Contractors threatening to axe public sector contracts due to price advance

Construction workers building the Paide building of Järva County State Gymnasium.
Construction workers building the Paide building of Järva County State Gymnasium. Source: Olev Kenk/ERR

The Estonian Association of Construction Entrepreneurs has sent a letter to the Ministry of Finance in which it threatens to terminate public sector construction contracts signed before Russia's invasion of Ukraine if the state is not willing to pay more for ongoing projects. The address suggests current material prices make it impossible to finish the projects based on existing agreements.

"Public sector contracting entities have largely lacked interest or a shared understanding of whether and how they and contractors might manage risks associated with unforeseen circumstances," head of the Estonian Association of Construction Entrepreneurs Kaupo Kolsar writes in a letter to the Ministry of Finance.

One such risk is Russia's invasion of Ukraine. "Considering the fact that several important construction sector supply chains pass through Russia and Belarus, the disruption is that much greater. For example, the prices of construction steel, including reinforcement steel and steel profile, on average doubled a few days after the start of the war," Kolsar writes.

"The cost of construction steel has tripled or even quadrupled compared to before COVID-19. The prices of all other construction materials have also grown – aluminum, copper and zinc by approximately 30 percent, stainless steel by 100 percent."

"This level of price advance is transferred to most construction elements and products, including loadbearing constructions, securing devices, special parts and systems, fillings, fixtures etc. The cost of timber and insulation materials has also grown by around 20 percent. Retailers and importers forecast all construction materials and products to become more expensive," Kolsar adds.

The association concludes that the price advance makes it impossible to perform public sector construction contracts signed before the war. "This means that a lot of projects might go unfinished as it might prove more sensible to terminate existing contracts and refrain from signing new ones in the conditions of higher input prices and unpredictable delivery timelines," the letter reads.

The association regards allocating public sector contracts more money as a possible solution. Its proposal would see contracts adjusted based on Statistics Estonia's construction price index. While existing rules allow contracts to be adjusted in case of unforeseen circumstances, contractors find the current system cumbersome and labor-intensive and would prefer an automatic increase.

The association also proposes extending project deadlines by three months and canceling contractual penalties or removals from tender should the deadlines not be kept.


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Editor: Marcus Turovski

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