Hyper-inflation in the construction market looks set to push costs at the over-budget National Children’s Hospital even higher, an Oireachtas committee will be told on Thursday.
With price growth rampant in the building trade, inflation looks set to grow beyond a key threshold in the contract which contractor BAM previously described as a “magic number” – opening the State to more costs.
The Public Accounts Committee will also hear that the contractor is “now forecasting a substantial completion date of end January 2024″.
The contract with BAM provides for “embedded risk-sharing” on inflation. However, senior officials in the Department of Health will tell the committee on Thursday that inflation is now beyond a threshold of 4 per cent “where the contractor can, under certain conditions, recover increases above this at the completion of build”.
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At a meeting of the Oireachtas health committee last year, David Gunning, chief executive of the National Paediatric Hospital Development Board (NPHDB) said that the 4 per cent level is “the magic number for us”.
“If it is below 4 per cent, it is the contractor’s problem. If it is above 4 per cent, the State has a responsibility,” he said last July.
`Degree of hyper-inflation’
The committee will on Thursday hear that “the degree of hyper-inflation that we are currently experiencing would have been very difficult to foresee at the time the parties entered this contract” and that for this reason “the compound effect of this increased inflation will be a driver of additional cost which has always been outside the €1.433 billion budget for the capital project”.
In his opening statement, Mr Gunning will tell the committee that while the NPHDB and BAM remain “fully aligned” on the January 2024 substantial completion date, there are “a number of factors which put pressure on this forecasted time frame so we continue to work with the contractor to understand what implications these external factors may have on the programme”.
Also pointing to Brexit, Covid and Ukraine, he will say that while these are global challenges they are having “an will have – potential impacts on this project while also bringing additional uncertainty”.
On costs, he will say that “the current period of high inflation is having a major impact on costs for a project of this scale” and that “any delay has a cost implication”.
Regarding the putative €1.433 billion cost of the project originally sketched out, he will say that “programme delay, Covid and Brexit will all add additional cost to the budget”. While he will decline to put a figure on the costs, he will say that the combination of all the factors “mean that the final amount will be above that already approved by Government”.
It is unclear exactly how breaching this level will hit final costs at the project, but Derek Tierney, assistant secretary at the Department of Health, will tell the committee that disruption to supply chains driven by Brexit, Covid-19 and now compounded by the war in Ukraine presents risks to the project timeline.
“More recently, the war in Ukraine has and will continue to give rise to global economic uncertainty, supply chain disruption and the effect on shortages of construction raw materials. It is right the development board might have concerns in relation to the risks to the construction works, especially in relation to the risks I have just mentioned,” Mr Tierney will tell the committee.
While a lot of steel and concrete – items exposed to inflation swings – has been installed at the site, and BAM as a “tier-one construction company” has global reach into supply chains, he will tell the committee that “the wider construction industry is challenged by these same supply chain issues and dramatic price increases and the NCH project cannot alone be immune to these external risks”.
Some costs are being mitigated, he will tell the committee, but “the key driver of costs across the sector and that affect this project also relate to increased costs of energy, fuel and transport of goods”.
Precise information on how exactly costs will be impacted is not yet available, Mr Tierney will tell the committee, saying that the “hardly predictable” course of the pandemic, geopolitical events and associated uncertainty make “speculation and precise definitive forecasting of time and costs, hypothetical or otherwise, at this time very challenging”. He will say it could also “negatively impact or jeopardise” ongoing commercial engagements with BAM on the contract. The Department of Health has refused to clarify the final cost of the project in recent months.
