Guidance on uncertain costs in public construction contracts

Due to the COVID-19 pandemic, many nations adopted strict lockdown measures which led multiple businesses to temporarily close until they could continue to operate safely. Such measures have led to a reduction in the supply of raw materials to the manufacturing industry for production. Many countries are now investing in national infrastructure projects in an attempt to aid economic recovery. The pandemic has also seen an increase in spending on home improvement projects largely due to increased levels of remote working and a lack of foreign travel. Collectively, this had led to an increased global demand for construction materials which, coupled with reduced levels of production throughout the pandemic, has resulted in shortages and delays in the availability of construction materials and an increase in pricing due to supply and demand.

The Department of Finance have responded by publishing a Procurement Advisory Note (PAN).

With regards to managing delays caused by material supply issues, the note outlines that for existing contracts where a contractor can offer compelling evidence on an open book basis that it has experienced a significant delay in the supply of a construction material that will impact the completion date, the Department and the contractor should work together in a spirit of mutual trust and cooperation to identify suitable alternative materials or agree any suitable changes to the completion date. For future contracts, Departments should review the availability of materials and estimated delivery times during the design phase.

On volatile material prices, the note indicates that it is reasonable to expect contractors to absorb price fluctuations within moderate tolerances. However, where contractors can offer compelling evidence on an open book basis that they have encountered cost increases that are higher than that which a diligent contactor could reasonably have anticipated, then the relevant Department should give consideration to the application of a Net Price Adjustment. This applies to existing construction works and maintenance contracts. For future works and contracts, Departments should be aware of increasing prices when setting budgets. Discussions should also be held at an early stage regarding the availability of materials.

The note also emphasises the need for both Departments and suppliers to work collaboratively in order to ensure there is full transparency surrounding any Net Price Adjustment payments. This may include suppliers making available any data from ledgers, balance sheets, and profit and loss accounts in order to demonstrate the impact of inflation. Records of decisions and any agreements reached must also be retained.

Under the existing rules of the Public Contract Regulations 2015, Regulation 72 provides for permissible changes to an existing contract – provided they are not "material changes".  Despite the criteria provided in this regulation, these can be difficult to navigate, as such the clarifications provided by the PAN are to be welcomed. 

For further information please contact Stephen Abram, Associate or James Flanagan, Associate.

Date published: 6 August 2021