Delivery of housing as mandated by Housing for All has been challenged across all tenures in recent months by the significant increase in construction material and labour costs. The CSO Wholesale Price Index (WPI) shows the annual increase for building and construction materials to be 18.5% to the end of June 2022. The viability of higher density development is reported as particularly challenging.
To specifically address market conditions applicable to pipeline delivery, inflation and interest rate increases the following measures are currently being rolled out by my Department and Government:
- Under Housing for All (Action 23.2) my Department is overseeing a Residential Construction Cost Study. This is an
analysis and value engineering exercise for each component of cost of construction (including cost of compliance) of house and apartment development, with a view to reducing cost and increasing standardisation. It will also identify opportunities for cost reduction for consideration by relevant Government Departments and industry. The study compliments work being carried out by my Department under Housing for All on other development cost areas, such as site acquisition and land value, planning, and utilities. It is scheduled to report in Q4 2022.
- The Department of Enterprise Trade and Employment have recently established the Modern Methods of Construction (MMC) Leadership and Integration Group to ensure integration, coordination and industry impact across several government supported MMC relevant initiatives
- ensuring continuous flow of innovations to the industry. Overall, the Group will have a leading strategic role in promoting a culture of innovation in residential construction as envisaged under Housing for All (Action 23.9) and will contribute to broader MMC development, which is central to pipeline delivery.
- The Construction Technology Centre (CTC) was recently established by Enterprise Ireland. Contracts were signed with a consortium of NUIG, UCD, Trinity and UCC at the end of June to establish the CTC, and the CTC was launched on 20 July.
- A Demonstration Park for MMC is to be established at the National Construction Training Centre in Mount Lucas. Request for Tenders for construction of the Demonstration Park will issue in the coming weeks.
- The Department of Finance have engaged in a study on Drivers of Cost and Availability of Finance for Residential Development. This report is due to be completed in the autumn.
In terms of procurement: in January, the Office of Government Procurement introduced the following interim measures to address the impact that the recent price increases in construction materials is having on public works tenders:
- Reduced fixed price period duration to 24 months (previously 30 months minimum).
- Permit mutual cost recovery within the fixed price period for material price changes in excess of 15% (previously 50%).
- Introduction of a new mechanism to address the period between tender submission and award through limited indexation of the tender price.
The above measures related to new Public Works Contracts going forward (contracts with a version date earlier than 7 January 2022).
More recently, in the interest of safeguarding public projects that are already under construction and to mitigate the risks of significant losses being sustained by contractors, the OGP has introduced an ‘Inflation/Supply Chain Delay Co-operation Framework’ for parties engaged under a public works contract. This framework will operate on an ex-gratia basis and includes measures to:
- address delay to the Substantial Completion of the Works, or a Section of the Works, that has occurred since 1 January 2022 where the delay is caused by supply chain disruption
- address recent inflation in the prices of fuel and energy
- address inflation in materials, from 01 January 2022 onwards for those Public Works Contracts with a version date earlier than 7 January 2022 - proactively, and collaboratively, manage the on-going impact of these external factors insofar as is possible within the project’s original delivery parameters
In respect of the situation regarding the approved housing body (AHB) sector my Department is staying in very close communication with this sector regarding a range of issues which have impacted on construction costs.
In mid-May, my Department issued an Information Note to the AHB sector which addressed the issue of material costs increases on turnkey contracts which were approved under the Capital Advance Leasing Facility (CALF) funding model.
In addition to this, my Department has accelerated its work on the CALF review which is a commitment under Housing for All. The timeframe for completion of the CALF review was originally Q4 this year. However, in view of the urgency arising on these issues, we are accelerating our progress and intend to deliver the outcome of this review in Q3.
The key purpose of the review was to examine the Payment & Availability-CALF funding model to determine if it should be adjusted to support delivery by the AHB sector across a wider range of geographic areas and what options might be available to enable this. This is in response to concerns expressed by local authorities and the AHB sector that low rents in certain areas were making the CALF model unviable.
Since the commencement of the CALF review, its scope will also consider how this funding model can consider and adapt to the rapid rise in construction inflation and the increase in interest rates and deliver a funding model which can respond and be applied equally to all areas across the country.
The intention with this accelerated timeframe is that the AHB sector would have the security of having a revised funding model which can ensure the viability of social housing projects and give an additional layer of confidence to their ongoing planning with developers. Also, a revised funding model which can operate in all areas will assist the Local Authority sector as they consider their social housing delivery pipeline required under their Housing Delivery Action Plans.
In response to the interest rate changes, for properties acquired by an AHB under the Housing Agency Acquisitions (HAA) programme, the Department liaised with AHBs and allowed an increase in CALF funding only and if appropriate. Under the HAA fund scheme, a limit of 30% CALF funding applies and this parameter was maintained. For properties acquired by an AHB under the Mortgage to Rent scheme, a financial reappraisal for CALF funding was offered to AHBs. Under the MTR scheme, an AHB can receive 40% CALF funding and a Payment and Availability (P&A) payment of up to 92% of the market rent – these parameters were also maintained for financial reappraisals.
Under the Mortgage to Rent scheme, an MTR provider must complete repairs on the property to bring the property up to private rental standards. An AHB must seek approval from my Department for these repairs based on estimated costs and the cost of these repairs are factored into the financial appraisal for CALF funding. If the estimated costs rise during the period between approval and procurement, my Department allows the AHB to resubmit the application. These are considered on a case by case basis and if my Department agrees that the costs increases are reasonable based on current market conditions, then their CALF funding will be reviewed and if appropriate, may increase.
