Department of Public Expenditure officials raised concerns that builders may “walk away” from State construction projects and that Government payments to help cover contractors’ inflation-related costs may not prevent insolvencies in the sector.
In an internal briefing, the officials warned inflation in construction costs and materials was putting growing pressure on public contracts coming in on budget.
The briefing note said there was a “substantial increase” in private contractors working on public projects warning of “difficulties in completing the works” at the previously agreed price.
Construction companies have complained about the rising cost of building materials, with financial pressures compounded by further disruption to energy prices and supply chains following the Russian invasion of Ukraine.
In early May, Minister for Public Expenditure Michael McGrath announced a new Government scheme would cover up to 70 per cent of builders’ inflation-related construction costs. The payments are aimed at preventing public works construction projects from collapsing due to financial difficulties faced by contractors.
Builders can retrospectively claim for expenses back as far as January 1st and the scheme is expected to cost €30-€40 million for the first three months of the year alone.
The internal briefing, written in April and released to The Irish Times following a Freedom of Information act request, warned that financial support for contractors might not prevent companies from collapsing.
“There is a risk that a payment to a contractor to compensate them for additional costs associated with such extraordinary inflation may not address the losses they have incurred, or they may be trading with substantial debts which may still result in insolvency,” the briefing stated.
The briefing noted the department’s Office of Government Procurement had raised concerns about a worst-case scenario where some contractors “walk away” from major State building contracts, or become insolvent.
The Construction Industry Federation told officials in late March that “this scenario is becoming a reality” for many of the industry group’s members, the briefing note said.
There had also been a drop in the number of contractors bidding for State contracts, it said. Procurement officials were “concerned” that Government efforts to address the problem earlier in the year were “unlikely to have the full desired effect” to shore up the number of companies bidding for contracts.
The briefing said the civil engineering sector was being severely hit by increases in energy prices, due to the rising cost of fuel for machinery. Road resurfacing works were “doubly exposed” due to their reliance on machinery and as the cost of asphalt was linked to oil prices, it said.
“This situation is impacting smaller contractors disproportionately since they lack the buying power to ‘lock in’ suppliers to prices and/or delivery dates,” the note said.
Mr McGrath responded to the briefing note to advise officials he would be bringing measures to assist the construction sector to Cabinet for approval in early May.
Speaking following the announcement of the plan to cover up to 70 per cent of builders’ inflation costs, Mr McGrath said the scheme would not be a “free for all”. The measures were needed to protect projects already in construction and avoid delays to vital infrastructure due to contractors facing financial difficulty, he said.