The Northern Ireland Executive has agreed to include mechanisms in existing and new construction contracts to make allowances for inflationary prices.
Government departments in Northern Ireland have been told that they should consider applying a net price adjustment for inflation – at least for the next couple of months.
The Construction & Procurement Delivery (CPD) unit of the Department of Finance has issued a procurement advisory note*. The section on managing the impact of volatile material prices says:
“It is reasonable to expect contractors to absorb price fluctuations within moderate tolerances as prices for materials will change regularly depending on the level of supply and demand within markets.
“There are various NEC contract pricing options including priced contracts (Options A and B), target contracts (Options C and D) and cost reimbursable contracts (Option E). The effect of an increase in the cost of materials will depend on the pricing option – the impact on a priced contract will be quite different from a target contract with a pain/gain share in relation to any increased costs. In addition, the impact of the change will depend upon the Secondary Optional clauses and any Z clauses. For example, the contract may already include an adjustment for inflation if Option X1 (Price Adjustment for Inflation) applies.
“Notwithstanding the presence or absence of an existing contractual clause to deal with price adjustment for inflation, where the contractor provides compelling evidence, on an open book basis, that clearly demonstrates that the impact of inflation is higher on specific element(s) of the contract than that which a diligent contractor could reasonably have anticipated, then the Department should consider applying a Net Price Adjustment for inflation to impacted element(s) of the Price.”
However, it adds that this is just a temporary measure and will be reviewed at the end of September 2021 to assess the effectiveness.
Northern Ireland Finance Minister Conor Murphy said: “Covid-19 has had a huge impact on the availability of construction materials with global demand, product shortages and delivery delays leading to market volatility and increased prices. Government contractors are experiencing escalating costs and delays in getting materials which they could not have foreseen when they tendered for government work. I have listened to the concerns of the construction industry and want to do everything in my power to ensure there is no risk to the completion of important projects.
“I am pleased the executive has agreed my proposals to make provision to manage delays in supplies and to include mechanisms in existing and new contracts to make allowances for inflationary prices. This will provide vital support to our construction industry which will play a key role in our economic recovery while also ensuring important government projects such as schools, hospitals and infrastructure projects are delivered.”
Mark Spence, managing director of the Construction Employers Federation said: “We welcome this vital lifeline for local contractors who for many months have been shouldering the escalating burden of unforeseen global price increases and material shortages whilst ensuring public works continue to be delivered.
“We particularly welcome the minister’s recommendation for all new government contracts to provide protection from such external factors in the future. NI construction employers are essential partners to the executive in delivering every aspect of public services and have continued to do so throughout the pandemic. These proposals start to address the previous imbalance of risk in taking on government contracts and can assist in ensuring continued delivery of public investment in infrastructure.
“Between now and the review point at the end of September, we will be constantly monitoring industry feedback on the advisory note – however we very much hope that it gives a strong basis for many of the current challenges facing our membership to be proactively dealt with.”
* The Construction & Procurement Delivery procurement advisory note is available at www.cefni.co.uk