THE GOVERNMENT WILL pay up to 70% of inflation-related construction costs on State projects, Public Expenditure Minister Michael McGrath has said.
Speaking to reporters after Cabinet today, McGrath said the open-ended new package of measures is needed due to the threat of projects not being completed.
He said the new package is needed to safeguard projects that are already under construction and “to mitigate the risks of significant losses” being sustained by contractors that the Government has partnered with to build State projects such as roads, schools and hospitals.
While he said it was difficult to put a cost on the scheme, it was estimated the bill for the first three months of the year would be €30-€40 million.
“The global pandemic related inflationary pressures that manifested in 2021 and which led to sharp increases in the price and constrained the supply of construction materials have not stabilised as many forecasts had predicted,” said the minister.
The conflict in Ukraine has also brought on significant increases in the prices of both fuel and energy this year, he added.
“This has had the effect of increasing the energy costs associated with construction operations, construction related supply chains have been affected, and the cost of producing and transporting construction materials is set to rise further,” he said.
Concerns over the viability of projects
Departments and bodies who are responsible for project delivery have reported concerns over the “viability of certain projects” unless the contractors engaged are able to recover some of the cost increases due to inflation, explained the minister.
He said in order to address the impact of inflationary pressures that has manifested during the last year and on future public works contracts.
McGrath said this intervention is required to address the further challenges that the current war in Ukraine has created and will safeguard projects that are already under construction.
The new framework will facilitate all parties to engage with one another on an ex gratia basis for the purpose of addressing the impacts of the most recent onset of exceptional inflation and supply chain disruption, said the minister.
Any additional costs attributable to inflation will be determined, as well as the retrospective inflation cost recovery on payments already made on projects from 1 January this year.
These additional costs will be apportioned between the parties, but the State will bear up to 70% of the additional inflationary related costs, confirmed McGrath.
Rising costs
He said that feedback he has received from colleagues is that when contracts were put out to tender, there has been a lack of competition seen, due to builders being reluctant to enter into State projects at a given price in light of the uncertainty around inflation and rising costs.
He said Government is also dealing with the situation where some contracts were entered into in 2020 when there was little or no inflation and a fixed price contract.
Builders now have to carry all of the risk and the increase in the cost of materials, which McGrath said has “led to some difficulties”.
While the minister said he is reluctant to intervene in construction contracts, these actions are “necessary and proportionate in the context of the significant risk that global exceptional inflation poses to the delivery of much needed public facilities in our national development plan”.
“I think the real risk would be if we were to do nothing, then we would have difficulty in getting certain projects off the ground, because contractors look at the existing contracts. And they see too much risk from their point of view,” he added.
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