Fixed price contracts on major projects leading to “low ball tender pricing” and later disputes over costs

Overly optimistic cost estimates for major public projects in Ireland were creating “significant public and political condemnation” when the final bill initially put forward had been nowhere near robust enough to begin with.

A risk paper from the National Transport Authority (NTA) also explained how government rules demanding a “fixed price” for every large construction contract had created a “perverse effect” leading to claims culture and adversarial relations between contractors and the public sector.

It said this had incentivised “low-ball tender pricing” where companies would look to win a tender using an unrealistic estimate and then try to claw back money at the end during costly dispute resolution process.

The NTA paper said while fixed price lump sum contracting could work for certain smaller “more conventional” projects, it was completely unsuitable for major programmes.

It said: “Because such programmes face countless variables and pressures, are enormously complex and take years – if not decades to complete, to expect an initial forecast (or fixed price) to stand the test of such wide-ranging variables is simply not realistic.”