Davis Langdon launched their Annual Review of the construction industry today. paul.mitchell@davislangdon.com

1. REVIEW
Davis Langdon Ireland Annual Review 2011

2. Cover image: Terminal 2, Dublin Airport

3. Contents
INTRODUCTION 2 REGIONAL DEVELOPMENTS 29
Overview 29
OVERVIEW 7
Sectors 29
Medium Term Outlook 8
Market 33
Regional Spotlight 33
SECTOR DEVELOPMENTS 13
Public 13 INDICATIVE BUILDING COSTS 37
Commercial 14
WORLD CONSTRUCTION 2011 39
Retail 15
Europe 40
Residential 15
Middle East 40
Hotels, Sports & Culture 16
Asia Pacific 40
Infrastructure & Industry 16
Australasia 41
INDUSTRY DEVELOPMENTS 19 The Americas 42
The Capital Works Management Framework 20 Africa 42
Understanding Specialist Contractors 21
DAVIS LANGDON NEWS 45
Recruitment Embargo 22
Reform in Public Sector Assets & 22
Facilities Management
Reviewing Insurance Valuations 23
Value for Money Requirements 23
NAMA – It’s all about the numbers... 24
Working Out of Distressed Projects 26

4. Introduction
It has been over 16 years since I One of the positive outcomes of the NUI Galway’s Science Research
first started work in our offices in boom years for businesses within Bundle, Bons Secours Private
Lower Hatch Street. Over that time the Irish construction industry is Hospital in Cork, Limerick Regional
I have, like most of you, seen vast the depth and wealth of knowledge Hospital Critical Care Centre and
changes in our industry. During the generated during this period. The the TCD Biosciences Building.
company’s 150 years in Ireland it high calibre and experience of our
has constantly evolved as it has people is in high demand from We look forward to reflecting on
grown, dominating new sectors overseas markets. Unfortunately, these projects in our Annual Review
and delivering new and innovative this has led to the all too familiar in 2012.
services to our clients. “brain-drain” from our economy.
In other cases it has served Irish We have continued to expand and
Whilst all companies have taken companies well in delivering projects deepen our service line offering
their fair share of pain during the from dual locations therefore in the industry with Facilities
past three years in Davis Langdon keeping people employed locally. Management consulting, Forensic
Ireland we have continued to focus and Recovery advice and with
on growth and innovation. At the During 2010 our offices here in industry renowned thought leaders,
end of last year, Davis Langdon Ireland worked with our colleagues DEGW, offer Business Consultancy
completed their merger as a in other parts of the world on major in the strategic use of place. We
new service line offering within projects including Stone Towers in are currently working with our
AECOM. In the first six months we Cairo, the King Abdullah Financial London-based teams on the UK’s
have jointly secured over 70 new District in Saudi Arabia, a €1.5 two largest rail schemes, including
appointments with AECOM across billion Marina development in the Specification Writing on London’s
the globe, amounting to over €20 UAE and a housing redevelopment Crossrail and Cost Management
million of fee income, including scheme for the people of Haiti. services on High Speed 2 (HS2)
Dublin’s involvement in a €7 billion which includes two lines from
scheme in Chile and a €700 million We are aware also of Irish Birmingham to Manchester & Leeds.
airport extension in Eastern Europe. companies that, with the help of
Enterprise Ireland, have started to During 2010 we saw a significant
We are very proud of the significant gain a foothold and deliver a return number of casualties in the
projects that we have been involved in foreign lands which is good news industry. In addition to a plethora
with in Ireland over the past year for business in Ireland. of sub-contracting businesses go
including Terminal 2, Grand Canal into liquidation we also saw some
Theatre, Grangegorman Strategic Over the course of the next year household names in the industry
Plan, the Motorway Service Area our 70+ strong office is in the close their doors. Unfortunately,
PPP, Glasnevin Museum, UCC enviable position of working it is likely that we will see more
Western Gateway Building, NUI on some of the country’s finest companies follow the various
Galway New Engineering Building projects here in Ireland, including routes of insolvency during 2011.
and UL World Performing Arts the National Children’s Hospital, the
Academy to name but a few. new HSE Mental Health facility at
Grangegorman, UCD Sports Centre,
2 | Introduction

5. Paul Mitchell
Director
Head of Office – Ireland
In articles and commentary support it in providing jobs and Our former Managing Directors
provided over the past 12 months restoring confidence. Michael Webb and Norman Craig
we have advised on the effect have done all the heavy lifting on
that the downturn would have on Easier said than done? The this one leaving it for me to sign
tender levels. Much has been made Construction Industry Council copies in Easons!
of the “below-cost tendering” in produced a robust report “Building
the marketplace but we are now a Better Ireland – Investing in We celebrated our sesquicentennial
reaching the elastic limit and are Infrastructure and the Built last year in the Grand Canal Theatre
seeing sub-contractors refuse to Environment to Support Ireland’s and promised to follow up with
quote for main contractors that have Smart Economy” with cogent bound publication in due course.
priced work at unsustainable levels. arguments of how to achieve this The final draft is under review and
in June of last year. we hope to get it back from the
There is now a narrow window of publishers very soon. We’ll keep
opportunity for the government to The construction industry you posted.
obtain the best value for money in needs formal representation
the marketplace and avail of the at government level to advise Finally, in these very challenging
technical expertise and experience it on how best to deal with the times and on behalf of my fellow
before it is too late. construction industry. The UK directors I would like to extend our
did exactly this in 2009 to ensure sincere thanks to you our clients
In our Annual Review in the early securing value for money from and colleagues for all your support
2000s we warned of the effects the government’s procurement of during 2010. We look forward to
of pumping investment into an construction, promote innovation working with you to deliver your
overheated construction market and sustainability in the industry business objectives during 2011
where value for money was not and be responsible for ensuring and beyond.
achieved. The reverse is true today. the government takes full account
A billion euro from the National of the impact of regulations on the
Pension Reserve Fund spent on our construction industry.
infrastructure deficit today would
yield significant value for money, We remain positive in anticipation
increase indirect employment, and will support our industry
savings on welfare payments and which we have all worked so hard Paul Mitchell
Director
GNP growth (estimated by the ESRI to create. Head of Office – Ireland
to be €0.4 billion per annum in the
years immediately after the money Like so many others in the industry
is spent). we will be releasing a new book this
year, non-fiction unfortunately, but
It is high time that the government, may fall under the thriller category
as constrained as it is, respect the depending on which decade you
construction industry for the vital read. It is the 150 year history of our
role it plays in our economy and business in Ireland!
Introduction | 3

6. University of Limerick: The Irish World Academy of Music and Dance
There is now a
narrow window
of opportunity for
the government
to obtain the best
value for money in
the marketplace
Interior, Terminal 2, Dublin Airport
4 | Introduction

7. National Paediatric Hospital
Turning Point Sculpture, Terminal 2, Dublin Airport
Introduction | 5

8. Consultants
Overview

9. The horizon has been constantly
shifting over the last 18 months and
this has been no more evident than
with the Public Capital Programme
Since the beginning of the economic In terms of “planned expenditure”
downturn some of the key questions forecasts, these have also
being posed in relation to the fluctuated considerably. The
construction industry and its horizon has been constantly
seismic decline include: shifting over the last 18 months and
this has been no more evident than
“How bad will things get?” with the Public Capital Programme
“When will we hit the bottom?” figures. Table 1 (overleaf) highlights
“How quickly will things rebound?” how much the planned expenditure
has dropped as the crisis has
There is no doubt that the deepened. Whilst there is broad
construction industry rode along agreement to the reduction of the
the crest of the wave during the deficit to 3 per cent of GNP by 2015,
Celtic Tiger and there are those differences may well arise on the
that would argue, incorrectly in our ratio of cuts to taxes.
view, that it was in fact the catalyst
for the collapse of the economy.
Regardless of which view one takes
on this, it is certainly fair to say that
it is definitely at the trough of the 50000 50
%
fragile economy today.
€m 2010
45000 40
2010 has seen a continuation of
the decline with overall output 40000 30
estimated to have dropped to
35000 20
under €11 billion (current prices).
30000 10
Figure 1 (based on DKM
Construction Industry Review 25000 0
& Outlook and Davis Langdon
estimates for 2010 onwards) 20000 -10
captures the full cycle of the
15000 -20
industry since the early nineties
and clearly demonstrates 10000 -30
the extent of the fluctuations
experienced in the last few years. 5000 -40
-50
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009(e)
2010(e)
2011(e)
2012
FIGURE 1: Construction industry output (current prices) and per cent change
Overview | 7

10. Tomás Kelly
Regional Director
Medium Term Outlook
Medium Term Outlook 2009 2010 2011 2012 2013
Looking ahead to the remainder € (million) € (million) € (million) € (million) € (million)
of 2011 and beyond, the picture NDP * 11,410 11,428 11,538 13,000 12,400 €60bn
remains bleak domestically over the
medium term. As we can see from Budget
Oct ‘08 8,231 8,297 8,193 9,672 9,159
table 1, the annual public spend
earmarked for 2011 is circa €4.65 Budget
billion, added to this, private sector April ‘09 7,329 6,621 5,491 6,000 6,000
capital investment is struggling due
IIP 2010 -
to a combination of the economic 2016 7,341 6,430 5,500 5,500 5,500
downturn and lack of finance
availability. Budget
Dec 2010 7,341 5,918 4,654 4,300 3,900 €26.1bn
Thankfully there are more
Table 1: Summary of changing planned public capital programme
influencing factors other than *NDP National Development Plan
the nation’s finances. Key external
factors will be the timing and
scale of an international economic In its end of April update on DKM Economic Consultants
recovery. We have already seen the Stability Programme, the reviewed what would be a
positive results in terms of Irish government reduced its GDP sustainable level of output in the
export growth which, if they can growth projection for the economy construction industry and from the
be maintained, should lead to in 2011 to +0.8 per cent. The latest extreme height of 25.1 per cent of
further investment in the industrial projections for the construction GNP in 2006 to a projected 7.9 per
and commercial sectors. industry are summarised in Table 2. cent in 2012, DKM concluded that
the sustainable level would be in the
Likewise there have been some In summary, we expect the rate range of 12 per cent - 15 per cent.
encouraging signs in terms of of decline in the industry to slow
inward investment with Ireland down in 2011 with overall output
attracting a range of companies at circa €8.9 billion (from a high
such as eBay, Google, PayPal, of €38 billion in 2007) and to be
Intel and Zurich to establish and/ followed by a 5% reduction in 2012
or expand their operations in and thereafter a couple of years
Ireland. Whilst the announcements at, or close to, zero growth. This
have typically been smaller than will leave the industry output well
in the past, nonetheless they do below the figure of €18 billion,
represent very valuable investment identified by the Construction
with significant benefits for the Industry Council in 2009 as the
construction industry and the long-term sustainable level for the
economy generally. Irish Construction Industry.
8 | Overview

11. % Change in Construction Volume Prices
In terms of Tender Prices, 2010
saw a continuation of the sharp
2010 2011 2012
decline in tender prices with an
DAVIS LANGDON -35.00 -21.5 -8 average decline of circa 7 per cent
over the year. Importantly, however,
ESRI -30.75 -17.5 -7
the end of the year seems to have
CENTRAL BANK -28.00 -10.60 brought an end to the fall in prices.
As a reflection of how low tender
DKM -29.60 -10.80 0.60
prices have fallen over the last
Table 2: Projected construction industry growth
three years, table 3 overleaf shows
selected indicative building costs
from our 2000 Annual Review
(converted to euro for comparison
Market been smaller sub-contractors and purposes). Looking at these it is
The change in the industry over the developers, there have also been fair to say that these rates would
last few years has not been confined a number of high profile not seem out of place in today’s
to the massive reduction in volume. contractors and consultancy market.
In tandem the industry has been practices. This has contributed
undergoing a sea change in terms to a sizeable reduction in capacity By contrast, the Consumer Price
of the new public works contracts. and this has become more Index (CPI) has shown a 28 per cent
This combination of extremely tough noticeable in the last few months increase over the same period.
operating market conditions and with fewer contractors submitting
new government contracts which expressions of interest in response A combination of the inability of
transfer greater risk to contractors to public contract notices. sub-contractors and suppliers to
has lead to an increasing number absorb further price reductions
of contractual disputes and we Other key developments include and the unsustainability of main
are likely to see a growing number contractors and consultants being contractors continuing to offer
going through the dispute resolution increasingly more selective in what “Directors Discounts” or “Zero
processes in 2011. they bid for and also shifting their preliminaries” should result in
focus to overseas opportunities 2011 seeing a halt to price
Another impact, which has been to retain key staff. These reductions and in fact modest
sharply felt, has been the continual developments are a clear indication tender price increases of circa 3
climb in the level of insolvencies of the sharp cash flow issues being per cent can be expected over
in the industry. Figures published experienced by businesses and the the full year.
by FGS (Farrell Grant Sparks) necessity to see a clear return on
indicated that there were 684 any investment.
construction-related insolvencies
in 2010, 39 per cent of total
insolvencies in Ireland last year.
Whilst the majority of these have
Overview | 9

12. Labour & Material Costs The SCS construction index, which It is these greener “far away
Costs obviously play a key role records input costs, has recorded fields” that have provided fertile
in determining tender price an average of 2 per cent increase ground for significant numbers of
movements and in this regard in costs in 2010. Irish consultants and contractors
December 2010 saw confirmation alike. It is imperative as individual
of the union’s acceptance of the In light of the contrasting trends companies and an industry as
7.5 per cent reduction in the in tender prices and construction a whole that we maximise the
Registered Employment Agreement. costs it is not surprising that there opportunities in “selling” our
Whilst industry employers had been has been considerable concern in services and skills. Several
seeking higher reductions, this relation to a lot of tenders in the companies have been successful
adjustment will be welcome. last year with regard to potentially in winning work overseas and
abnormally low tenders (ALT’s). this can help sustain some of the
On the materials front there is a As a result, tender evaluations valuable jobs and skill base which
much wider range of variables. are taking protracted periods and has been created over the last
From domestic suppliers effectively contractors are taking longer to number of years. If Irish contractor
“buying” contracts in order to get bonds. These delays, combined and consultancy businesses
stay open (and make some small with the natural slow down in the can continue to innovate and
contribution to the cost of the progression of projects through exploit these international
capital invested in developing the public capital programme, are opportunities, then we can create
and expanding their businesses creating real output and cashflow work domestically as well as
during the boom), to the other issues for all in the industry. internationally. Through this we
extreme of specialist materials can maximise the benefits for
sourced from international Conclusion Irish businesses and the domestic
economy as opposed to being
suppliers which may have been There is much talk about Irish
experiencing an inflationary cycle resigned to another brain drain and
exports bucking the trend showing the permanent loss of a skill base
and a strengthening currency growth levels on the back of
against the Euro. that we as an industry developed
improving international economies. over the last decade.
2000 2011
€ / per square metre € / per square metre
Offices - Owner Occupier 1,270 – 1,900 1,400 - 2,300
Secondary Schools 900 – 1,020 930 - 1,100
Hospitals 1,525 – 2,540 1,575 - 2,400
Basic Factory 510 - 825 600 - 850
Table 3: Comparison of indicative building costs
10 | Overview

13. Modest tender
price increases
of circa 3 per
cent can be
expected
over 2011
The Atrium, No. 2 Grand Canal Square
Overview | 11

14. Expert
Sector
Developments

15. In the last year there have been many
references to the public sector as
“the only show in town”
The downturn in the construction Public
industry has been notable by the
In the last year there have been
shift in the balance between the
many references to the public
different sectors. Figure 2 shows
sector as “the only show in
the sharp contrast between the
town.” Whilst this may be an over
split in the five years from 2006 and
simplification, the figures for
our projection for 2011.
new build construction in 2010
included in the DKM Review and
The residential sector has reduced
Outlook document would support
from a wholly unsustainable 65.9
the premise that the public
per cent in 2006 to 20.8 per cent in
sector (General Building and
2011. Similarly we have seen the
Infrastructure) represents,
public sector increase as a share
by a large majority, the main
from 21 per cent to 73 per cent
source of non-residential new
despite having been reduced from
build construction in Ireland.
€6 billion to €4.5 billion.
Increasingly consultants and
contractors are seeking out
opportunities in sectors they
would not have traditionally
operated. Notwithstanding this
and the associated risks for 2006 2011(f)
clients, a worrying consequence
of the downturn is that output in
certain specialist sub-sectors may
fall below a critical mass to support
sufficient competition to sustain
the specialist skills and in the
medium term value for money. Residential Residential
65.9% 20.8%
Retail Retail
We would anticipate that in the 7.0% 0.9%
short-to-medium-term those Commercial Commercial
sectors experiencing oversupply 4.5% 2.4%
following the Celtic Tiger boom Hotels, Sport, Culture Hotels, Sport, Culture
2.5% 2.8%
(residential, retail and tourism)
Infrastructure Infrastructure
will remain in sharp decline 16.0% 57.4%
whereas the public sector and the Public building Public building
industry and infrastructure sectors 4.1% 15.8%
will decline at a slower rate. FIGURE 2 Graph showing contrast between the split in
the five years from 2006 and our projection for 2011
Sector Developments | 13

16. John O’Regan Anthony McDermott
Director Regional Director
Public Commercial
As summarised in the overview,
Public Capital Programme €m €m
there has been a distinct lack of 2010 2011
certainty around the projected
public capital spend as the Department Outturn (P) Estimate
economic crisis has worsened. Education 705 491
The most recent estimates for 2011
published in February indicate the Health 385 392
following projected expenditure per Transport 1,760 1,438
department (see Table 4).
Environment 1,464 1,002
It is likely that this will be relooked OPW 159 124
at by the new government with
a probable emphasis on a larger Enterprise, Trade & Innovation 469 508
number of smaller projects, but the
Tourism, Culture & Sport 113 99
envelope is unlikely to be increased.
There is also the likelihood of Other 863 636
greater capital expenditure by
TOTAL 5,918 4,690
semi-state organisations in the
infrastructure sectors of energy, Table 4 : Public Capital Programme
broadband and water.
With an increasing emphasis on It is anticipated that by the end With NAMA and foreign banks
achieving value for money, cost- of 2011 we will see the start of getting through their due diligence
benefit analysis and other project a gradual improvement with the examinations they are likely to
prioritisation mechanisms are likely prospect of the funding crisis being become more and more focussed
to be used on a wider basis and on addressed, coupled with a steady on disposals which hopefully
lower value projects. flow of foreign direct investment may prove attractive to overseas
stimulating some activity in the investors. In this regard it is likely
Commercial office and industrial sub-sectors. that the higher quality assets
Companies such as LinkedIn, Yahoo in prime locations will hold up
The commercial property market
and Google have recently acquired significantly better than those
has been at the coalface of the
or set up new offices here and the that were not needed in the first
property issues arising from the
recent sale of the NAMA-owned instance and then were located
economic and financial crisis being
Montevetro building to Google on the wrong side of the Monopoly
experienced in Ireland for the last
has been the largest commercial board game!
couple of years. The interwoven
transaction here in some time
nature of many of the residential
(circa €100 million). These sub-
and commercial developments,
sectors have also seen some
with the sets being transferred
activity arising from consolidation
to the National Asset Management
and cost-reduction measures.
Agency (NAMA), has lead to a very
unsettled period with low levels
of activity.
14 | Sector Developments

17. Mark Smith Cathal Barry
Associate Regional Director
Retail Residential
Retail The negative sentiment and poor In addition, a recent survey
trading conditions are likely to lead carried out by the Department of
It was another tough year for
to more casualties in the market Environment, Heritage & Local
Irish retail in 2010. Retailers have
during the year and are proving to Government indicated that there
worked very hard to reduce costs
be a real barrier to closing deals is currently a supply overhang
and entice customers to part with
that have been in the pipeline of approximately 33,000 new
their hard earned cash. Constant
for some time. This is especially units completed (including near
reports of tenant negotiations
true of the grocery and consumer completed) and available for sale
with reluctant landlords continued
goods sector in under populated in the Irish market; 9,000 of which
unabated and our unexpected
residential developments as were located in Dublin.
weather in December added to
reflected by the sale of Liffey Valley,
further misery, dashing any hope
one of our largest shopping centres.
of hitting end-of-year targets. Public
The ongoing restructuring of
The outlook for 2011 is likely to Residential the social housing investment
continue to test the resolve of the Private programme away from construction
retailers given the government’s and acquisition towards long-term
austerity measures in the four year House building has been a major
leasing and rental accommodation
plan. Consumers will continue to be driver of the Irish economy over the
will have implications for future
cautious in the light of uncertainty last decade-and-a-half, with output
levels of public house building.
around the general economy. reaching unsustainable levels of
The level of new social housing
However, on a more positive 90,000 units in 2006.
units built, which until 2009
note, retailers will have made the would have been between 5,000
necessary hard cuts during 2009 The housing sector has been going
and 7,000 units, is expected to be
and 2010 and will be better placed through a severe adjustment now
substantially lower over the next
to weather 2011. for close to four years with output
few years with current estimates
for 2011 projected to be slightly
of between 1,000-2,000 new units
A number of new developments will down on 2010 levels to circa 7,000
projected for 2011 and 2012.
be coming to market during 2011 – 8,000 units followed by a slight
including Balbriggan Shopping pick up in 2012 to 8,000-9,000
Centre and potentially the Point units, subject to some increase in
Village. Retailers will also start to liquidity in the market and NAMA
populate the remaining units in involvement in providing loans to
Terminal 2. Overseas retailers are purchasers. Currently growth is
likely to take advantage of market being restricted by weak consumer
conditions and the favourable sentiment, the protracted economic
terms on offer for new units as situation and the uncertainty
well as the change-out of non- regarding the availability of finance
performing tenants in turnover rent and future capital values.
agreements. Overall, the main focus
is going to be on effective asset
management and controlling costs.
Sector Developments | 15

18. Andrew Thompson Eoin Dunphy
Associate Associate
Hotels, Sports & Culture Infrastructure & Industry
Hotels, Sport & Culture In rail, the Cherrywood Luas In the energy sector there are a
extension and the Phase 1 of the number of innovative and exciting
2010 brought the completion of
Navan Rail line were opened. new projects in wind, waste-to-
a number of very significant new
energy, geothermal, wave, hydro
world class facilities to Dublin
2011 is likely to see a significant and other renewables. Many of
such as the new Aviva Stadium, the
reduction (circa -25 per cent) in them are being delayed by planning
National Conference Centre and the
infrastructure expenditure. Much and/or availability of finance.
new Grand Canal Theatre in Dublin
of the speculation remains around Hopefully the momentum of a new
which will be enjoyed by many for
the Metro North and whilst the government, together with the
years to come.
Interconnector and the Dublin Area rising oil prices, will give this sector
Rapid Transit (DART) Underground the stimulus and stability to unlock
Unfortunately, looking ahead,
projects are still advancing, none some of these projects in 2011.
at least in the short term, the
of these will result in significant
outlook for these sectors looks
construction activity in 2011.
likely to remain low largely due
to the current public expenditure
Davis Langdon acted as PPP
reductions forecast combined with
co-representative for the
the current funding constraints.
SuperStop Consortium in relation
There continues to be very limited
to the recently completed design,
movement in the hotel sector with
construct, operate, maintain and
existing room supply continuing to
finance contract with the National
outstrip current demand.
Roads Authority (NRA) for three
service areas (six service stations)
Infrastructure on the national road network, two
of which are located on the M1
& Industry motorway and one of which is on
Dublin Airport Terminal 2 was the M4 motorway.
opened in November. At its
peak Terminal 2 was the largest The decision by Intel to proceed
construction project in the state, with their plans in Leixlip will give
and employed up to 2,600 workers a much needed shot in the arm
on site. to the industrial sector. Whilst
manufacturing and export markets
2010 also saw the substantial are holding up well, there are very
completion of the national few large-scale capital projects in
motorway programme, including this sector. Most of the work is in
the motorway service stations, upgrading and the steady churn
Limerick tunnel, the M50 upgrade required to keep facilities going.
and the various sections of
motorway around the country.
16 | Sector Developments

19. Residential Development, Ballyloughan, Galway Motorway Service Areas, PPP Tranche 1
Motorway Service Areas, PPP Tranche 1
Sector Developments | 17

20. Leaders
Industry
Developments

21. From the public sector client
perspective, the major challenge
is “getting more from less” and
“business change management”
With the industry in such a state of Additionally, the combined
flux as we have been experiencing offering of significantly reduced
over the last couple of years, it is not capital costs and moderated pay
surprising that there is a wide range expectations has greatly improved
of issues occupying people’s minds. our competitiveness. This is being
reflected in our export lead growth
Here we take a look at a number of and, when allied with our low
the key client issues and identify corporate tax rate, is attracting
potential solutions towards more than our fair share of
addressing them. international investors.
From the public sector client The Croke Park Agreement is
perspective the major challenge supposed to be the spring board for
is “getting more from less” and public sector reform. Unfortunately
“business change management” it has suffered from a slow start. Of
whereas from the private sector course the real test of its success
perspective the emphasis has been will be the amount of real “reform”
on “restructuring portfolios” and as opposed to purely “cutting
endeavouring to extract liquidity costs.”
and value from existing assets.
In terms of precedent for the
The fall out of these developments implementation of strategic
together with the wider economic reform, the construction
and property crisis has manifested procurement reform agenda has
itself in a number of ways and been in train since the government
these have been felt across all decision of 2004. In the last
sectors and service providers in 18 months these reforms have
the industry. Among the impacts been taking hold but not without
has been a significant reduction in presenting on-going challenges.
the numbers engaged, including a Here we identify some of the key
number of high profile insolvencies issues impacting public sector
in both the contracting and implementation and issues that
consulting arms of the industry. are more generally the focus of
clients in the industry.
On the positive side, these
enforced adjustments have lead to
a significant improvement in the
value for money available.
Industry Developments | 19

22. Tomás Kelly
Regional Director
The Capital Works
Management Framework
The Capital Works Aside from the fundamental The Guidance Notes in Pillar 4
changes of contractor and reinforce this by stating they
Management consultant contracts which are appropriate where design
Framework were introduced in 2007, some constraints on the contractor are at
examples of other areas of change a minimum, and the contractor may
In May 2004 the government
which clients are likely to have to respond to output requirements in
decided to reform public sector
implement in 2011 include: innovative ways, and thus present
construction procurement
greater opportunities for delivering
through the introduction of the
a) The introduction of a Project better value for money.
Capital Works Management
Coordinator
Framework. This decision set in
The project structure allows d) Post Completion Performance
train a major programme of work
for the identification of a Evaluations
by the Government Construction
Contracts Committee (GCCC) Project Coordinator. The Project Under the new Guidance Notes, all
and the Department of Finance Coordinator will be the main works contractors and consultants
to review all aspects of capital promoter and practical leader of should be assessed in accordance
project procurement from appraisal the project, and has the pivotal with the performance and
through to project review on roles of liaising between the Design timeframe details contained in
completion of the project. Team and the Management Team; of their contract. These assessments
engaging with all the stakeholders; may subsequently be used as
The culmination of this review has and of implementing the decisions reference material in relation
been the completion of the Capital of the Sponsoring Agency. to suitability assessment of the
Works Management Framework contractor for future projects.
(CWMF) and its subsequent b) Formalisation of approach to The implementation of this new
publication on Risk and Value Management Framework, produced by the
www.constructionprocurement.gov.ie. Risk and Value Management Department of Finance, has been
The objective of the initiative is have existed and played a role in made mandatory since May last
to achieve greater cost certainty, projects over the last number of year (Circular 06/10). Arising from
value for money and more efficient years however these procedures this it is likely that audits will be
project delivery. introduce a more structured and carried out and it will be important
formal approach to their adoption. for the public sector to be seen
The framework is made up of four implementing these softer type
pillars and whereas Pillars 1 & 2 are c) Procurement Strategies issues as well as the fundamentals
primarily concerned with reforming of using the correct contracts.
The introduction of Design and Build
the processes involving interaction contracts in Pillars 1 and 2 opened
with the private sector, namely the door for the use of Design and
contracts with Works Contractors Build for public sector projects.
and Consultants, Pillars 3 & 4 are
primarily concerned with reforming
the processes on the “Client” public
sector side.
20 | Industry Developments

23. Eoin Dunphy
Associate
Understanding Specialist
Contractors
Understanding they are focusing on international possible to get highly competitive
opportunities or some of the larger tenders and still use the best
Specialist Contractors industrial clients where they can contractors. This approach will
The standard of Mechanical secure direct appointments. deliver value for money at the tender
and Electrical (M&E) specialist stage, protect quality and ensure
contractors in this country has In the short term it is generating successful delivery.
traditionally been very high and opportunity for the small-to-
many of the Irish contractors medium-sized subcontractors.
would punch well above their weight The long-term impact on the
when compared with their UK and industry, however, is concerning.
international counterparts. These The concern is that main
specialists play a vital role in the contractors will run into difficulties
successful delivery of any large and in delivering such buildings if
complex building. they do not have the right
sub-contractors in place.
To many, the field of Engineering
Services can be seen as a black art In order to address this issue all
of complex systems and processes parties need to play their part.
that bear little resemblance to the The specialist contractors need to
less sophisticated building shells in “de-mystify” the whole area and be
which they reside. more transparent in their dealings
with main contractors. Main
Furthermore, the specialist industry contractors need to rebuild some
that has evolved to deliver the design of the key relationships with the
and installation of these systems trade and take a more long-term
is seen by some as a “clique” that view when entering into contracts.
operates outside of rest of the industry. Clients and their advisors need to
These views and attitudes can lead avoid the “race to the bottom” on
to distrust and frustration which tenders and instead concentrate on
have been further exacerbated by value for money rather than lowest
the aggressive tendering conditions tender cost.
that the new government form
of contract and the weak market At Davis Langdon we have a
conditions have generated. specialist Engineering Services
Team who understand the
The net result is that many of the technology and know the market. We
larger household names in the can guide clients and design teams
Mechanical & Electrical contracting through the issues demystifying
world are at loggerheads with some the “black art” of M&E costs
of the main contractors and are and procurement. With the right
declining to bid for work. Instead approach to procurement it is
Industry Developments | 21

24. Stuart Griffin Gregory Flynn
Associate Regional Director
Recruitment Embargo Reform of Public Sector Assets
and Facilities Management
Recruitment embargo is changing with an increasing Understanding the cost of
use of project management operation per building and across
In 2009, the government ordered
consultancies who are charged a whole property portfolio is
an indefinite public sector jobs
with managing project delivery and essential and a “first step” in
embargo. The only exceptions to the
leaving the public sector personnel establishing a plan for change.
recruitment freeze are key personnel
to formulate policy.
in the health and educational
To maximise efficiencies, greater
sectors. The move, which was
implemented to cut the public Reform in Public Sector space sharing can be achieved
and involves a transition from
sector pay bill, is estimated to result
in the loss of up to 4,500 jobs a
Assets and Facilities the concept of “my desk” to “our
year across the entire public sector Management space.” Significant cost savings
are possible through reduced
through natural wastage & voluntary Property is the government’s second rental costs, running and FM costs
redundancy/early retirement. most expensive asset after its staff and disposal receipts, and over
and the requirement for government the whole life of the building or
The recruitment freeze clearly to rationalise its estate and improve tenancy these can often outweigh
has implications for public sector ways of working is equally as any capital construction and fit-
bodies seeking to undertake pressing as the need to instigate out costs in establishing a new or
construction or development public sector reform in human re-modelled environment. As fiscal
projects. A lot of organisations in resources and business operations. constraints tighten, even more than
the public sector have experienced
before, clients will need to brave
reductions in personnel in the last Of course there have been forays the approach of “spend to save.”
two years and the double whammy into reviewing the government
that a lot of the personnel who have estate in the past, most notably the
left/taken early retirement held a recent decentralisation programme.
lot of the knowledge and expertise
in project delivery. Unfortunately at a time when
the government has invested in
Combined with this reduction increasing its property portfolio,
in resources there has been an the opportunity to release the
increase in the volume of work. more expensive city centre
Whilst the number of projects has accommodation has been
been reduced due to cutbacks, greatly diminished.
the Capital Works Management
Framework has clearly set out At a macro level it is likely that
additional roles and responsibilities reforms can be achieved in the
and the formalisation of some medium term with a planned
tasks such as risk and value programme. At a micro level
management. The net effect of (individual department or
the recruitment embargo and the organisation/body) reforms and
implementation of the CWMF is efficiencies can begin to be
that the model of project delivery achieved at a quicker pace.
22 | Industry Developments

25. David Johnston Jason Hobson-Shaw
Associate Associate
Reviewing Value for Money
Insurance Valuations Requirements
Reviewing Therefore, the reinstatement cost Value for Money
calculation will need to be informed
Insurance Valuations by an up-to-date cost database Requirements
Falling tender prices, witnessed and based on sound professional The need to achieve value for
over the last two-to-three judgement. money from construction projects
years, have been raising interest has never been so important.
amongst property owners and The accuracy of the Reinstatement In the public sector, the reduction
managers about the current Cost Assessment is directly in the Public Capital Programme in
level of insurance coverage on dependent on reliable and up- Budget 2010 will see a heightened
their portfolios. In particular, the to-date information relating to need to achieve more with less.
level of insurance cover may well the property. Property owners are This drive for efficiency requires
exceed the current rebuilding continuously altering, upgrading careful proactive management to
cost with the consequence of and extending their portfolios, ensure that returns are maximised
higher than necessary insurance therefore, accurate calculations on capital investments. There is
premiums. Good practice dictates of floor area are critical as they also a growing need to ensure
that insurance reinstatement are a key component in the overall that the risk of not achieving the
cost assessments be reviewed at cost assessment. The delineation business case objectives is
regular intervals throughout the life between landlord and tenant actively managed.
of a property. This is particularly responsibilities is important.
relevant in times of fluctuating Each property within a portfolio Value Management provides an
tender prices as have been will need to be reviewed on an effective process for maximising
experienced in the last three years. individual basis with regard to value in line with the employers’
insuring obligations to ensure the and end users’ requirements,
In addition to building costs, responsibilities between landlord and fulfils the first of these
allowances for professional fees and tenant are clear and accounted requirements. Risk management
included in the Reinstatement for in the assessment. fulfils the second requirement
Cost Assessment may not reflect as part of effective project
current market conditions. To take account of changes being management, by providing a
Consultant fees have experienced made to properties and the process for managing risk.
sizeable decreases in the recent importance of establishing a sound Value and Risk Management
past, therefore, these too will basis for insurance valuations, can be employed as an integrated
need to be reviewed to ensure an combined with the need for reliable process at strategic stages and
accurate assessment of overall cost data and market knowledge, decision points throughout the
reinstatement cost. Of course other it is essential that insurance project lifecycle. However, there
factors may have arisen requiring valuations are regularly renewed — is greater potential for improving
insurance valuations to increase. in the current climate it can often value and reducing or mitigating
These could include changes to be a win-win situation. risks in the earlier stages of
regulations such as improved a project.
energy performance requirements
necessitating higher specification
materials.
Industry Developments | 23

26. It is essential that Value NAMA — it’s all about
Management concentrates on
optimising benefits and costs the numbers…
€71bn 145
rather that the traditional value worth of property loans
engineering approaches where transferred at a price paid
costs are reduced with a resultant of €30bn ~ 58% discount
loss of benefits.
Business Plans
44
€1.1bn
30
to be reviewed
The area of risk transfer has the number of receivers
by NAMA in 2011
certainly been a major discussion appointed to date
point in relation to the Works
€592m 2
Contracts with contractors of
equates to c.40% of total
plans have been reviewed which
of the top borrowers business
the view that too many risks
are been passed to them and/
or that insufficient information extended to coalition parties
is made available to allow them borrowers within opposed to any
to adequately assess and price NAMA to date further transfer of
Paddy McKillen
loans relating to
the risks. The more formal and loans to NAMA
structured approach to risk
management at the early design
stages identified in the guidance
notes should result in a more
€99.9m
price paid for Montevetro 11
considered approach to risk building by Google
the number of
allocation and the appropriate top borrowers
€4bn €1.1bn
investigations and assessments that it is
being carried out in sufficient time expected that
for inclusion in tender documents. enforcement
loans yet to worth of loans transferred action will be
In public sector projects, the need be transferred from AIB at start of 2011 taken against
for Value and Risk Management has from AIB at a discount of 60%
been recognised and endorsed in
c.€24bn 12
2
the new Capital Works Management
Framework (CWMF). The CWMF
deal from BoI/AIB
EU-IMF rescue
the terms of the
transferred under
of loans to be
a further €16bn
as in ‘NAMA-2’,
sets out detailed requirements for
MoU’s close
- €10bn
implementing robust processes for
Value and Risk Management at key to completion
stages during a project lifecycle. This with the 30 top
should be seen as a positive step borrowers
in formalising these requirements
to ensure a level of consistency of
approach by project teams.
= €14bn
potential shortfall in Bank Stress Test
24 | Industry Developments

27. Paul Mitchell
Director
NAMA —
it’s all about the numbers...
Yes, it certainly has been a year As we have stated before, the
of the numbers! What else would outflow of construction activity from
one expect given the scale of NAMA is not so much dependent
the unprecedented loan transfer on NAMA’s work rate or success,
underway in the state. but demand in the marketplace.
The two are obviously inextricably
In our Annual Review last year we linked but nobody is going to start
stated that NAMA planned to have a new hotel in an under-populated
all loans transferred by mid-2010. area even if NAMA did approve it or
We commented then that this was indeed had the resources to make it
ambitious and we’ll repeat our call happen. Where the frustration does
again this year and estimate that lie, however, is when there is some
it will most likely be by the end element of demand and the funds
of 2011 or even early 2012 before are held up in the application and
we see all loans transferred. This approvals process.
also depends on what the coalition
parties negotiate with the EU in It was a positive sign in the
relation to the bailout. industry to see Google purchasing
the Montevetro building from
So what has it meant for our REO. The obvious effect is an
industry? The property advisors immediate reduction in the supply
have had a very busy year and in in the market and hopefully a
a lot of cases their accounts are corresponding increase in demand
now showing a profit. The majority for a similar type space in the same
of the developers are in limbo locality. Grand Canal Dock Offices,
waiting to submit their business amongst others, should see some
plans or await the outcome of their of the benefit of that transaction.
fate following the various levels of
credit review. Those consultants The main question at the moment is
that were heavily reliant on the what effect the coalition will have
construction phase of development on NAMA. In their programme for
in the private sector during the government, they have stated that
boom years are the hardest hit. they do not agree with it and will
Currently they are either seeking seek to change it as part of their
work in other markets or have bailout negotiations.
downsized and waiting patiently, on
a skeleton staff. The contractors are
similarly placed but have picked up
various work out schemes mainly
for receivers put in place by the
Banks/NAMA.
Industry Developments | 25

28. Neil McBeth
Associate
Working Out of
Distressed Projects
Working Out of in our 1995 Building Regulations. In viable projects it is likely that
Unfortunately, the victims in these NAMA or the respective bank will
Distressed Projects situations are the owner occupiers move to secure a return and either
In the 2009 Annual Review, a lot who are left with the leaky homes carry out the minimal works to
was made of the sheer number of with inadequate infrastructure, secure successful disposal or “sell
distressed projects that needed security or life safety systems. as seen” but in either case there
to be completed under NAMA’s must be someone at the other end
command during 2010. Whilst These people are left wondering to take the product out.
quite a number of projects limped what recourse they have when the
to the finish line, a lot of them did developer has gone out of business
not as the cost benefit analysis and their negative equity home
returned an all too familiar “No”. requires significant funds to put
Projects have also succumbed things right.
to the closer scrutiny afforded to
schemes nowadays by numerous A mature approach is required by
levels of review/credit committees. all parties in this situation including
Even cases that require completion the owner, the receiver/NAMA/
works to comply with statutory bank and the local authority. As
Health and Safety requirements tends to be the case in a lot of
have suffered and take their the more serious situations, the
dubious honour of being on the fault lies with a party that does
“dangerous ghost estate” list. not have the capacity to deal with
its rectification. Parties charged
On the schemes that have with cleaning up the mess from a
been successfully worked-out, financial perspective are carrying
whether through receivership or out significantly more technical
some version of intensive care, due diligence before taking on any
stakeholders not normally involved hidden liability in these cases.
in such technical detail have
encountered a steep learning curve. Whilst much of 2010 was taken up
It is fair to say that it has left a lot with reviewing schemes and taking
of people asking the difference action from an insolvency point of
between “Self-Certification” view, it is unlikely that there will be
here in Ireland and “Building much change in 2011. Apart from
Control” in the UK, from a building schemes that have a clear business
regulation perspective. We have case, it is likely that the only funds
seen a number of truly shocking spent on distressed projects will
residential schemes that have be the €5 million announced by
been complete, signed off, sold government for the “dangerous”
and currently occupied that fall far ghost housing estates.
short of the standards set down
26 | Industry Developments

29. Grangegorman Development
Public sector —
Reduction in the
Public Capital Grangegorman Development
Programme in
Budget 2010 will
see a heightened
need to achieve
more with less
HSE Mental Health Replacement Facility, Grangegorman
Industry Developments | 27

30. Global
Regional
Developments

31. The results of Census 2011 will
undoubtedly make interesting reading
and may signal the likely trend in the
distribution of construction output
going forward
Overview It is expected that construction
output will continue to follow
In 2010 we saw the virtual
the broad distribution of the
completion of the main inter-urban
population. The results of Census
routes from Dublin. These significant
2011 will undoubtedly make
projects, which have been primarily
interesting reading and may signal
delivered over the last ten years, are
the likely trend in the distribution of
probably amongst some of the most
construction output going forward.
visible physical examples of the
significant investment during the
Celtic Tiger era. Sectors
Looking at the sectors in the
The direct impact of these vital regional context, whilst there may
motorways, coupled with the be some chinks of light, the overall
investment in upgrading the rail outlook remains weak.
links, has resulted in bringing
the regions closer together and,
importantly, made doing business
in the regions more sustainable.
Notwithstanding these closer links
there remains distinct regional
variations and subtleties in respect Dublin
of sector emphasis. 46%
Mid-West/Midlands
Typically the spread of construction 15%
Southern
output matches the distribution of 24%
the population across the country. Connaught &
With the increasing urbanisation North West
15%
of the country this results in the
vast majority of output being
concentrated in the major cities
and towns. As a result circa 40 – 45
per cent of output is in the Greater
Dublin Area (Dublin, Kildare, Meath
& Wicklow).
FIGURE 3 Distributions among regions
Regional Developments | 29

32. John O’Regan
Director
Residential – there is planning permission for a
Private residential development further estimated 58,025 dwellings
from a commercial point of that have not commenced and
view is at a virtual standstill. are therefore not posing any
Banks and receivers are slowly immediate construction or site
completing a limited number specific difficulties.
of “Ghost Estates.” Similarly, a
small number of projects are
progressing through planning Estates surveyed
generally aimed at retaining site Number of units per estate
values rather than for immediate 0-53 CO. DONEGAL
development. Significant stock 54-152
153-355
exists in a combination of 356-899
complete and stalled conditions. 900-2314
In 2010, the Department of
Environment, Heritage & Local
Government carried out a
nationwide survey of all estates CO. SLIGO
CO. MONAGHAN
where developments were either CO. LEITRIM
CO. CAVAN
commenced in the last three CO. MAYO CO. LOUTH
years, or completed in the last CO. ROSCOMMON
three years but with a vacancy rate CO. LONGFORD CO. MEATH
greater than 10 per cent. The map
shows the 2,846 developments CO. WESTMEATH
CO. DUBLIN
(15 per cent of which were active) CO. GALWAY
surveyed. The key findings were; CO. OFFALY
CO. KILDARE
– There are 78,195 dwellings in the CO. WICKLOW
CO. LAOIS
developments surveyed that are
CO. CLARE
complete and occupied;
CO. CARLOW
– 23,250 dwellings are complete CO. TIPPERARY
and vacant; CO. KILKENNY
CO. LIMERICK CO. WEXFORD
– 9,976 dwellings are near complete;
– 9,854 dwellings are at various
CO. WATERFORD
early stages of construction
activity from site clearance, CO. KERRY CO. CORK
foundations up to wall plate
level; and
30 | Regional Developments

33. One-off housing continues as – Digital Media although expenditure is projected
individuals with available funding to drop in 2011.
– Data Centres
take advantage of low site costs and
building prices. New social housing – Call Centres Major projects completed in
is also at a standstill with the 2010 include Terminal 2, the
exception of a number regeneration These areas have all experienced Aviva Stadium and the National
projects such as in Limerick. an amount of activity and are Convention Centre in Dublin.
showing increased signs of growth.
Commercial and Retail Typically the projects are upgrades, There has also been significant
Whilst there have been no re-fits and fit-outs of existing investment in the third level
significant new developments operational facilities. education sector (which is
undertaken there has been some essential if we are to continue
activity across the regions from The available stock of existing units to attract the international
major retailers such as Tesco, Lidl of suitable size, quality and location investment mentioned above) with
and Aldi. Retail fit-out continues is limited and will be quickly used a particular emphasis on science
in the budget-conscious end up as demand continues. and technology. Among the projects
of the sector which has seen completed or under construction in
increased activity in contrast to Examples of significant 2010 include:
the general trend. Similarly activity announcements in the last six
in the corporate fit-out market is months have included: – New Engineering Building,
often driven by restructuring and NUI Galway
efficiency drives. – Intel — Kildare
– Bundle of three research
– Valeo — Galway buildings, NUI Galway
Multi-national/Foreign Direct – Fidelity — Dublin and Galway – I.T. Building UCC
Investment
The marginal bounce in the global – Quest Software — Cork – World Academy Building, UL
economy, Ireland’s increasing – PayPal — Dublin – New Medical School, UL
competitiveness, tax structure
– Citi — Dublin and Waterford – Science City, Phase 1, UCD
and highly educated workforce are
continuing to provide a steady flow
of projects across the regions Public
The key growth areas have been: As highlighted earlier, the
distribution of construction
– Pharmaceutical tends to mirror the population
distribution. This is, in part at least,
– Bio-Pharma derived from the need to provide
– Bio-Medical certain services in close proximity
to the population. In this regard, the
– Medical Devices
education sector has seen ongoing
– ICT development in primary and second
level schools across the country,
Regional Developments | 31

34. Infrastructure improves overall road safety With the majority of the motorway
As stated at the start, there has and assists in providing network now in place, 2011 will
been a significant number of consistent journey times. see the start of a reduction in
motorway schemes completed in investment in roads. That said,
– M50 Upgrade:
2010, particularly on the western other areas of civil engineering may
Looking ahead, the 57 kilometres
seaboard. Among the schemes see increased investment in the
M17/M18 Gort to Tuam motorway
which have dramatically improved renewable energy sectors though
which is at the preferred
the journey times are: to date the schemes are typically
bidder stage will make another
small and infrequent. With the
significant addition to the
– The Limerick Tunnel: western seaboard presenting good
Atlantic corridor route.
10 kilometres of dual opportunities for exploiting our
carriageway including the 675 wind, wave and tidal resource, it
In the same region the Limerick to
metres Limerick Tunnel under is imperative that the necessary
Galway rail line has been officially
the River Shannon. The tunnel structures are put in place to make
reopened, with trains travelling
took four years to construct at the business model work and also
between the two cities for the first
a capital cost of €605 million to provide a return for the state.
time in 34 years. The re-opening
and was delivered within budget Despite its very public difficulties
of the rail link comes after €160
and ahead of schedule. The the Corrib Gas terminal and
million was spent upgrading the
tunnel has the capacity to take pipeline is ongoing.
Ennis to Athenry line.
approximately 40,000 vehicles
out of Limerick city centre. Greater Dublin and NE
60%
– The new 22 kilometer M18 South
Motorway: This new motorway 17%
will save approximately 20 Connaught and NW
10%
minutes during peak commuting
Mid West/Midlands
times between Limerick and 13%
Galway. The scheme also
represents the completion of
another section of the Atlantic
Corridor, which is the strategic
route linking Letterkenny to
Waterford, through Sligo, Galway,
Limerick and Cork.
– The M7 Motorway (Limerick
to Nenagh & Nenagh to
Castletown Co Laois):
The opening of this scheme
brought about the completion
of the M7 Dublin to Limerick
inter-urban motorway which FIGURE 4 Regional Breakdown of construction output 2010(e)
32 | Regional Developments