveyors Ireland (SCSI) Tender Price Index shows that national
construction tender prices increased by 7.5% in the first half of
2022 and figures released by the Central Statistics Office in
September 2022 show that the cost of certain materials such as
steel, cement and timber are still increasing by percentages well
in excess of the standard rate of inflation. Price inflation in the
construction sector is undoubtedly having an impact on the cost,
viability and progression of projects, be it those already underway
or those yet to commence, with many projects stalling temporarily
in the hope that prices may fall in the coming months.
- Inflation causes. Cost inflation in the
construction industry is attributable to many factors such as
labour and material shortages brought on by Covid 19 and the war in
Ukraine; energy inflation caused by the increase in oil and gas
prices; unavailability of skilled personnel; and the tightening
insurance market.
- Public sector. On public sector projects, the
Co-Operation Framework Agreement introduced by the OGP in May 2022
is welcome, but it doesn't go far enough. The discretionary
nature of the ex-gratia payment and the fact that any contribution
paid by a Contacting Authority must be paid without additional
Exchequer funding has meant that the Co-Operation Framework
Agreement is not as far reaching as perhaps originally anticipated.
The discretionary use of the Framework Agreement has proven
challenging in circumstances where certain Contacting Authorities
have not opted to implement the Framework Agreement, due to budget
constraints or other factors. Notwithstanding this, our panel's
experience with the Framework Agreement has been positive, largely
due to collaboration within the industry driven by the will to keep
projects, contractors and the supply chain viable.
- Private sector. The private sector has more
flexibility in terms of risk allocation within its construction
contracts and some solutions seen include value engineering
proposals, early contractor engagement and bespoke drafting
solutions to provide a contractor with time / cost relief for
delays and/or increased costs as a result of events such as supply
issues due to the war in Ukraine or Covid 19. The panel also
discussed the potential use of forms of contracts other than the
RIAI form of contract, such as the NEC form of contract which is
considered more collaborative in nature. As with public sector
projects, collaboration is key, particularly for those contracts
already in place and where the risks are most likely weighted on a
contractor.
- Mitigation measures. The need to value
engineer projects was acknowledged by all panellists as one
effective way of reducing costs on a project. Early contractor
engagement in this process is hugely beneficial given that the
contractor is at the coal face of material sourcing and purchasing
and therefore is best placed to know where value can be found.
Contractors and subcontractors on private sector projects can
assist discussions for additional payments by vouching their
increased costs. This offers a level of transparency, which was
identified as a key step to enabling all parties at the table to
have an effective and solution orientated conversation in relation
to cost inflation mitigation.
- Looking to the future. We are in challenging times but there are grounds for optimism. It was noted that the OGP has indicated its intent to update the public works forms of contract to encourage greater collaboration, appropriate risk management and a contractual basis for the measures currently dealt with under the Co-Operation Framework Agreement – it is not yet known what the nature of these changes will be or when the updated contract forms will be published.
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