From the mid-90’s to 2007 the Irish economy grew rapidly with the property bubble being front and centre. During this period, the Government faced public scrutiny as there was a public perception that cost overruns were a result of mismanagement and there was some negative criticism. In May 2004 the Government decided that the procurement of public sector projects needed to be reformed in order to address the public’s perception of cost overruns. As a result, the Public Work Contracts (“PWC”) were eventually introduced in October 2006 with most public bodies implementing them from February 2007 onwards. A new Capital Management Works Framework (“CWMF”) was introduced in May 2010 to complement the features of the PWC by providing supplementary guidance and contract documents.
The main aim of the Public Works Contracts and CWMF was to implement a fixed-price lump-sum contract that would ensure cost certainty and timely delivery of projects. It was anticipated that contractors’ rates would likely increase to reflect the increased risk allocated to them, but this would be a worthwhile trade-off for being able to provide the public with the perception of increased cost certainty and avoiding any further criticism.
The asserted intention of the PWC was to rebalance risk so that there was an optimal allocation of risk. In practice, this allocated a significant proportion of the risks to the contractor and implemented changes to the valuation of claims whereby they would generally be valued using the contractor’s competitively tendered rates.
However, not long after the introduction of the PWC Ireland’s economic conditions drastically changed. By September 2008 Ireland officially declared that it was in a recession and the property bubble had finally burst. The construction industry was particularly hard hit, it was estimated that between 2007 and 2010 it lost over 200,000 jobs. This resulted in tendered rates becoming much lower than anticipated, which made it more difficult to win public work and profit from it, especially when tendered rates were also used to value claims.
In addition, the clauses contained in the PWC which deal with delay and compensation are overly complex and often result in contractors not being fully rewarded for any additional work they take on. In particular, the programme contingency clause is poorly understood and can give generous allowances to the Employer before the Contractor is entitled to compensation.
Furthermore, many compensation events under the PWC are limited to time only, such as weather events, unforeseeable ground conditions, unforeseeable utilities in the ground, and the discovery of items of archaeological interest. Contracting authorities should be better able to take on the risk associated with groundworks as they are typically the party which provides the information on ground conditions in the first instance.
It can prove difficult for contractors to quantify this level of risk and incorporate it into their rates. Moreover, recent reports suggest that contractors do not apply a sufficient level of contingency to public tenders as there is a perception that public tender award criteria prioritise low price bids over technical capacity and quality scores.
Overall, the PWC encourages a lack of transparency, trust and cooperation between contracting authorities and contractors. Employer-friendly provisions such as Programme Contingency, deemed rejections and stringent deadlines for disputing assessments result in an environment where it is in the Contractor’s best interest to be selective with the information shared with the Employer.
In contrast, many other standard forms of contract promote a collaborative approach between parties (such as early warning mechanisms) to ensure that risks can be dealt with in a productive manner.
While Ireland’s economy may have recovered, one could argue that in today’s market conditions fixed-price lump-sum contracts are becoming less and less viable for contractors.
Contractors are now overly exposed to risks associated with labour and material shortages, which is proving to make an already difficult business environment even harder. It was reported by the SCSI in July 2022 that inflation in construction costs had surpassed Celtic Tiger levels.
Over recent years a number of key players in the Construction Industry have reported on the inefficiencies of both the procurement practices of government bodies and the unviable amount of risk the PWC places on contractors. Various industry stakeholders have been quite vocal in their view that a lot of the problems contractors experience with the PWC could be resolved by implementing international standard forms of contract such as NEC, JCT or FIDIC on public sector projects.
While there are 11 different forms of contracts available under the CWMF, there is a clear lack of flexibility as to how contracting authorities are able to implement them. There is an argument to be made that a more flexible contract which appropriately allocates risk may prove to be better value for contracting authorities. However, we have been advised by the construction procurement policy unit in the Office of Government Procurement (“OGP”) that there are no plans to substitute the Public Works Contracts for another form of contract. Instead, the OGP is currently undertaking a review of the CWMF and PWC.
Currently any amendments to or derogations from the Public Works COntracts must be sanctioned by the Government Contracts Committee for Construction (“GCCC”) on a project-specific basis where the circumstances warrant the approaches offered by the particular forms of contract. This includes the use of the NEC, JCT and FIDIC forms of contract.
Recent examples of the NEC being used in the public sector was seen between 2017-2019 with the remediation of a steel slag tip in Cork Harbour by Cork County Council (“CCC”). CCC commented that it was vital that the procurement strategy allowed for:
CCC conducted market engagement with potential bidders prior to the procurement process which deemed that the NEC was most the suitable form of contract. The collaborative approach around risk management along with the use of a target cost contract resulted in the Project being delivered on time and on budget.
We recommend that until a review of the PWC is complete we believe that more contracting authorities and consultants should take it upon themselves to ask the GCCC to sanction amendments to the PWC or permit the use of alternative forms of contract for their projects. Through flexibility and better risk allocation, improved value can be achieved on public sector projects.
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Published 20 February 2024
