Construction firms unwilling to take on fixed-price contracts as inflation surges

About 90 per cent of Irish construction firms say they will no longer take on fixed-price contracts given the rapid increase in raw material costs, according to a new survey from the Construction Industry Federation (CIF).

The overwhelming majority of firms (91 per cent) also believe economic sanctions against Russia will lead to a further rise in construction costs over the next three months, while 85 per cent expect the price of building projects to increase during that period.

Rising raw material and energy prices have been inflating construction costs since early 2021. Recent figures from the Society of Chartered Surveyors of Ireland indicated construction inflation surged to 13.4 per cent in 2021, with the cost of insulation, cement, plasterboard, metals and fuel all rising significantly.

A further hike in energy costs on the back of Russia's invasion of Ukraine this year and increased evidence of wage inflation as more firms report difficulties in getting staff has compounded matters.

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The CIF’s latest construction outlook survey indicated that as a response to these issues some 89 per cent of construction companies want to see the Government introduce “an effective and fair price variation clause” into public sector contracts which would apply retrospectively.

The Government has already announced it will pay up to 70 per cent of builders’ inflation-related construction costs in a bid to protect vital public works, which are now at risk as builders’ profit margins slump.

The CIF’s survey also indicated that most firms (82 per cent) had experienced supply chain disruption since the Ukraine conflict erupted in late January, while 98 per cent reported an increase in the cost of raw materials over the past three months.

"Over the last few months we have been highlighting the issues of hyperinflation in the industry and how that is going to impact on the pipeline of construction activity, particularly when it comes to public tendering," CIF director general Tom Parlon said.

The survey results illustrated “the extent of these problems”, he added.

“Nine out of 10 construction companies... will not tender for fixed price contracts while these increases continue. No-one could be expected to commit to a definite price for projects which could take years when costs are rising on a daily basis.

“It is practically impossible to estimate where costs are going to go based on the levels of inflation we have seen in the industry over the last 18 months and especially since the turn of the year,” he said.

Reform

Mr Parlon said there was an “urgent need for the Government to reform the public works tendering process”.

“Until that is tackled issues around public tendering will continue, which is likely to have a knock-on impact on the advancement of the Government’s various construction programmes.”

The survey also indicated that almost 40 per cent of firms increased their turnover in the past three months, with a similar number (39 per cent) expecting a further increase over the next three months.