Better wear shades: the future is complex
The message from the Wales Industry Stakeholders Group is that the future is problematic, to say the least. Inflationary pressures, materials price volatility and labour costs. We share some of the outputs of its most recent meeting
Inflationary pressures, materials price volatility and labour costs – how can the industry better manage these pressures and is support needed? Are these risks being well managed across the sector?
We have taken some of the comments and outputs from the most recent Wales Industry Stakeholders Group discussion, facilitated by CEWales and reported them here. But what we want is your opinions too. And your answers to the questions posed please.
As industry we want leadership, or at worst, guidance, and information from Government. So how is Welsh Government taking this forward? Is there a need for the WPPN to be updated? More needs to be done on how the WPPN’s are implemented.
More needs to be done from the client, can they do more from a contractual perspective? The sector wants more to be done on price adjustment clauses which was a proposal by Vaughan Gethin MS.
There are budgetary pressures from clients as projects have been priced, two to three years ago, so have they been adjusted to reflect the market? There is high variability in sharing cost risks. It is important to come to the market correctly from procurement. How can the sector influence and inform budgets that were set a long time ago, for example 21st Century Schools budget was set in 2016. Looking at types of contracts can help clients with cost pressures.
Industry is still reporting working in an environment of fixed priced contracts, this needs to be changed at procurement with the behaviour change starting here, to filter though to Tier One’s.
We need a global application for change. There are no fluctuation clauses in NEC or JCT contracts, this needs to change to a variable approach. Hyperinflation clauses need to be looked at.
At a NEC contract level, we need to use Inflation Clause X1 more often to share the risk on inflation. In England, the industry is experiencing that local authority clients are becoming more receptive to contracts that have such clauses.
Councils cited the need for cost certainty. Design and build process led by principal contractors gives a more strategic view on frameworks when bids come out. Clients need to think about budgets in a different way by building in risks as part of the cost, like shared risk registers, enabling the risk cost to be held by both the client and contractor.
The sector wants evidence of price increases, to make informed decisions to put provisions in place like risk schedules, hyperinflation clauses and an open book approach. Indecencies do not often reflect inflation, so clients need to take more of the risk.
There is experience of non-return on tenders, therefore there is a need to reassess budgets. Construction Purchasing Managers Index (PMI) needs to be taken into consideration from the outset and reimbursements made on cost. On the design side, capacity and resource is the issue, it is difficult for clients to fix budgets, so it is very fast moving and therefore difficult to adapt that quickly.
A separate contract for materials is recommended. Within the NEC contract there is a way to look at early warning signals to address the risk as they materialise. The lack of estimating resource is at the heart of it, this needs to be addressed.
Frameworks are trying to respond to the market, and some have x1 clauses, which are used for shorter contracts. For example, Health Boards are asked to look at contingence plans but there is evidence of contractors not bidding for the work. The issue is more than material inflation, people costs are escalating, and sought-after resources are becoming scarce and demanding higher than inflation increases.
The Minister needs to be made aware of these issues immediately and the sector requires direction and leadership from WG.
In conclusion the industry forum feels the WPPN is not sufficient to effect change in response to a rapidly changing market. A recommendation is that a further WPPN is issued (or a rider) that puts forward a short suite of options which would include:
2. risk share
3. carving out of materials such as steel, copper aggregate (NEC enables this if X1 is engaged)
4. some hyperinflation clause BUT strongly discourages contracts being let without any provision for inflation.