Minister McGrath introduces measures to address the impact of Construction Material Price Inflation on Public Works Projects

The Minister for Public Expenditure and Reform, Michael McGrath TD, today, (Tuesday), announced details of further measures to address the impact that exceptional inflation in construction materials and energy is having on public works contracts.

As economies reopened in the aftermath of Covid-19, significant inflation, coupled with shortages in the supply of particular construction materials was experienced. The Russian invasion of Ukraine has considerably exacerbated these pressures on construction projects. Since early 2022, significant increases in energy prices are driving further price increases and leading to great uncertainty around delivery periods for certain construction materials.

As a consequence of the conditions experienced in 2021, amendments to

address further price volatility were announced in November 2021. These apply to new contracts. The amendments did not address energy price volatility or delay caused by supply chain disruption.

Through extensive engagement with industry and public sector stakeholders involved in the delivery of the National Development Plan 2021-2030 NDP, it is clear that the delivery of many critical public capital projects was being put at risk due to the rapid increases in material and energy prices in recent times. For contractors who tendered for projects prior to the onset of these inflationary pressures, this issue is particularly acute.

In the interest of safeguarding public projects that are already under construction and to mitigate the risks of significant losses being sustained by contractors, Minister McGrath is introducing an “Inflation Co-operation Framework" for those parties engaged under a public works contract.

The Framework will facilitate both parties to engage with one another for the purpose of addressing the impacts of this most recent onset of exceptional inflation and supply chain disruption and will operate on an ex gratia basis. The Framework will set down the approaches and the parameters within which parties to a public works contract calculate additional costs attributable to material and fuel price fluctuations using price indices published by the Central Statistics Office.

In recognition that neither party is responsible for the global events that have given rise to inflation, it is proposed that the additional inflation costs will be apportioned between the parties, with, subject to budgetary constraints, the State bearing up to 70% of the additional inflationary related costs. The Framework will apply to payments made from 1 January 2022.

Commenting on the launch of this new financial service, Minister McGrath said:

“While the changes introduced in January have brought greater stability to contracting arrangements, through ongoing engagement there has been sustained feedback from Government Departments and their Agencies that successful delivery of priority projects included in the NDP is jeopardised by construction inflation. More recently, Departments have reported specific issues with fuel costs and supply chain disruption, including reduced competition for public works contracts and challenges relating to completing projects underway during 2021. The changes implemented in January have provided a degree of mitigation on materials price increases (for contracts awarded with a revision date of 7th January 2022).

“I recognise the problems that these exceptional material cost increases, fuel costs, and supply chain disruption continue to have on public projects and those charged with their delivery at present. I am conscious of the difficulties being experienced by public bodies in progressing their projects and the ability to deliver the wider NDP whilst at the same time I need to maximise value for money for the taxpayer. It is vital that public works contracts remain a viable proposition for contractors with whom we partner in the delivery of the NDP.

“It is for these reasons, I am introducing further measures in addition to the ones put in place in January. I consider that these actions are necessary and proportionate in the context of the significant risk that global exceptional inflation poses to the delivery of much needed public facilities in the NDP. The measures available under the Framework strike an important balance between the additional costs incurred by the State to support Contractors engaged on public projects and the State’s ability to deliver the NDP, whilst providing value for money for the taxpayer.”