Spending billions on infrastructure is a risky business

‘Lowest bid wins’ approach to tenders needs to change, say both sides of process

‘Construction’s a tight margin business and there’s very little room between a project making money and becoming an abysmal failure.’ Photograph: Dara Mac Dónaill

‘Construction’s a tight margin business and there’s very little room between a project making money and becoming an abysmal failure.’ Photograph: Dara Mac Dónaill

 

Building roads is a precise feat of engineering, but according to one industry veteran, the current system for awarding and winning contracts induces some imprecise guesswork. “You’re there the night before [submitting a bid], you have to write up the bill,” a source confides. “We need the work; the lads are available, the crews are available, what do we have to do to win it?”

Many of the contracts awarded by the State boil down to one simple factor: price. And when you’re awarding billions of euros in contracts, it’s only right and proper that due emphasis be placed on how much is being paid. However, that can also lead to a race to the bottom, with nasty fallout afterwards. To get the best chance of winning a project, insiders say, some – literal – sunny assumptions are made.

“Procurement and lowest-price tendering, just by the nature of it, it has a psychological effect on you,” says a source. “You take the view the sun is going to shine every day, and there’s not going to be any problems”.

Peter Walsh, the chief executive of Transport Infrastructure Ireland, agrees. “They can’t expect to win a contract unless they take the most optimistic view of how things are going to turn out.”

That leads to a strange shadow bidding process where both parties are operating in the knowledge that the ultimate cost will differ from that agreed in the tender. “You will never out-turn [deliver] at the tendered price, because it is the most optimistic view of how things might occur,” says Walsh.

Data released under Freedom of Information to The Irish Times shows how this dynamic played out in real life, across 15 roads projects with an aggregate approved tender price of €1.75 billion. The total value of claims – additional costs – submitted across these projects exceeded this sum by €850 million; all but one busted through the tender price, by an average of 15 per cent across the schemes. In the end, TII agreed to pay just under €270 million of the disputed claims.

Over budget

Somewhat confusingly, exceeding the tender price doesn’t mean the project went over budget. Each project has a broader budget for construction that covers a range of contingencies. These are not published, as they are commercially sensitive, but TII says the 15 projects came in under budget by 11 per cent.

So while the current system doesn’t seem to bust budgets, it does seem fairly opaque. And the lowest-cost-wins approach leads to furious battles over years. “Construction’s a tight margin business and there’s very little room between a project making money and becoming an abysmal failure,” says an industry source. Scrapping over payments, the same source observes, is now at a level where it’s inhibiting development. “They’re spending so much time dealing with disputes and trying to eke out recovery from something that’s gone wrong, it’s stopping them getting better at construction.”

This view is shared by some on the State side. While delivering a good price for the taxpayer, one State source concedes that the rancorous process can drive bidders away, while tight margins thin out the field of bidders for state work. “If you stand back from it, we’re seeing fewer and fewer companies tendering for work and that’s not great,” says a senior source.

TII, and the industry, are urging a move away from lowest-price wins bids to contracts that share risk more equally; a New Engineering Contract (NEC) and a so-called “Fidic” contract (an internationally used contract which among other things allocates and balances risk), would be more appropriate, according to Walsh. It’s a view shared by the Construction Industry Federation (CIF), which says it wants “more collaborative contract modes” such as the NEC.

Megaprojects

The issue, insiders say, may become problematic as the sums spent on so-called “megaprojects” rises in line with Government commitments under the €116 billion Project Ireland 2040 plan. Walsh still says megaprojects such as Metrolink need a new contractual approach that doesn’t hinge on lowest-price wins.

The approval process to allow these other contract forms be considered as an option is under consideration, having been supported by the Office of Government Procurement, but it is not yet signed off as the State faces into an almost unprecedented period of investment.

The path ahead is not straightforward, according to a spokeswoman for the Department of Public Expenditure and Reform: “Major projects are usually complex, bespoke, and the risks associated with them tend to materialise.” The department is developing the Public Spending Code, strengthening assurance processes for major projects and improving “processes and frameworks to ensure value for money”.

Spending billions on infrastructure is a risky business. However, insiders fear that doing so in an environment where contracts add friction and lack clarity could store up problems for the future.