Update on Guidance issued by the Office of Government Procurement with respect to material price inflation

For a significant part of 2021 the construction industry has seen marked price inflation to certain construction materials. In response to this, the Office of Government Procurement (“OGP”) issued general guidance on 24 November 2021 for Contracting Authorities whose public works tenders have been impacted by this price inflation.

The OGP note that the recent price inflation is not affecting all materials to the same degree, with steel and timber having seen the greatest increases. They also attribute the price inflation to a variety of factors but specifically refer to shortages due to supply chain distribution arising out of the pandemic; and a spike in global demand as a result of a combination of fiscal stimulus packages as being two of the most important factors.

Where (i) tenders have been received by a Contacting Authority but a contract is yet to be awarded or (ii) for live tenders where the tender deadline has not passed the OGP recommends that Contracting Authorities review the project in question to determine its exposure to material price inflation (by reference to the Wholesale Price Index for Building and Construction Materials published by the Central Statistics Office in the first instance). Where there is a risk that the project will be impacted, the OGP outline some of the possible options to be considered including the possibility of resubmission of tenders or cancellation of the tender process. The note recommends the need for specialist procurement advice depending on the circumstances.

With respect to tenders that are yet to commence, the OGP has advised that “in recognition of the projected period of price volatility” it would publish a series of interim amendments to the price variation provisions in the public work contracts (“PWC”) and associated Instructions to Tenderers in December 2021. The interim amendments will introduce the following new provisions into the PWCs:

1. an indexed price adjustment mechanism in the Instructions to Tenderers for certain forms of public works contracts. It is proposed that this will apply to the materials element of the tendered sum prior to the award of contract;
2. in forms PW-CF1 – PW-CF5 inclusive, the Base Date for PV1 and PV2 will be reduced to 24 months from the date of the award of the contract (as opposed to the usual 30 months); and
3. the sub-clauses dealing with exceptional material price increases will be amended to adjust the threshold from 50% to 15%.

The OGP indicate that following consultation, broader amendments to the price variation provisions to the PWCs will be introduced in Q1 2022.

It is expected that price volatility will remain a challenge for the construction industry during 2022 with continuing uncertainty for some public projects. While the guidance is welcome, it is clear that the options are limited in the short term at least.