Ministers Donohoe and Smyth announce package of Public Works Contract reforms

The Minister for Public Expenditure, National Development Plan Delivery and Reform, Paschal Donohoe TD, and Minister of State with responsibility for Public Procurement and eGovernment, Ossian Smyth T.D., have announced significant amendments to the Public Works Contract to provide greater certainty with respect to risk in response to continuing challenges in the construction market.

The package will aim to rebalance the risk involved in delivering public works projects, while maintaining expenditure control for contracting authorities.

The package includes:

  • Introducing Liability Caps for Contractors );
  • Amending the Price Variation Mechanism for recovery of inflationary cost to an approach solely based on published indices;
  • Removing the fixed price period for materials, energy and fuel;
  • Lowering the threshold for recovery of inflationary costs in key material categories;
  • introducing a simple price variation provision to cover materials in Public Works Contracts of lesser value.

While the acute pressures on supply chains and inflation costs have eased, prices are not expected to return to 2020 levels. Contracting Authorities will now be required to provide for inflation above a pre-defined threshold in the project budget, rather than transferring that risk to the contractor in a competitive pricing environment.

Limiting the Liability of a contractor to a monetary amount proportionate to the project, will also deliver greater certainty as to the extent of a contractor’s financial exposure under a public works contract. This follows on from similar measures introduced in March for construction consultancy contracts.

The Price Variation mechanism will operate using a formula fluctuation method which responds to movements in the publicly available indices published by the Central Statistics Office, ensuring that both parties are adhering to a fair and transparent process.

Currently, contractors may be compensated for inflation in excess of 15% for materials and fuel. This threshold is being reduced to a range between 3-10% from which contracting authorities will select a level that reflects the project’s main inputs. It will allow for a certain level of inflation to be properly priced in tenders whilst reducing the potential to over-provision for inflation risk which may make projects unaffordable.

On announcing these changes, Minister Donohoe said: “I am pleased to announce these measures to address uncertainty and risk in the delivery of Public Works Contracts. This follows a series of measures introduced by my department over the last 18 months to address the challenges that the construction industry has faced over the last two years in terms of material price inflation, supply chain disruption and the reduced availability of professional indemnity insurance. The measures which I am announcing today underline my department’s renewed focus on balancing the concerns of industry and the needs of departments and agencies to deliver public infrastructure.

Improving the risk/reward balance of public works contracts through the introduction of caps on liability and reform of the price variation mechanisms will encourage a greater level of competition for public works tenders. This will lead to an improved quality of bids received and maximise value-for-money, key priorities for my department in delivering the NDP.

We continue to develop a comprehensive and agile response to the risk posed by exceptional levels of inflation and supply disruptions that create a challenging and uncertain environment for project delivery.”

All public works projects valued at over €200,000 are advertised on eTenders. To avail of opportunities to participate in Public Works projects under these new conditions, Minister Donohoe said: “I want to remind all businesses on eTenders how important it is to stay up-to-date with the new system changes so that they can continue to access the variety of opportunities available to them through public procurement.

The new platform promotes digitalisation with increased online functionality and offers free and unrestricted access to procurement competitions.”

The Construction Industry Federation has welcomed the announcement of amendments to the Public Works Contract to support the delivery of infrastructure under the National Development Plan critical for Housing for All and Climate Action.

Paul Sheridan, CIF Director of Main Contracting said: “While we need to study the proposed mechanisms in detail, they appear to embed strict checks and balances that will help provide greater budget certainty and value for money to the state and taxpayer, while also supporting the viability and delivery of important infrastructural projects.

“These mechanisms bring us closer to alignment with international norms and are to be widely welcomed by our industry. We remain focused on supporting the Government and Office of Government Procurement as they work on developing further reforms necessary to effectively balance risk, support green procurement and ensure that all projects are awarded based on quality and not lowest price, through the International Construction Measurement Standards and Building Information Management.”

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