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National Development Plan

Dáil Éireann Debate, Thursday - 16 June 2022

Thursday, 16 June 2022

Questions (138)

Gerald Nash

Question:

138. Deputy Ged Nash asked the Minister for Public Expenditure and Reform if he will provide an update on the impact of rising construction costs on the delivery of the National Development Plan; the total cost to the State in 2022; the estimated cost in 2023 of his Department’s commitment to pay 70% of the construction cost inflation on recently agreed contracts; and if he will make a statement on the matter. [31014/22]

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Written answers

There have been significant and sustained increases in the prices of a broad range of commonly used materials in the construction sector throughout 2021 in the aftermath of the pandemic. Energy prices also showed marked increases in 2021 and have further escalated in response to the Russian invasion of Ukraine. Both represent significant input costs for construction projects and inflation is a risk that contractors have been expected to bear under the public works contracts for a defined period.

These inflationary provisions have operated reasonably effectively over the years since their introduction, albeit in times of relative price stability. However, the price movements experienced on construction materials over the past 12 months have arisen suddenly and with no warning. In response to this challenge, I introduced a series of measures to address the risk posed.

- The OGP issued procurement guidance in November 2021 to assist public bodies in managing the challenges they face concluding ‘live’ tenders.

- With reference to future tenders, the OGP published interim amendments to the provisions in the public works contracts on 7 January 2022. Within certain parameters, these amendments reduce the level of risk of extraordinary price inflation that contractors have to bear, while also enabling the Exchequer to obtain cost reductions should exceptional price reductions occur during the course of the works. The measures are designed to encourage confidence in the tender process and to mitigate against the over-provision for price inflation in tender prices. However, they do not cater for fuel/energy price increases or supply chain disruption.

While these changes had been expected to bring greater stability to contracting arrangements on projects whose tenders were received after 18 January 2022, there has been sustained feedback from Government Departments and their Agencies that successful delivery of priority projects included in the NDP is jeopardised by further inflationary pressures associated with the war in Ukraine. Departments have reported specific issues with fuel costs and supply chain disruption, including reduced competition for public works contracts and challenges relating to projects underway since early in 2021.

The ‘All Materials’ category of the Central Statistics Office’s (CSO) Detailed Wholesale Price Indices for Building and Construction Materials saw a 16.9% increase in the 12 months to March 2022. In some of the sub-categories the 12 month increase is more severe, ‘other structural steel’ for example shows a 64.1% increase and rough timber 46.3%.

Through extensive engagement with industry and public sector stakeholders involved in the delivery of the National Development Plan 2021-2030 (NDP), it is clear that the delivery of many critical public capital projects is being put at risk due to the rapid increases in material and energy prices in recent times. For contractors who tendered for projects prior to the onset of these inflationary pressures, this issue is particularly acute.

In the interest of safeguarding public projects that are already under construction and to mitigate the risks of significant losses being sustained by contractors, on Tuesday 10 May I announced details of the “Inflation Co-operation Framework" for those parties engaged under a public works contract.

There are two strands to the framework depending on whether the project is operating under the older form of contract; published before 7 January 2022, or the new form; published on 7 January 2022. For the older forms the framework will cover materials and energy price increases, and supply chain disruption. For the new forms only energy price increases and supply chain disruption will be covered as these forms were amended to allow for material price inflation.

The framework facilitates both parties to engage with one another for the purpose of addressing the impacts of this most recent onset of exceptional inflation and supply chain disruption and operates on an ex gratia basis. The framework sets down the approaches and the parameters within which parties to a public works contract calculate additional costs attributable to material and fuel price fluctuations using price indices published by the CSO.

In recognition that neither party is responsible for the global events that have given rise to inflation, it is proposed that the additional inflation costs be apportioned between the parties, with, subject to budgetary constraints, the State bearing up to 70% of the additional inflationary related costs.

It has been decided that it is appropriate for the State to bear the majority of any additional costs identified on the basis of the limited capacity of contractors to bear these additional costs which are exceptional in terms of the increase and the uncertainty with respect to their duration. As the State is the ultimate owner and beneficiary of the asset that is under construction, it is imperative that quality materials continue to be used to ensure the durability of completed asset.

However contractors should continue to carry some degree of the additional costs arising due to inflation in recognition of the original terms upon which they tendered and it encourages more efficient purchasing thereby addressing value for money concerns.

The framework applies to payments made from 1 January 2022 in recognition that inflationary pressures were further building from this point in anticipation of the invasion of Ukraine. The extent of additional payments that will arise on projects going forward will depend on the materials that are to be incorporated, the stage of the project’s development and further movement in prices which is extremely difficult to forecast at this moment and contracting authorities will be working within ranges which are related to movements in various indices.

The measures available under the framework strike an important balance between the additional costs incurred by the State to support Contractors engaged on public projects and the State’s ability to deliver the NDP including housing delivery, whilst providing value for money for the taxpayer.

Departments are consistently required to deal with fluctuations in market conditions in delivering required infrastructure. The key requirements that underpin approvals process for capital investment, namely appraisals on the economic and financial value of projects, will remain. Only projects that deliver the required benefits on key Government objectives and prove to be Value for Money for the State will go forward to implementation.

While the amendments announced recently may lead to some extended timelines in project delivery, it is open to Departments to amend existing plans to deliver similar outcomes within the agreed Budgetary ceilings in the NDP.

The 2022 capital allocation is €11,403 million. This is an increase of €0.9 billion or 8% on the 2021 allocation and an increase of almost €2.3 billion or 25% on the actual spend (exclusive of carryover) in 2021. In aggregate, including capital carryover, there is €12.2 billion available for capital spending this year.

The ceilings detailed in the NDP are cognisant of the overall capability of the construction sector to deliver on the NDP and of the appropriate share of National Income being devoted to infrastructure. The levels of capital spending, at close to 5% of GNI*, are already among the highest in the EU and are close to the limit of the overall capability to deliver in the coming decade.

In the NDP, it was clarified that there will need to be an agile approach to funding allocations and in-plan reprioritisation of funding, particularly where underspends and policy changes are apparent.

These changes impact on live contracts within the fixed price period, much of this period will have elapsed and the greater flexibility in the changes announced will only impact from 2022 onwards. Outside of that, there is evidence that the market prices and tender prices for core materials have increased. Similar to any process of Vote management, it will be up to sectors and Accounting Officers to assess whether existing timelines for the implementation of key projects will need to be adjusted on account of recent changes made or if there will be a need for prioritisation within their existing 5 year departmental ceilings. It is also possible for the same set of projects to be delivered with some extension of delivery timelines or some re-evaluation of project scope.

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