The challenge of rapidly rising raw material costs means that nine out of 10 construction companies in Ireland are now unwilling to take on fixed-price contracts, according to a new survey.
The Construction Outlook Survey conducted by the Construction Industry Federation (CIF) also found that a similar proportion of businesses expect the economic fallout from the Ukraine war to mean costs will rise further over the next three months. .
As a consequence, 85% of the 342 CIF member companies that participated said they anticipate the price of construction projects to increase during that time period.
Nearly all respondents said they had seen the cost of raw materials rise in the past three months.
Due to the challenging cost environment, nine out of 10 of those who participated in the survey said they want the government to introduce price retrospective variation clauses in public contracts.
“No one can be expected to commit to a defined price for projects that could take years, when costs are rising by the day,” said Tom Parlon, CIF’s Director General.
“It’s practically impossible to estimate where costs will go based on the levels of inflation we’ve 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 bidding process for public works.”
The Government recently agreed that it will pay 70% of additional inflation costs on public construction projects, as part of measures to tackle inflation costs in construction.
The cost of this intervention is likely to be 30 to 40 million euros during the first three months of this year.
However, CIF said it did not go far enough and wants the public service works contract to be permanently modified to account for fluctuating prices.
He warned that work could slow or stop on key housing and infrastructure projects unless the issue is addressed.
But Housing Minister Darragh O’Brien said the government’s recently announced scheme was retrospective to January, when costs really started to rise in earnest.
“Yes, inflation and material price inflation is a challenge, and not just one that we face here in Ireland, across Europe and the developed world,” he said.
“But we want to make sure that houses continue to be delivered at the rate that they are.”
He added that changes had already been made to the new contracts to allow flexibility in prices when necessary.
Mr O’Brien acknowledged that there was anecdotal evidence that there had been a risk of work being halted in some places over the issue, prior to the announcement of the Government’s burden sharing agreement.
“Those changes have been very well received, I think they will work,” he said.
“And we’ll do everything we can to make sure sites don’t get shut down. And certainly new schemes that come on board, we can look at as part of new contracts.”
Overall, the survey identified key challenges for the sector as the rising cost of raw materials (88%), access to skilled labor (72%) and fuel (68%).
However, despite the problems with inflation, construction companies remain optimistic about their prospects.
Four in ten said that their turnover increased in the last three months and a similar number expected a further increase in the next three months.
32% also expect to increase their employment levels in the next three months.
Meanwhile, the Minister of Public Expenditure published today more details of the construction inflation scheme for public works.
It will operate from the time the parties agree to commit until the project is completed or the parties choose to withdraw by notifying the other.
A proportion of the inflation-related material and energy costs may be carried back to January 1 of this year in those contracts prior to the introduction of the amendments; in other words, contracts with a review date prior to January 7.
Inflation will be calculated based on the official rates published by the OSC.
The framework will also allow the recovery of costs derived from fluctuations in energy prices for more recent contracts.
“The release of the guidance material and letter of agreement today allows public agencies and their contractors to establish a cooperative framework that will be co-located with the public works contract,” said Michael McGrath.
“It will facilitate engagement and a quick determination of the impacts of exceptional inflation and supply chain disruption.”