Public Works Contracts - Construction Material Price Inflation

The global supply chain crises and the sustained increase in the price of construction materials caused by the Covid-19 pandemic and the war in Ukraine has prompted the Minister for Public Expenditure and Reform, Michael McGrath to introduce a suite of interim amendments to clauses within Public Works Contracts. 

Contractors working under a Public Works Contracts for building and engineering projects will now be able make an application to the Employer’s Representative for an extension of time and/or financial relief under the interim and voluntary ‘Inflation/Supply Chain Delay Co-operation Framework Agreement’ (the “Framework”).  

The Framework enables the Employers’ Representatives on the Project to issue an Inflation/Supply Chain Delay Notice ("Notice") granting an Ex Gratia Payment and Extension of Time. By granting these reliefs it will hopefully rebalance the inflationary risk that Contractors (and named Specialists) are carrying on public works projects due to the soaring costs of materials. 

Under the Framework the parties begin by engaging on a “without prejudice basis”, to determine the extent of the impact of the supply chain disruption and seek to agree an appropriate way forward. Before engaging in these discussions parties need to consider the following: 

• The use of the proposed Framework is voluntary.

• Accurate records are essential in ensuring both parties have confidence in the process.

• Contractors will need to illustrate that there were no measures that could’ve been taken when drafting a tender that would have addressed the potential for delay while also presenting evidence that delays were beyond their control i.e. that an order was placed in a reasonable time.

• No additional Exchequer funding will be made available for the reliefs so departments and agencies will be expected to meet the additional project costs within their existing budgets. Therefore the parties can expect a rigorous interrogation of any application for relief. 

• The Framework is not applicable to the PW-CF6 contracts for minor work under €1 million.

• Any prior relief granted due to supply chain disruption that has already been dealt with under any other ‘Covid Co-operation Framework’ are excluded from relief. 

• Any additional costs that may already have been determined under the contract or by agreement with the Employer; or in any recommendation/award by a Conciliator, Adjudicator or Arbitrator shall be excluded from relief.

• The Contractor shall not be entitled to any Ex Gratia Payment in respect of inflation on costs incurred during any period in respect of which the Contractor is not entitled to an extension of time under the Contract or to an Ex Gratia Extension of Time under the Framework. 

The Office of Government Procurement (“OGP”) proposes that parties to a Public Works Contract avail and utilise the voluntary Framework which is based on a cost burden share basis, whereby, the Employer makes an ex gratia contribution to the inflation amount calculated and waives the application of liquidated damages in respect of associated delay for the period specified in the Notice. 

Potential Private Sector Impact 

The RIAI standard form of building contracts contains provisions for increased material and labour costs, whereby, it allows for the increase to contract sum if these cost arise after designated date. Traditionally however this provision is amended at the negotiation stage, leaving the Contractor to carry the risk of any increases to material costs. 

Going forward it is foreseeable that private developers and contractors will seek to insert the mechanisms of the Framework into their own building and development contracts as a solution to overcome the well documented unwillingness within the construction sector to take on fixed-price contracts under the current economic climate. 

Calculating the Ex Gratia Payment 

The formula for calculating price inflation is based on the construction sector price indices published by the Central Statistics Office (“CSO”). 

The amount of the Ex Gratia Payment under the Framework depends on the date on the form of Public Works Contract. Category 1 applies to those contracts with a version date of 7 January 2022 and Category 2 applies where the form of contract is that dated prior to 7 January 2022.

*Only available where PV1 applies in the contract

The Formulae will calculate the amount by measuring movements in a specified price index and can be found in the applicable appendices of the Framework.

Material Inflation 

For the purpose of determining material price inflation, the rates in the Pricing Document are non-negotiable however the below table is the list of permitted material categories catered for in the Framework. A maximum of six such categories may be selected to apply to the calculation of “Material Category Inflation” and applicable categories must reflect the material content of the works yet to be completed. 

** Classifications of Detailed Wholesale Price Indices (excluding VAT) for Building and Construction Materials published by the CSO

The formula used to calculate the inflation uses the direct value of the permitted Material Category accepted by the Employers Representative as being paid for in the Certificate for payments made under the Contract, and the direct value of all materials accepted as being paid for in the Certificate. The direct values are agreed by using the bill of rates and descriptions in the Pricing Document and excludes profits and overheads. 

Fuel & Energy Price Inflation 

In relation to fuel price inflation, table 5 wholesale price indices for energy products published by the CSO provides the relevant calculations. The below table demonstrates the percentage of the effective value to be adjusted by the fluctuations in the relevant index:

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The Relevant Index for calculation for the Energy Price Inflation amount is the category “Electricity” in Table 7 COICOP Division 04 the Consumer Price Index, published by the CSO and the percentage of the effective value to be adjusted by the fluctuations in the relevant index to arrive at the Energy Inflation Amount is 0.25%. 

The Paperwork 

The OGP has prepared four template Excel workbooks for contracting authorities to use for assessing, in a transparent and consistent manner, the amount of the Ex Gratia Payment in respect of a Certificate for payments made under the Contract from 01 January 2022 onwards. The workbooks contain the formulae that are contained in Appendix Two and Appendix Three of the Framework.

For live tender competitions (i.e. tenders have not been received), contracting authorities may elect to propose the use of the Framework with the Public Works Contract. For tender competitions conducted under a restricted procedure, it is recommended that contracting authorities consider the implications of using the Framework with the Public Works Contract and seek expert procurement advice before determining the next appropriate step. 

For further information on the appropriate next step, or general legal advice on this topic, contact Shane Byrne, Martin Cooney, Fergal Ruane or any member of the dedicated ByrneWallace LLP Infrastructure, Construction and Energy Group for market-leading expertise combined with a wealth of experience advising the public sector.