THE CONSTRUCTION INDUSTRY is calling for a change to public works tender contracts, as building-related costs continue to rise.

Industry representatives have said it is becoming increasingly difficult for contractors to provide accurate costing estimations in tender competitions for public projects such as social housing, schools and hospitals. 

Paul Sheridan, director of main contracting services at the Construction Industry Federation said a number of contractors are in “great difficulty” because they are absorbing all of the increased costs of developments.

Under public works contracts, inflation risks – including material price increases – largely pass to the contractor.

“They have to get on with the job contractually, but they’re destroying their balance sheets, practically subsidising public works themselves,” Sheridan said.

“There are contractors that are handing back the keys and walking off site because they can’t stand over the tenders now.”

He said he is aware of one particular project that has already cost €25 million above initial estimates and the contractor has no mechanism to recover any of these additional costs. 

Construction costs have been rising over the last number of years due to the impacts of Brexit and the Covid-19 pandemic, but the invasion of Ukraine by Russia has intensified the situation. 

Russia is among the world’s top five steel producers and Ukraine also supplies much of the world’s supplies of steel.

The conflict within Ukraine has significantly impacted on the steel industry’s ability to produce and export materials. At the weekend, one of the Ukraine’s biggest iron and steel works, Azovstal, was badly damaged in the besieged city of Mariupol.

In addition to this, the European Union’s sanctions have cut off member states’ access to Russian steel. 

Last week the European Council agreed to adopt a fourth package of restrictive measures against Russia. This included an EU import ban on steel products currently under EU safeguard measures, amounting to approximately €3.3 billion in lost export revenue for Russia.

According to figures published by the Central Statistics Office (CSO) today, steel prices in February were almost 30% higher than the same month in 2021. Other building materials such as cement (11%), timber (64%), electrical fittings (18.5%), plaster (30%) and glass (10.7%) have also seen price hikes over the last 12 months.

Sheridan pointed out that this latest CEO data covers the period before the invasion of Ukraine and figures are likely to be considerably higher now. 

“Steel has been rising at a very high level for the last 12 months, maybe more, it has been pretty consistent,” he said.

“Now what’s happening is that certain types of steel are no longer available. To make steel you need fuel for energy and fuel is more expensive, so it all feeds into itself. So there’s a supply chain issue and at the same time the cost to produce it is shooting up.”

These rising prices are impacting on the ability of contractors to put a price on large, long-term projects, he said. 

It’s different when you’re pricing for private contracts because you’ll be able to negotiate and you might have a price variation or review clause, but public works are on fixed price contracts. There are certain mechanisms that provide a certain amount of relief but it’s not nearly enough.

He said it takes 12 months for public works contacts to be awarded after initial applications and by this time estimations are out of date. 

This has put companies that won contracts over the last two years in a difficult position, Sheridan said, citing one example in which 

“You’re talking about 12 months across a very volatile period, even going back to May 2020,” he said.

“We’ve never seen price increases accelerating like this. And it’s across a range or products, basically all construction materials and the fuel you need to produce them.”

“We don’t know what cost materials will be next week, never mind next year and we’re not sure whether they’ll even be available in the right quantities – or at all – to allow building to go ahead.”

The price increases and competition for materials is also likely to delay a number of large-scale projects, he said, as contractors cannot continue work without certain materials.

In response to a query from The Journal, the Department of Public Expenditure and Reform pointed to measures introduced in January this year by the Office of Government Procurement. 

The measures were introduced to re-balance the risk presented by inflation in the price of building materials in both the tender process and under contract.

They include:

• A new mechanism to address the period between tender submission and award through limited indexation of the tender price;
• A reduction of the fixed price period from 30 to 24 months;
• A reduction in the exceptional increases threshold to permit cost recovery within the fixed price period for material price increases in excess of 15% (previously 50%) of their price at the date of contract award.

These new measures only apply to new public works contracts from January this year and will not change anything in contracts for projects currently underway.

“Whilst these changes have yet to bed in, the OGP continues to monitor the inflation pressures faced by contractors, particularly with respect to the recent sharp increase in energy prices, and is engaging with stakeholders which include industry and public sector contracting authorities,” the department said.

Sheridan acknowledged the changes put in place by the OGP to address the issues but he said initial indications are that these measures have not been enough to adequately address the impact of price increases in recent months. 

The CIF is asking the government to make changes to public works contracts to ensure the financial risks are more balanced and that contractors are not forced to take on the bulk of the inflation burden.

He said some well respected business in construction are “looking at pulling back from public works contracts” because of potential financial risks associated with them. If the current situation continues, he added, many firms may decide to focus only on private contracts or on projects in the UK and Europe.