The Office of Government Procurement (OGP) has published interim amendments to the standard form Public Works Contracts under the Capital Works Management Framework (CWMF). These interim amendments address the impact of recent construction material price increases and supply chain disruptions prompted by the pandemic, and to a lesser extent, Brexit.
The OGP has reported that steel and timber products have seen sharp sustained price increases since mid-2020, joined by insulation and plastics in early 2021. Other construction materials remain in short supply or with long delivery timelines. In addition to pandemic disruptions and shortages, as anticipated, the implications of Brexit are also having an impact on the projects and construction sector in Ireland.
Inflation risk largely passes to contractors under the Public Works Contracts. The price usually remains fixed for such contracts with a value of greater than €1m for a defined period, typically 30 months from contract award. When this period expires, the contractor may recover an excess percentage above a 10% threshold on price increases. Where construction material price increases (eg more than 50%) occur within the fixed price period, the contract prescribes a mechanism for adjusting the contract sum subject to satisfying certain tests. However, given the sharp and sustained construction material price increases since early 2020, it was acknowledged that public bodies and contractors alike were experiencing difficulties in project tendering and delivery.
Guidelines on Construction Material Price Inflation
In November 2021 the OGP published guidelines to assist public bodies managing live tenders in light of significant construction material price increases that have arisen prior to contract award, seeking also to balance the interests of the public purse.
Changes to the Public Works Contracts
Following on from and to be read in conjunction with the guidelines, the OGP has published a suite of interim amendments to the Public Works Contracts (the 'amendments') which will apply to tenders due to be received from 18 January 2022 onwards, summarised as follows:
1. Limited indexation
Formulae are introduced in the standard form tendering documents to determine the extent of an increase (if any) that will apply where the construction materials price in the successful tender, as measured by relative movements in a specified index published by the Central Statistics Office (the Index), has increased above a specified threshold.
For the standard form building works contracts (PW-CF1 and PW-CF2), the civil engineering works contracts (PW-CF3 and PW-CF4) and the minor works buildings and civil engineering works contract (PW-CF5), the formula will determine an 'Applicable Factor' that will adjust each interim payment to the main contractor and any specialists named under the contract.
For the public works short form contract (PW-CF6) the formula will determine the adjustment to apply to the successful tendered price to arrive at the final tendered price for the contract.
2. Amendments to Price Variation Clauses
The fixed price period in the standard price variation clauses in PW-CF1 – PW-CF5 has been reduced to 24 months from the Tender Inflation Indexation Date. This date is the last day of the month in which the latest available Index is published at the contract date. Subject to meeting certain requirements, the contract sum will be increased where the price of a material has increased or decreased by more than 15% of the price on the Tender Inflation Indexation Date.
Contracting authorities should provide a copy of the amendments to tenderers; consider the potential impact of the amendments on particular future projects and budgets; carefully review tendering documents and, in particular, letters to successful tenderers and seek expert advice as necessary.
The OGP has noted that further amendments on construction materials price inflation will be developed during 2022 following stakeholder consultation as part of ongoing Public Works Contracts/CWMF review and the commitments in Housing for All (the Irish Government's housing policy to 2030).