Wednesday 18 July 2018

The right moves: Build contract costs set to spiral as employment orders come into force

Paul McNeive
Paul McNeive

Paul McNeive

I find myself on the project board for a major public infrastructural development, and learning about the brief, this has thrown up some interesting information about the operation of building contracts in the public and private sectors. Perhaps the most startling news is that possibly scores of building contracts are at risk of cost-inflation, arising from recently-introduced Sectoral Employment Orders (SEOs) in the construction sector.

This situation developed following a Supreme Court decision which held that the existing registered employment agreements were unconstitutional. An SEO was introduced last November, setting minimum terms for pay, pensions and other benefits in the sector. Another SEO, covering the mechanical and engineering sector, is due this month, and others will follow soon for the various trades.

The problem which arises now is - what happens to the contract prices for building contracts that are already signed? Sources tell me that public works contracts are least at risk as those contracts cater, to an extent, for higher costs incurred by the contractor, and that will be the employer's position.

The contractors, not surprisingly, disagree, and as I understand it, 'Notices of Claim' for increased costs have been made for the majority of existing public works contracts, affecting hospitals, schools, road schemes, etc.

It looks as though the Government is going to have to come up with a clarifying position, or these disputes will soon be heading for the courts.

The problem also arises in the private sector, where contracts don't have the same provisions for the contractor to take all the risk on costs. There are provisions for wage variations, but apparently, these are often struck out. Also, I understand that the standard RIAI building contract does allow the contractor to claim for higher costs arising from legislative changes.

Another source told me that some contractors are already paying rates in excess of the new levels, but that there will be a 'knock-on' effect. Labour costs represent approximately 40pc of the cost of a modern building, so signed contracts must be now at risk of a price increase of between 3pc and 4pc.

Project Boards were included in the 2016 amendments to public works contracts and are thus only being seen in operation now. The project board is made up of an equal number of representatives of both the employer and the contractor. The board's role is to attempt to settle disputes under the building contract before resorting to arbitration and the courts, in a sensible move to save time and money. The creation of project boards followed a period whereby it was felt that government-written contracts had become 'one-sided' against contractors. The system had become adversarial and there were too many challenges and referrals to arbitration.

Another positive development is the increasing use of a balance sheet. A balance sheet is not a standard clause in the public works contract but is being used in several, as being consistent with the intent of standard contracts.

Because public works contracts do not allow for any contingency sum, the focus on cost variations can become adversarial. The balance sheet is a methodology which seeks to avoid a cost claim being made every time there is a change to the Bill of Quantities. Instead, the employer's representative and the contractor maintain the balance sheet on which variations in costs are recorded. This allows for an off-setting process and hopefully avoids later disputes.

Moves to reduce overruns in public sector contracts are welcome, but there is a potential cost problem developing around many public and private contracts signed last year, in an already inflationary market.

Paradise In Laois

It was my pleasure last Friday to visit Ballyfin Demesne, in Co Laois, where I spoke to a visiting group of CEOs of companies from California. Open since 2011, the property is a fairly new addition to Ireland's top hotels. Often dubbed 'Ireland's most expensive hotel', Ballyfin is a sumptuously-refurbished country house, on a private estate overlooking a lake. It is a stunning place to visit, with each room more beautiful than the last.

The property is owned by Fred and Kay Krehbiel and the general manager, Damien Bastiat, told me that business is growing strongly. While the main market is visitors from the US, over 90pc of whom stay on a full-board basis, Irish business has been increasing rapidly, and now constitutes approximately a third of all guests. Room rates, on a full-board basis, start at €960 per night.

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