The Minister for Public Expenditure, National Development Plan Delivery and Reform, Paschal Donohoe TD, and Minister of State with responsibility for Public Procurement and eGovernment, Ossian Smyth TD, have announced significant amendments to the Public Works Contract to provide greater certainty with respect to risk in response to continuing challenges in the construction market. The package will rebalance the risk involved in delivering public works projects, while maintaining expenditure control for contracting authorities.
The package includes:
- Introducing Liability Caps for Contractors (as previously announced);
- Amending the Price Variation Mechanism for recovery of inflationary cost to an approach solely based on published indices;
- Removing the fixed price period for materials, energy and fuel;
- Lowering the threshold for recovery of inflationary costs in key material categories;
- Introducing a simple price variation provision to cover materials in Public Works Contracts of lesser value.
While the acute pressures on supply chains and inflation costs have eased, prices are not expected to return to 2020 levels. Contracting Authorities will now be required to provide for inflation above a pre-defined threshold in the project budget, rather than transferring that risk to the contractor in a competitive pricing environment.
Limiting the Liability of a contractor to a monetary amount proportionate to the project, will also deliver greater certainty as to the extent of a contractor’s financial exposure under a public works contract. This follows on from similar measures introduced in March for construction consultancy contracts.
The Price Variation mechanism will operate using a formula fluctuation method which responds to movements in the publicly available indices published by the Central Statistics Office, ensuring that both parties are adhering to a fair and transparent process.
Currently contractors may be compensated for inflation in excess of 15% for materials and fuel. This threshold is being reduced to a range between 3-10% from which contracting authorities will select a level that reflects the project’s main inputs. It will allow for a certain level of inflation to be properly priced in tenders whilst reducing the potential to over-provision for inflation risk which may make projects unaffordable.
On announcing these changes, Minister Donohoe said:
“I am pleased to announce these measures to address uncertainty and risk in the delivery of Public Works Contracts. This follows a series of measures introduced by my department over the last 18 months to address the challenges that the construction industry has faced over the last two years in terms of material price inflation, supply chain disruption and the reduced availability of professional indemnity insurance. The measures which I am announcing today underline my department’s renewed focus on balancing the concerns of industry and the needs of departments and agencies to deliver public infrastructure.
Improving the risk/reward balance of public works contracts through the introduction of caps on liability and reform of the price variation mechanisms will encourage a greater level of competition for public works tenders. This will lead to an improved quality of bids received and maximise value-for-money, key priorities for my department in delivering the NDP.
We continue to develop a comprehensive and agile response to the risk posed by exceptional levels of inflation and supply disruptions that create a challenging and uncertain environment for project delivery.”
All public works projects valued at over €200,000 are advertised on eTenders. To avail of opportunities to participate in Public Works projects under these new conditions, Minister Donohoe said:
“I want to remind all businesses on eTenders how important it is to stay up-to-date with the new system changes so that they can continue to access the variety of opportunities available to them through public procurement.
“The new platform promotes digitalisation with increased online functionality and offers free and unrestricted access to procurement competitions.”
Businesses can register or reactivate their eTenders accounts here.
Minister of State with responsibility for Public Procurement and eGovernment, Ossian Smyth said:
“Building Information Modelling is a key enabler in the drive to net zero carbon construction projects. It has the potential to transform the design, construction and management of construction projects, and the operation and maintenance of the asset after completion.
The OGP, in partnership with the Build Digital Project, is developing templates and guidance material to guide contracting authorities in setting BIM requirements for their consultancy engagements. This will ensure a consistent approach to its application across the public sector.”
The International Cost Management Standard provides a common reporting framework allowing the interrelationship between construction cost and carbon emissions to be explored. Minister Smyth said:
“The reporting structure provided by ICMS will enable decisions to be taken on the basis of the total cost of ownership including the environmental impacts of decisions with respect to material selection, foundation design and energy use and production.
Combined with the data handling capacity of BIM and the availability of greater levels of information on materials and building components, contracting authorities and their project teams can review a project’s environmental standing at all stages of its delivery lifecycle with ICMS.
The information recorded can be used in the lifecycle of the asset to support decisions around sustainability and the circular economy.”
The OGP will commence publication of the amended forms of contract and associated schedules from the 26th June 2023.
Notes:
- These changes follow work done previously by the Office of Government Procurement to address inflation risk in construction materials through the Inflation/ Supply Chain Delay Co-operation Framework Agreement, and risk and uncertainty through reforms in the requirements for Professional Indemnity Insurance and imposing liability caps in the contracts used to engage construction consultancy services.
- Further amendments will also be introduced to the Instructions to Tenderers and Suitability Assessment Questionnaires to introduce other amendments to the CWMF to remove barriers to tendering by improving accessibility and eliminating much of the administrative burden associated with completing the paperwork to assess the capability of Contractors.
- Guidance on the operation of Price Variation Limitation of Liability clauses in the CWMF will be updated to reflect these position changes.
- Further technical information is available on the CWMF website which is regularly updated to reflect policy and legislative changes.
Working example:
- A Contracting Authority determines that the level they wish to set the price variation is at 5%.
- The relevant CSO wholesale price indices are set out in the contract and are benchmarked from the date that is 10 days prior to the submission of the tender.
- Month 1 - timber increases on the relevant CSO index by 4% from its benchmark - Contractor gets a 0% increase in payment for that commodity.
- Month 1 - steel increases by 12% on the relevant CSO index - Contractor gets a 7% increase in payment for the portion of that commodity in the payment application.
ENDS