The controversial new contracts for State building projects could drive up the price of developments such as roads and other infrastructure, according to a leading engineering firm.

The director of Davis Langdon PKS, Norman Craig, warned yesterday that the new fixed-price contracts being introduced by the Government for infrastructure development "may slow down the flow of new public-sector projects" this year. "It may also lead to higher tender figures in the short term as contractors and subcontractors familiarise themselves with the new regime," he said. "Indeed, it is possible that a two-tier market will emerge, with keener pricing for private-sector projects where the client continues to accept the risks which in the public sector are now transferred to the contractor."

The Construction Industry Federation (CIF) is challenging the new fixed-price contracts in the European Court of Justice.

In February, the government introduced contracts that fixed the cost of public building projects, in a bid to halt big cost over-runs in such developments.

However, the CIF warned that the new contracts would force its members to assume all of the risk associated with infrastructure building, which would inevitably force up the prices they quote in tenders.

The federation argues that the cost over-runs are largely due to factors such as increases in land prices and delays in the planning process.

The CIF wants the Government to use engineering construction contracts, which involve the contractor at an early stage in the design of a project. This allows the client and the building firm to identify potential risks and agree a mechanism for sharing likely costs. The UK and other European countries use this model.

Davis Langdon PKS published its summer review of the Irish building industry yesterday, which predicted that the number of houses built in the Republic this year would fall to 75,000 from a high of 90,000 last year.

It expects commercial and retail building activity to grow at a rate of 3 per cent, while civil engineering will increase by 6 per cent. However, Mr Craig said the increase in other sectors would not offset the fall in residential construction. "We expect a 5 per cent reduction in the volume of new construction in 2007."