Guidance from the Office of Government Procurement regarding the Public Works Contracts and Ex Gratia Payment Scheme

In this article, Georgina Wallace and Finola McCarthy look at the recent guidance that has issued regarding Public Works Contracts arising from the closure of all non-essential construction sites on 8 January 2021 as part of the national effort to prevent the spread of Covid-19. The mandatory closure was given legal effect by the Health Act 1947 (Section 31a - Temporary Restrictions) (Covid-19)(No. 10)(Amendment) Regulations 2021) (the “Measures”) which provided for a limited list of essential construction activities to continue during the lockdown period, set to continue until at least 5 April 2021.

Guidance Issued on 12 February 2021

On 12 February 2021 the Office of Government Procurement (“OGP”) issued a guidance note (the “Guidance”) in respect of public works contracts (“PWCs”) affected by the Measures dealing with the following matters:

1. Delay -

the Guidance re-iterates the position that under the PWCs a mandatory closure of sites promulgated by law would entitle a contractor to claim for delay and seek a subsequent extension of time to the date for substantial completion provided all notice requirements in the contract have been complied with. The OGP advises that any time associated with delay arising from the introduction of the Measures should be calculated from the date the contractor was required to close the site, i.e. 8 January 2021.

2. Costs -

further to previous guidance issued, the OGP recommends that employers make an ex gratia payment to contractors for the period of the site closure on the basis that the PWCs do not entitle the contractor to recover costs associated with delay and in light of the ‘exceptional circumstances currently facing contractors on publicly funded projects’. The Guidance sets out two different procedures, one for contracts made before 14 April 2020 where work was ongoing in January 2021 and the second for those entered into after 14 April 2020.

(i) Contracts made prior to 14 April 2020 - The OGP advises parties to use the Covid-19 Co-operation Framework (the “Framework”), as detailed in the OGP guidance Guidance of 24 June 2020, to determine ex-gratia payments in respect of certain costs arising from the implementation of the Measures.

(ii) Contracts made after 14 April 2020 - in contrast to contracts made prior to 14 April 2020, any costs arising from the period of site closure between 8 January 2021 until 31 January 2021 are not permissible costs in calculating the ex-gratia payment for contracts made after 14 April 2020.

3. Future Amendment to-

The OGP has specified the intention to amend the PWCs (amended forms expected to be issued in the second quarter of 2021) to cater for a cost sharing mechanism between the employer and the contractor in the event of site closure on the grounds of public health.

Guidance Issued on 26 February 2021

Supplementary guidance and model forms of agreement were published by the OGP on 26 February 2021 (“Supplementary Guidance”) to give effect to the proposed ex gratia scheme detailed in the Guidance note of 12 February 2021. This Supplementary Guidance differs from previous guidance notes issued on the ex gratia payment scheme as it sets out two distinct procedures in calculating the payment depending on whether the contract was entered into prior to 14 April 2020 (“Note 1”) or on or after 14 April 2020 (“Note 2”).

1. Permissible Costs

Contracts made prior to 14 April 2020 where works are ongoing as of January 2021

Note 1 provides that the ex gratia payment shall represent a portion of ‘Contract Preliminary Costs’ (“Preliminaries”), as per the pricing document, that are ‘unavoidably incurred, reasonable and vouched for the relevant closure period’ to be reviewed on a project by project basis between the contractor and employer or its appointed representative. Additional focus has been placed, in respect of contracts made prior to 14 April 2020, on the principles of burden sharing set out in Section A4 of the Covid Cooperation Framework (published 24 June 2020) and that they shall also apply in respect of the ex gratia payment which was not referenced in previous guidance notes issued. Furthermore, in contrast to previous guidance issued, Note 1 makes it clear that the employer shall bear a maximum of 50% of the agreed costs and, depending on the resources of the employer, this contribution may be less than that. (No formula has been included in Note 1 as an aid in calculating the ex gratia payment despite this being included in previous guidance notes issued on 14 April 2020 and 8 May 2020.

The OGP refer to permitted categories of Preliminaries in calculating the ex gratia payments as follows:

(a) Supervision: calculated based on the aggregate of supervision items for those members of the contractor’s personnel ordinarily engaged in the supervision of the works in the week preceding the commencement of the relevant closure period and who continue to be employed during this period except in circumstances where costs are recovered by the contractor under Revenue’s Employment Wage Subsidy Scheme;

(b) Plant: costs associated with hoisting, lifting and distribution of materials, where not included elsewhere in the contract pricing document;

(c) Scaffolding: the hire and inspection of scaffolding during the relevant closure period provided that the scaffolding was erected before the commencement of the relevant closure period and remained on site during the closure period. (The employer will only be liable to a maximum of 50% of the costs whereas this amount is 65% (in respect of scaffolding erected prior to site closure) or 100% (in respect of scaffolding not yet erected but included in the initial set up costs) for contracts made on or after 14 April 2020);

(d) Hire of site accommodation and storage. (No reference is made to other initial set up costs such as hoarding, roadways and hard standing referred to in the previous OGP guidance of 8 May 2020);

(e) Insurances (as required by the contract);

(f) Health and safety obligations in relation to the site; and

(g) Site security measures for the closure period.

Items (e) to (g) were not included in previous guidance notes as permitted cost items.

In circumstances where, in accordance with the Framework, the parties have agreed an ex gratia payment of direct costs relating to the Protocol Measures, only those reasonable, vouched direct preliminary costs unavoidably incurred during the site closure will be recoverable as part of the ex gratia payment.

Contracts made on or after 14 April 2020

As with contracts entered into before 14 April 2020, the ex gratia payment shall only be in respect of Preliminaries that are unavoidably incurred, reasonable and vouched for the relevant closure period. In general, Note 2 is largely similar to the provisions of the previous OGP guidance issued on 8 May 2020. Note 2 provides that such costs may include costs associated with insurance premiums, security on site, and performance of any on-going health and safety obligations. The OGP have detailed a formula in Note 2 to calculate the value of the ex gratia payment. This formula mirrors the formula set out in the OGP’s previous guidance note of 8 May 2020 regarding the calculation of the ex gratia payment up to 4 May 2020 (referred to as Applicable Period 1). However, it is important to note that the full site closure period is not taken into account and any costs from the period of site closure between 6 January 2021 and 31 January 2021 are specifically excluded.

The following permissible Categories of Preliminaries are outlined in Note 2, and these are the same categories as set out in the previous guidance issued on 8 May 2020:

(a) Initial set-up costs: costs associated with the establishment of the site to include all site set up costs stated in the contract preliminaries including, but not limited to, site accommodation and storage, hoarding, site services, roadways and hard standing, etc. In the event that such costs have not agreed at the commencement of the works, the employer shall determine such costs. Specific ratios are provided for in respect of scaffolding. If scaffolding was erected on the site and remained erected during the closure period, 65% of the total scaffold amount stated in the preliminaries or if scaffolding was not yet erected, or had been taken down, 100% of the scaffold amount;

(b) Consumables: includes items such as PPE, fuel, small plant and tools, waste disposal, cleaning and any demobilisation costs included in the preliminaries. During the period of site closure such consumables are excluded from the ex gratia payment however large items of plant and machinery that remain on site for the duration of the closure period shall be taken into consideration in the amount of the ex gratia payment; and

(c) Supervision: 50% of the aggregate of the Contract Preliminaries supervision items for those members of the contractor’s personnel ordinarily engaged in the supervision of the works in the week preceding the commencement of the relevant closure period and who continue to be employed during this period except in circumstances where costs are recovered by the contractor under Revenue’s Employment Wage Subsidy Scheme.

Excluded Costs

The OGP have specifically excluded any bond premium, sums incurred for a standing conciliator, any utility fees and contributions and any allowance for profit and overheads, expressly provided for within the contract as preliminary costs, as excluded categories for the purposes of calculating the ex-gratia payment for contracts made before and after 14 April 2020.

2. Supplemental Agreements regarding the Ex Gratia Payment

The OGP have issued the model form Covid-19 Site Closure Supplemental Agreements for use in respect of contracts made prior to 14 April 2020 and a separate form for contracts made on or after 14 April 2020 (the “Supplemental Agreements”). The form of both agreements are largely the same, however the form relating to contracts prior to 14 April 2020 specifically references the principles of the Framework and the representations in paragraphs 2 and 3 of it. The Supplemental Agreements are in the form of a letter to be exchanged between the employer and the contractor and make provision for claw back of the ex gratia payment if the contractor breaches the terms thereof.

Appended to the Supplemental Agreements is a notice referred to as the ‘Covid Closure Costs Notice’ (the “Notice”) which sets out the extent of the ex gratia closure payment for the period identified in the Notice which has been agreed between the parties. This is a new form which was has been introduced by the OGP. The Supplemental Agreements provide that payment of the ex gratia payment shall be within the next scheduled interim payment under the contract following the date of the receipt by the employer of the signed counterpart Notice, however there is a specific waiver regarding any claim and/or entitlement to interest for late payment of the ex gratia sum.

3. Relevant Closure Period

The duration of the ‘Relevant Closure Period’ in Clause 2.2 of the Supplemental Agreements shall be:

(a) Contracts made prior to 14 April 2020 - the period shall (i) commence on the later of 8 January 2021 or the date on which the site closed (if after 8 January 2021) and (ii) cease to apply from the earlier of Midnight on 5 March 2021 or the permitted date or re-opening of the site (this is footnoted in the Supplementary Note to refer to sites which open before 5 March 2021); or

(b) Contracts made after 14 April 2020 - the period shall (i) commence on the day later of 31 January 2021, the date on which the site closed (if after 31 January 2021) or the expiry of any stated period of site closure on foot of a closure for public health reasons in the PWCs for which the contractor is not entitled to cover costs and (ii) shall cease to apply from the earlier of Midnight on 5 March 2021 or the permitted date of re-opening of the site (this is footnoted in the Supplementary Note to refer to sites which open before 5 March 2021).