Minister Donohoe announces introduction of fee indexation into contracts
From Department of Public Expenditure, NDP Delivery and Reform
Published on
Last updated on
From Department of Public Expenditure, NDP Delivery and Reform
Published on
Last updated on
Minister Donohoe has announced the introduction of fee indexation into the contracts used to engage construction related consultancy services and archaeologists, which will support the delivery of vital projects under the National Development Plan (NDP) . Welcoming the introduction of fee indexation, Minister Donohoe said:
“Fee indexation represents a proportionate sharing of inflation risk between suppliers and contracting authorities. It also represents a significant reduction in the level of inflation risk that consultants engaged by the state are expected to bear.
The introduction of fee indexation is a part of the ongoing work to balance the risk/reward involved in engaging in public works projects. A key priority for my department is enabling the timely delivery of NDP projects so that we can continue to deliver critical infrastructure and meet the needs of our growing population.”
Before the introduction of these revised arrangements, consultants, when calculating their tendered fee, were required to take account of inflation which may arise over the period of their engagement on the project. It is difficult in the current climate to forecast inflation beyond a 2-year horizon. Additionally, a consultant risked being disadvantaged in a competitive tender process if they reflected inflation in calculating their fee and other tenderers did not or were overly optimistic in their predictions.
The new arrangements will apply to contracts that are awarded following tenders for construction consultancy or archaeological services that are received on or after 10 October 2024.
The key elements of the revised arrangements may be summarised as follows:
• The tendered fee will remain fixed for a period of 2 years from the tender submission.
• After 2 years, the fee will be adjusted, on an annual basis, by a factor that is applied to any fees earned in the subsequent year.
• The factor will be calculated by the Office of Government Procurement, a division of the Department of Public Expenditure, NDP Delivery and Reform, using a formula that is published on the Capital Works Management Framework website.
There is no adjustment to the fee for the first 2 years from tender. However, there are inflation forecasts published by the Department of Finance and the Central Bank which cover a 2-year horizon which consultants can use when calculating and tendering their fee.
For the portion of the service delivered after the fixed price period, the contracting authority fully retains the risk of inflation up to 2%. The rate of 2% reflects the European Central Bank's target for inflation as measured by Harmonised Indices of Consumer Prices (HICP). Should inflation - as determined by the relevant statistics/indices - exceed 2%, the contracting authority and consultant will share the risk, with the contracting authority bearing 70% and the consultant 30% of the percentage in excess of 2%.
In a situation where the service overruns the scheduled performance period due to the poor performance of a consultant, the fee will not be subject to further adjustment for inflation.
Further information about the introduction of fee indexation can be found here: https://constructionprocurement.gov.ie/fee-adjustment-mechanism
Notes
The introduction of fee indexation is part of the effort underway to reform the Capital Works Management Framework (CWMF). The CWMF represents the tools that a public body must use to procure and manage the external resources necessary to deliver a public works project under the NDP. A key objective of CWMF reform is to rebalance the risk that is transferred to service providers and contractors engaged in the delivery of public works projects.
Construction and archaeological consultancy services are typically engaged under the Standard Conditions of Engagement which comprise two distinct forms of contract, one used to engage Construction Technical Professionals (CTPs) and the other for archaeological services.
Under the Conditions of Engagement currently in use under the CWMF, CTPs and archaeologists, when calculating their tendered fee, are required to take account of inflation which may arise over the period of their engagement on the project. For much of the time since this contract was introduced in 2007 we have witnessed very low levels of inflation in the economy - that was the case up until 2022.
However, since 2022 the prevailing economic conditions have changed dramatically. The aftermath of the pandemic, and the Russian invasion of Ukraine, has caused inflation to spike dramatically, which has increased costs across the economy. Whilst the level of inflation has returned to within acceptable levels, given the current geo-political situation there are reasons to suspect further shocks, which can be addressed using an adjustment mechanism that can react to sudden change.
Should an event arise, such as in 2022, which causes inflation to spike then a CTP may struggle to provide the standard of service required thus jeopardising a good project outcome.
The formula has been developed to provide a transparent means of adjusting the fee for inflation. It considers the annual percentage change in two statistical releases published by the Central Statistics Office (CSO) using the following weightings:
The adjustment factor that is applied to the fees for the subsequent 12 months is the one that aligns with the quarter in which the tender for the project was submitted.
For example, if a tender is submitted in Q2 of 2025 then the fee adjustment factor that will be first applied will be the one published for Q2 of 2027 (because the fee is fixed for 2 years from the date of the tender submission).
Thereafter the fee will be subject to the adjustment factor for Q2 of 2028, Q2 of 2029 and so on until the scheduled performance period is completed.
ENDS