I thank the Chairman and the members of the committee for the opportunity to make a brief introductory statement.
The invitation relates to the committee's interest in contracts in the local government sector that have gone to conciliation and arbitration. I set out in my letter, late last week, 14 local authority projects relating to programmes within the remit of the Department of the Environment, Heritage and Local Government that are currently at conciliation and arbitration.
It would be useful if I briefly summarised the Department's management role and procedures relating to capital projects carried out by local authorities and funded by the Department. I will then outline the role of the conciliation and arbitration process and how local authorities engage with the Department on decisions relating to contracts and entering and going through the process.
The general procedures for the management of capital programmes are laid down by the Department of Finance in its capital appraisal guidelines of 2005. My Department, in turn, has advised local authorities, through various circulars, on how these procedures are to be complied with regarding the management of capital programmes for housing, water and waste management. These circulars outline a comprehensive set of procedures to be applied by local authorities in managing projects from the initial stages, such as determining the brief for consultants, through to various intermediate stages, such as cost benefit analysis, contract documentation, procurement and construction, to dealing with the final account.
Local authorities must use the standard forms of contract approved by the Department of Finance for public capital contracts. The contracts contain a mechanism for resolving difficulties that may arise, whether regarding costs or other contractual matters. The dispute resolution process provided for in standard contracts involves negotiation in the first instance, then, if required, the process moves on to conciliation and arbitration. Ultimately, matters may be referred to the courts.
An effective dispute resolution procedure is essential to the efficient operation of contracts and provides protection for both the employer and the contractor. This employers' protection embraces a duty of care for any costs falling to be funded by the Exchequer.
In spending public funds, local authorities must ensure they get value for money and when a dispute arises regarding costs they must consider the issues involved and seek to resolve it in a fair and equitable manner. Clearly, it would be inappropriate and wrong if local authorities were to attempt to abuse the conciliation and arbitration process and treat contractors unfairly. However, as the name implies, the purpose of the process is to reach a fair and reasonable resolution of disputes. Local authorities carry a duty of responsibility to ensure that any claims for additional costs are legitimately admissible. If they are of the view that certain claims for additional costs are not well-founded they must resist them through the procedures available.
With regard to the Department's oversight of local authorities' engagement in conciliation the following procedures apply. In respect of projects funded by the Department a local authority must notify the Department at all significant stages including: when a dispute is referred to conciliation; before agreeing settlement or accepting a conciliator's recommendation; before rejecting a conciliator's recommendation or where it is rejected by the contractor, causing the dispute to go to arbitration; prior to an appeal to the courts on a point of law; and prior to proceeding with terminating a contract.
This enables the Department to monitor local authority engagement in the operation of conciliation and arbitration. In exercising this oversight, the Department will ensure risk analysis is applied at critical points in the decision-making process. Where a local authority recommends a settlement, it must demonstrate that any such settlement or recommendation for settlement is either within the terms of the contract, or where not strictly within the terms of the contract, is considered to be more cost effective than an arbitration outcome would be on the basis of a risk assessment.
Risk assessment is now being extensively applied. Detailed risk assessments must be carried out prior to making a decision to terminate a contract and at all the stages referred to earlier. Where termination is being considered, the risk assessment should be prepared by suitably-qualified technical and-or legal advisers. Such advisers must be independent and not have any previous involvement with the project at any stage. To assist local authorities further in this regard, the Department is developing a guidance and risk template which will be completed this year.
I should say also that the new forms of construction contracts for public work, fixed-price lump sum contracts now in place will provide for much more comprehensive and detailed preplanning, reducing the likelihood of cost overruns and, in time, the potential for cases proceeding to conciliation and arbitration.
There are currently 12 housing projects, one water project and an urban development project in the conciliation and arbitration process. The reality is that the great majority of contracts do not go to conciliation or arbitration. The day-to-day management of these arbitration cases is the responsibility of the local authorities, subject to complying with the reporting procedures associated with the Department's oversight responsibilities of the capital programmes in question. The total tender value of the housing and water services projects is €71.6 million which represents 2.5% of the 2008 total investment of €2.88 billion in housing and water services, or 3.1% of the €2.24 billion Exchequer and local authority capital expenditure on the housing and water services programmes.
I recognise the conciliation and arbitration process is an important part of the public works contracts system. It is essential it operates well for all parties concerned, the employing local authority, the contractor and of course the Exchequer. The arrangements my Department has in place to monitor and manage local authority projects going through conciliation and arbitration will ensure proper risk management is undertaken to inform decision making in the process.
I thank the joint committee for the opportunity to make this opening statement.
