Strategic opportunity for reform of public construction contracts

We each procure goods and services every day, yet any mention of public procurement or construction contracts can send a chill through a room, writes Orla Hegarty, Assistant Professor and Course Director, Professional Diploma (Architecture), School of Architecture, Planning and Environmental Policy, UCD.

Construction is slow, expensive, and uncertain. Understandably, people are wary of a process that cannot be budgeted precisely.

Uncertainty is risk, and all construction contracts have rules about changing conditions such as unexpected events, delays, changes, and inflation. Some risks are priced in at the start, others are only paid if they arise.

One approach is to have bidders make educated guesses about the unknowns (and the un-knowable) and to fix their prices. The downside is that this comes at a premium. In 2019, when PwC reported on the escalation of costs in the National Children’s Hospital, it said that “the capital budget made no provision for the price premium that the public sector would need to pay the contractors to bear the risks transferred to them”.

In Ireland, this is not unusual as since 2007, public procurement policy has favoured fixed price contracts that prioritise cost-certainty over achieving value for money. At that time, the then Minister for Finance said: “The contractor will be incentivised to control and manage specified risks.” He acknowledged that this would result in higher prices.

The subsequent recession years exposed the drawbacks. Contractors in need of work did not price for risks, and contracts failed or had to be renegotiated mid-build. Even in favourable economic conditions, assumptions can often be wrong, meaning money paid for costs that never arise. Despite these downsides, the Land Development Agency too favours fixed price contracts with its CEO saying: “We look for fixed prices. There is a cost to that because it is on the contractor if something goes wrong. Essentially, it is their problem.”

Currently, another public sector strategy is to side-step procurement rules by buying or leasing new-build properties. In this scenario, the buyer often has no control over design, specification, quality, and even speed of delivery.

While this may seem expedient, it means substantial amounts of public money are being spent without competition or transparency – both of which are essential to ensure an open market, fair pricing, and financial oversight.

At EU level, this loophole has come under scrutiny and this will likely happen again. Additionally, this means purchase prices include high-cost private finance at a time when the housing budget is underspent. Finance costs could be avoided entirely with regular contracts and monthly stage payments.

Similarly, recent delays to the O’Devaney Gardens housing development were due to a requirement for the developer to provide finance. This project eventually went on site in December 2023, seven years after it was first tendered – and four years after the contract was awarded – during which time market prices had increased by 51 per cent.

Delay costs money. This could have been avoided entirely with a regular building contract, for which the EU sets a minimum timescale of just 35 days, with an additional 14-day standstill before a contract is signed.

Other outsourcing difficulties were highlighted after the 2018 collapse of Carillion – a large UK contractor – that halted the construction of five schools in Ireland, with one contractor losing €8 million. Poor financial and project management were out of reach.

When the company collapsed, it spread a contagion through the construction sector, that the Irish and UK governments had to resolve at considerable cost. All of the new schools had been bundled into one contract.

Clearly there is a balance to be struck for administrative efficiency, but this practice is not recommended. It limits competition and excludes many SMEs.

Housing projects can readily be designed as smaller phases and contracts to spread the risk, return more competitive prices, and give opportunities to new contractors to grow the sector. With so much public money being invested in housing, there is now a strategic opportunity for reform that speeds up delivery, drives efficiencies, and grows the construction sector through new opportunities.