State moves to lower exposure to inflation on major projects

The State has moved to protect itself from huge inflation bills on major infrastructure projects while also offering more reassurance to companies worried about project risks, Minister for Public Expenditure Paschal Donohoe has announced.

Mr Donohoe and Minister of State Ossian Smyth announced significant changes to the public works contract on Monday, including a lower threshold for the State’s exposure to inflation costs.

At the same time, a cap has been introduced to limit the liability of a contractor hired under a contract to a certain monetary amount, which will be determined by the contracting authority and stated in the tender documents.

In terms of inflation, contractors currently can be compensated for inflation in excess of 15 per cent for materials and fuel. They will now be limited to a scale of between three to 10 per cent, which will be set by the contracting authorities. It will allow for a certain level of inflation to be properly priced in tenders, in order to ensure major projects are affordable.

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“In relation to what is motivating the changes here, it is our view that the introduction of the liability caps will play a role in a broader set of companies participating in tendering processes. The presence of an unlimited approach to liability was deterring, on one hand, larger companies who had a very clear corporate approach regarding how much risk they are willing to take on projects, but on the other hand smaller enterprises and businesses who would have been reluctant to enter into tendering processes would have clarity about what liability they would have into the future,” Mr Donohoe said.

“Then in relation to the cost-saving element of it, we do believe it is appropriate now to reduce the inflation modelling for large projects from 15 per cent to a range between three and 10 per cent. Because in the absence of this, we do believe that there is a risk of higher levels of inflation being baked into the contracts for delivering important projects,” he said.

He also said that while inflation is still at a high level, the Government is hopeful that there are signs of moderation. The Government also announced that it would be removing the fixed price period for materials, energy and fuel.

[ Reform of public works contracts urgently needed, Oireachtas committee told ]

Over the lifetime of the Coalition’s National Development Plan, some €165 billion will be invested in new and upgraded infrastructure that will meet the needs of our growing population. The Government is hoping that the new liability cap will give greater certainty to the businesses that the State engages to deliver essential public buildings and infrastructure.