Rising costs in the construction industry and risk allocation in public and private sector contracts

RDJ Partner Alison Bearpark and Consultant Denise Kennedy were joined by guest speakers Ronan McGee, Director at Duke McCaffrey Consulting and Seamus Duggan, Joint Managing Director at Duggan Brothers (Contractors) Limited to discuss rising costs in the construction industry and risk allocation in public and private sector contracts. We have provided 6 key takeaways from the event below.

1. Price inflation. The Society of Chartered Surveyors Ireland (SCSI) Tender Price Index shows that national construction tender prices increased by 7.5% in the first half of 2022 and figures released by the Central Statistics Office in September 2022 show that the cost of certain materials such as steel, cement and timber are still increasing by percentages well in excess of the standard rate of inflation. Price inflation in the construction sector is undoubtedly having an impact on the cost, viability and progression of projects, be it those already underway or those yet to commence, with many projects stalling temporarily in the hope that prices may fall in the coming months.
2. Inflation causes. Cost inflation in the construction industry is attributable to many factors such as labour and material shortages brought on by Covid 19 and the war in Ukraine; energy inflation caused by the increase in oil and gas prices; unavailability of skilled personnel; and the tightening insurance market.
3. Public sector. On public sector projects, the Co-Operation Framework Agreement introduced by the OGP in May 2022 is welcome, but it doesn’t go far enough. The discretionary nature of the ex-gratia payment and the fact that any contribution paid by a Contacting Authority must be paid without additional Exchequer funding has meant that the Co-Operation Framework Agreement is not as far reaching as perhaps originally anticipated. The discretionary use of the Framework Agreement has proven challenging in circumstances where certain Contacting Authorities have not opted to implement the Framework Agreement, due to budget constraints or other factors. Notwithstanding this, our panel’s experience with the Framework Agreement has been positive, largely due to collaboration within the industry driven by the will to keep projects, contractors and the supply chain viable.
4. Private sector. The private sector has more flexibility in terms of risk allocation within its construction contracts and some solutions seen include value engineering proposals, early contractor engagement and bespoke drafting solutions to provide a contractor with time / cost relief for delays and/or increased costs as a result of events such as supply issues due to the war in Ukraine or Covid 19. The panel also discussed the potential use of forms of contracts other than the RIAI form of contract, such as the NEC form of contract which is considered more collaborative in nature. As with public sector projects, collaboration is key, particularly for those contracts already in place and where the risks are most likely weighted on a contractor.
5. Mitigation measures. The need to value engineer projects was acknowledged by all panellists as one effective way of reducing costs on a project. Early contractor engagement in this process is hugely beneficial given that the contractor is at the coal face of material sourcing and purchasing and therefore is best placed to know where value can be found. Contractors and subcontractors on private sector projects can assist discussions for additional payments by vouching their increased costs. This offers a level of transparency, which was identified as a key step to enabling all parties at the table to have an effective and solution orientated conversation in relation to cost inflation mitigation.
6. Looking to the future. We are in challenging times but there are grounds for optimism. It was noted that the OGP has indicated its intent to update the public works forms of contract to encourage greater collaboration, appropriate risk management and a contractual basis for the measures currently dealt with under the Co-Operation Framework Agreement – it is not yet known what the nature of these changes will be or when the updated contract forms will be published.

For more information on the content of this Insight please contact the event speakers:

• Alison Bearpark, Construction Partner, RDJ LLP | E. alison.bearpark@rdj.ie
• Denise Kennedy, Construction Consultant, RDJ LLP | E. denise.kennedy@rdj.ie
• Seamus Duggan, Joint Managing Director, Duggan Brothers Ltd. | E. sduggan@dugganbrothers.ie
• Ronan McGee, Director, Duke McCaffrey Consulting | E. ronan.mcgee@dukemccaffery.ie