Lincolnshire County Council is planning a mid-year uplift to prices under key highways contracts to support small sub-contractors, at a cost of nearly £1m.
A report to its executive councillor for highways, transport and IT, Richard Davies, provides an insight into how one council is dealing with what it calls ‘the risks to the Highway Service key delivery contracts as a result of rapidly rising inflation within the construction sector’.
It warns: ‘In year inflation pressures are rising quicker than the mechanisms built into the original Highway Works, Professional Services and Traffic Signals term service contracts which is causing financial pressure at all levels within the supply chain.’
It recommends uplifting price list rates within the Highway Works and Traffic Signals contracts from 1st August 2022 for work activities where small or medium enterprises (SMEs) are providing greater than 75% of the service.
The report notes that the council has included a specific clause built to track inflation throughout the lifespan of its highway maintenance contracts.
Both the Highway Work and Traffic Signal contracts (with Balfour Beatty and Colas respectively) are cost-based contracts where the contractor is paid the actual cost of completing the work, at prices that were tendered at the start of the contract.
However, it states: ‘Based on the latest inflationary figures there remains a significant risk that SMEs working within the Highways Works and Traffic Signals contracts are struggling to deal with the pressures they are facing.’
The report adds: ‘The level of service from SMEs working within LCC is high and the loss of any of these firms would be significant in terms of Lincolnshire’s economic impact but also quality of the ongoing Highway Service.
‘Replacement to SMEs, whether via alternative SMEs or direct delivery would likely take several months to transition to a new provider and is likely to result with employees seeking opportunities away from the Highway maintenance sector.’
It estimates that the proposal would see the council lift the total of the target prices for the two contracts by £964,000 for the rest of the financial year, leaving the highways service ‘an in-year budget pressure’ of the same value.
It adds that ‘the level of Highway related activity will need to be managed within the total funding available’.
The report includes an alternative option to provide a mid-year uplift to all three contracts, which would cost approximately £1.5m but ‘ensure the whole supply chain feels the benefit of the increased prices and prevents any anomalies in how the increase is distributed’.
It notes that while most of the world is being impacted by rapidly rising inflation, the impacts within the construction sector are above those experienced in wider society and tracking higher than official measures of inflation.
It attributes this to skills shortages throughout all areas of the industry built up over several years. These include:
- the well-publicised shortage of HGV drivers;
- ‘exaggerated inflationary pressure in comparison to other sectors due to the price of oil and gas’
- and rising cost of metal and metal-based products such as electrical cable, street lighting columns, and reinforcing bar for concrete and structural steel.
The report, from Jonathan Evans, head of highways client and contractual management services has been sent to the council's Highways and Transport Scrutiny Committee prior to consideration by Mr Davies between 16 and 20 September.
