The State body in charge of motorways has been warned of “serious concern” that building contractors on big public projects “could and will fail” because of soaring construction costs.
An unpublished report for Transport Infrastructure Ireland (TII) found “significant financial pressures” on public contractors, as escalating costs in the six weeks since the Ukraine war started add to the surge in prices for fuel, materials and labour since last year. The report added, however, that it was “not possible” to identify specific contractors at risk of failure.
At issue are clauses in the standard public works contract that restrict the scope for builders to claim relief from rising inflation, which advanced last month at the fastest rate for 22 years.
The State budget for roads this year is €1.4 billion, between new projects and maintenance. But builders have been rocked by double-digit increases in the price of concrete, metal, timber and piping, as well as the jump in energy costs.
The assessment for TII by consultants ChandlerKBS, dated March 31st, concluded that recent Government moves to tackle escalating costs “do not go far enough” and said different contract models should be considered. Such measures were introduced in January, the month before Russia invaded Ukraine.
Many projects already under way were “ not eligible” for price escalation payments until after the 31st month of construction.
In addition, many contractors did not make provision in their tenders for cost increases at the levels required to trigger such payments.
“If a resolution can be found. . . we have the potential to sustain, attract and grow a supply chain that could optimise the value for money obtained in delivering Ireland’s national development plan,” ChandlerKBS said. “Without reform, we may not have the supply chain available to deliver it.”
Price escalation
The report, seen by The Irish Times, said none of the “multiple price escalation claims” that contractors had submitted on TII projects had been accepted. “Contractors are instead having to revert to indirect methods of recovery, which we anticipate will complicate contract administration and may lead to the development of adversarial relationships,” it said.
“While the public works contract has succeeded in offering client organisations financial protection for price escalation amongst other risks, there are now clear signs that it is having a detrimental impact on the market’s appetite and ability to delivery.”
Citing interviews in March with senior market participants, ChandlerKBS said the adequacy of the inflation provisions in the public works contract was under serious scrutiny.
“To stimulate the market, we consider it would be prudent to consider either the introduction of significant amendments to the public works contract or the potential to use an alternative standard form of construction contract.”
Official data published on Thursday shows that the 6.7 per cent annual inflation rate in March was the fastest since November 2000. The price of electricity, gas and other fuels rose 46.7 per cent in 12 months, diesel rose 46 per cent and petrol rose 35.2 per cent.
Separate research by construction consultants Linesight said rising oil and gas prices were “making it more expensive to move supplies and other necessary materials to construction sites”.
Linesight added that a new package of sanctions may restrict steel imports from Russia, adding to the market volatility and the supply-demand imbalance. “The EU constitutes a key market for Russian steelmakers.”
The ChandlerKBS report for TII said construction inflation had risen “at a rate that was not expected by the market” since the second quarter of 2021. “It is widely considered that it is not sustainable for contractors to continue to absorb price escalation at the rate the market is currently experiencing.”
