Most building firms won’t take on fixed price contracts. Source: RTE news and Bartra May 2022 Newsletter

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Most building firms won’t take on fixed price contracts

Updated / Monday, 23 May 2022 17:28

Almost all respondents have seen the cost of raw materials rise over the past three months
Almost all respondents have seen the cost of raw materials rise over the past three months

By Will Goodbody

Business Editor

The challenge of rapidly rising raw materials costs means that nine out of every 10 construction companies in Ireland are now unwilling to take on fixed price contracts, a new survey has found.

The Construction Outlook Survey by the Construction Industry Federation (CIF) also found that a similar proportion of firms expect the economic fallout from the Ukraine war will mean costs will rise further over the next three months.

As a consequence, 85% of 342 CIF member companies who participated said they anticipate the price of construction projects will increase over that timeframe.

Almost all respondents said they have seen the cost of raw materials rise over the past three months.

Because of the challenging cost environment, nine out of every 10 of those who took part in the survey said they want the Government to introduce retrospective price variation clauses into public contracts.

“No one could be expected to commit to a definite price for projects which could take years, when costs are rising on a daily basis,” said Tom Parlon, Director General of the CIF.

“It is practically impossible to estimate where costs are going to go based on the levels of inflation we have seen in the industry over the last 18 months and especially since the turn of the year.”

  • “This also underlines the urgent need for the Government to reform the public works tendering process.”

The Government recently agreed that it will pay 70% of extra inflation costs on public building projects, as part of measures to address inflation costs in construction.

The cost of this intervention is likely to run to €30m to €40m for the first three months of this year.

However, the CIF said it did not go far enough and it wants the public service works contract permanently amended to take account of fluctuating prices.

It has warned that work could slow down or stop on key housing and infrastructure projects unless the issue is tackled.

But Minister for Housing, Darragh O’Brien, said the scheme recently announced by the Government was retrospective to January when costs really began to rise in earnest.

“Yes inflation and material price inflation is a challenge, and not just one we are facing here in Ireland, right across Europe and the developed world,” he said.

“But we want to ensure that homes keep being delivered at the pace that they are.”

He added that changes had already been made to new contracts to allow for flexibility in pricing where required.

Mr O’Brien acknowledged that there was anecdotal evidence that there had been a risk of work being stopped on some sites over the issue, prior to the announcement of the Government’s burden sharing deal.

“Those changes have been very much welcomed, I think that they will work,” he said.

“And we will do everything we can to ensure that closures of sites don’t happen. And certainly new schemes that are coming on board, we’re able to assess them as part of new contracts.”

Overall, the survey identified the key challenges for the sector as the rising cost of raw materials (88%), access to skilled labour (72%) and fuel (68%).

Despite the problems with inflation though, construction businesses remain upbeat about their prospects.

Four out of ten said their turnover rose in the last three months with a similar number expecting a further increase over the next three months.

32% also expect to grow their levels of employment over the next three months.

Meanwhile, the Minister for Public Expenditure today published further details of the construction inflation scheme for public projects.

It will operate from the point at which the parties agree to engage until the project is completed or the parties elect to withdraw by giving notice to the other.

A proportion of inflation related costs on materials and energy can be backdated to January 1 this year on those contracts which pre-date the introduction of the amendments – in other words, contracts with a revision date earlier than January 7.

Inflation will be calculated based on the official indices published by the CSO.

The framework will also permit the recovery of costs arising from fluctuations in energy prices for more recent contracts.

“The publication today of the guidance material and the letter of agreement allows public bodies and their contractors to establish a co-operation framework that will sit alongside the public works contract,” said Michael McGrath.

“It will facilitate engagement and a speedy determination of the impacts of exceptional inflation and supply chain disruption.”

Business Editor

Follow@willgoodbody

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Images Courtesy of Getty Images.

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