Public Works Contracts: A Review of Recent Developments
PUBLISHED: 14th June 2023
Over the last two years, the Office of Government Procurement has introduced a series of changes to the Capital Works Management Framework.
These changes have taken the form of new guidance applicable to the procurement and administration of public works projects, as well as changes to the terms of the Public Works Contracts themselves. These measures have been implemented in recognition of the challenges posed to the construction industry in Ireland, including the cost and availability of professional indemnity insurance, inflation and supply chain disruption.
We review some of the key developments in this article.
New Guidelines for Professional Indemnity Insurance
Guidance Note GN 1.1.2 was published in February 2022 with the aim of addressing the difficulties for Consultants and Contractors in procuring professional indemnity insurance (PII) within the current market.
Of particular significance are the steps that are recommended to be taken when a Consultant or a Contractor, who is currently under contract or participating in a framework agreement, is unable to maintain the required level of PII.
The Contractor or Consultant should notify the Employer or Contracting Authority as soon as they are aware they are unable to maintain the level of PII required under the relevant contract. The Contracting Authority should then request that the Contractor or Consultant obtain confirmation in writing from their insurer that this change in their policy is not as a result of any claims that have been made against the Contractor or Consultant. Where this has been confirmed, the Contracting Authority should not deduct the cost of taking out the required level of PII under the contract from the contract sum. Where the Contracting Authority feels they remain exposed due to the reduction in the PII policy, they are permitted to take out a contingency PII policy (for which they should pay, not the Contractor or the Consultant).
Model Form MF 1.29. Letter to Contractor / Specialist re Temporary PI Insurance Arrangements.
A new model form of letter was published in February 2022 that can be used by Contracting Authorities and Contractors/Specialists to document any temporary PII arrangements being put in place. It allows for Contractors or Specialists to procure the “Next Best Available Cover” where they are unable to retain the level of “Each and Every Insurance” required under the Contract. The Contractor or Specialist must also continue to monitor the EU and UK insurance markets at annual intervals and procure the required level of PII or better cover than the “Next Best Available Cover” provided that such cover is available at the “Increased Premium Rates”.
“Increased Premium Rates” means rates that do not exceed 125% of the premium rates payable on an annual aggregate basis at the time of the applicable annual renewal , provided that any difference between (i) premium rates for cover on an annual aggregate basis and (ii) premium rates for the Each and Every Insurance or better cover than the Next Best Available Cover (whichever is applicable) is not due to any act, omission, default, claim, notice of claim, negligence or otherwise of or against the Contractor or Specialist.
Tackling Inflation through the Public Works Contracts
Guidance on public works tenders with respect to recent material price inflation.
In Guidance published in November 2021, the OGP reported that there had been a sharp increase in the prices of certain construction materials. It was reported that while not all construction materials were experiencing the same level of price inflation at that stage, there had been a substantial and sustained increase in the price of steel and timber products since mid-2020. It was noted that other materials had followed suit, with the prices of insulation and plastics also increasing since the beginning of 2021.
To minimise the impact of inflation on the price of construction materials, in January 2022 the OGP released a suite of interim amendments to the Public Works Contracts. These amendments included the introduction of changes to the optional price variation clauses PV1 and PV2 in PW-CF1 to PW-CF5, such as:
- a reduction to the duration of the fixed price period (commencing on the Tender Inflation Indexation Date) from 30 months to 24 months; and
- amendments to the sub-clauses dealing with material price increases, which now allow for prices to be increased (or decreased) where the price of a material on the Purchase Date has increased (or decreased) by 15% or more than the price at the Tender Inflation Indexation Date, by adding the excess percentage over 15% to the price of the material at the Tender Inflation Indexation Date (the “First Adjustment”). Previously, a material would need to have increased in price by more than 50% of the price at the first business day of the month in which the purchase occurred or the price at the Designated (Tender) Date (whichever was highest), in which case the excess percentage over 50% was applied to the price of the material at the Designated Date.
The sub-clause also provides (as before) that increases or decreases in the price of any material at the Base Date (i.e., the date of expiry of the fixed price period) of more than 10% will result in the excess percentage over 10% being applied to the price at the Base Date (the “Second Adjustment”). This is subject to the proviso that in the case of any increase arising from both the First Adjustment and the Second Adjustment, the Contract Sum can only be adjusted by the amount of the higher of the two increases. In the case of a decrease, the Contract Sum can only be adjusted by the amount of the lower of the two decreases.
The latest versions of the Public Works Contracts can be viewed here.
The Inflation / Supply Chain Delay Cooperation Framework Agreements
On 20 May 2022 the OGP published a form of Inflation / Supply Chain Delay Co-operation Framework Agreement, along with a Guidance Note, which now exists in two separate forms for the PW-CF1 to PW-CF5 and PW-CF6, respectively. While use of the Framework Agreements by parties to these Public Works Contracts is voluntary, their purpose is to provide a means for parties to set out the approaches and parameters within which they can address and calculate the additional costs attributable to material and fuel price inflation, using price indices that have been published by the Central Statistics Office.
The Agreements aim to mitigate the risk of a substantial increase in disputes that might be brought to formal dispute resolution and the resulting costs and potential delays to the delivery of works associated with such disputes, by recognising that parties to Public Works Contracts are not responsible for the global events that have contributed to inflation. The Agreements propose that inflation costs should be divided between the parties, with the State potentially bearing up to 70% of inflation costs. The Agreements also allow for the waiver of the application of liquidated damages arising from a delay in meeting the Date for Substantial Completion due to supply chain delays.
Introduction of Liability Caps
Liability Caps are due to be introduced into Pillar 1 (Public Works Contracts) in the second quarter of 2023. Liability caps have already been introduced in standard conditions of engagement for technical consultancy services (COE1) and archaeological services (CEO2) which may provide some indication as to how these liability caps will operate in the Public Works Contracts. These conditions now incorporate a new sub-clause (Limit of Liability), limiting the consultant’s liability under the contract to a monetary amount ascertained in a calendar year.
The Liability Cap is subject to a number of exclusions:
- death, personal injury or illness;
- fraud or fraudulent misrepresentation;
- wilful default;
- third party property;
- the application of Sub-clause 13.26, whereby the Consultant agrees to indemnify the Client in respect of any loss, damage or liability whatsoever arising from any infringement of any third party’s intellectual property rights due to use by the Client in good faith of information, documents, obtained from the Consultant; or
- any liability which the Consultant cannot lawfully exclude or limit.
Guidance Note GN 1.6.4 provides guidance on the new Liability Cap. While there is no standard approach to setting the limit of liability, this Guidance Note provides that the Client should, when preparing to tender, arrange for an assessment to be carried out to identify the risks associated with the Consultant’s failure to comply with the contract terms, the financial impact of a breach of contract, the likelihood of that breach occurring and the overall severity of the risks to the Client.
Thoughts
The introduction of these measures is a welcome attempt by the State to ensure that the continued delivery of public sector projects will not be compromised by the challenges faced by the construction industry in recent times. Continued monitoring of market conditions and further adaptation will undoubtedly be required to ensure that stakeholders on public sector projects are protected from the economic pressures imposed upon them.
This article was authored by Cori Gormley and Cian O Lionaird from our Projects and Construction team. For more information, please contact Cian O Lionaird or Jamie Ritchie.
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