On the edge: the gulf between labour costs north and south means construction contracts are increasingly being awarded to firms from outside the state

While value for money remains first and foremost on everyone's mind, floods of shoppers will continue to make the trek north of the border for cheaper prices. The government's response to this trend is to appeal to our sense of patriotism by encouraging us to buy local and in so doing, support our ailing retail sector. However, the same trend prevails in the construction industry and the response from government could not be more contrary. While Northern Irish and UK contractors bid for work in the Republic, at significantly cheaper prices, local contractors lose out and in turn are squeezed out of business.

With construction output for 2010 forecast at €10bn, almost a quarter of the peak €38bn in 2007, it is clear that there is significantly less work to go round. Consequently, the level of competition for the work that does exist is understandably ferocious. In this environment, much like the cash-strapped shopper heading north, buying decisions are made largely on cost. Those contractors most able to reduce costs can submit more favourable tenders and ultimately win the work. However, the existence of the Registered Employment Agreement (REA), which governs wage rates, immediately puts Irish builders and contractors at a disadvantage when bidding for work on their own doorstep.

The REA was initially conceived through social partnership in the 1960s and sought to gain agreement between the industry's representative body for employers (Construction Industry Federation) and the various unions representing workers. Unions might see this as necessary protection for the workforce; employers might be inclined to see it as a ball and chain, weighing down competitiveness, and ultimately, costing jobs. These agreements, and subsequent negotiations to update them, have become the accepted legal position to determine wage rates in construction. It is fair to say that none of the many improvements to wages over the years look, in isolation, either excessive or unjust; however, the cumulative effect of these negotiations has resulted in the industry fighting with one hand behind its back in tackling competitiveness issues.

To illustrate the point, let's look at the most basic grade of Construction Labourer (designated a Grade D). This will be someone whose job on a building site will largely be the manual labour of carrying and clearing up. The rate of pay stipulated for a Grade D labourer is €14.88 per hour. He is entitled to overtime at time-and-a- half for work over eight hours per day, with 'Double Time' applying on Saturday afternoons, Sundays and bank holidays. Additionally, this worker benefits from the interesting notion of travel pay (being paid to travel to work!) calculated by the distance between the construction site and the GPO in O'Connell Street. So if we imagine that this labourer is working on the Dublin Airport site, he stands to pick up an extra €133.92, just for getting to work. Based on working a standard Monday-Friday week, with a half day on Saturday, this worker will be earning €780.33 per week.

Now take a similar labourer resident for tax in the UK, where there is no REA, and where the market rate for a labourer is about £6.50 per hour. This labourer, with no overtime or travel bonus will earn £269.75 for the same working week. Factor in the exchange differential, at approximately 1.1, and the equivalent cost is €296.73. Given that payroll on-costs in the UK and Ireland are broadly similar, it's fair to conclude that the 163% differential in pay rates is reflected in the employment costs. With this gulf between labour costs north and south of the border, is it surprising that procurers of construction projects are increasingly awarding work to firms from outside the state?

When this happens, the state and taxpayer lose in a variety of different ways. The more work local contractors lose, the more pressure they will be under, until inevitably closures and redundancies ensue, as we saw repeatedly throughout the course of 2008 and 2009. This results in loss of tax revenue from the company itself. In instances of mass lay-offs, where the company survives, but in a skeletal form, redundancy rebate payments must be paid from the exchequer.

The employees who lose their jobs become social welfare recipients, so instead of contributing around €17,000 annually to the exchequer, they actually cost slightly over that amount. Capital Gains Tax from the company that wins the work does not get declared within the state as all profits go to the country of origin. Workers on the job can be pay-rolled for up to two months in their country of origin meaning there are no PAYE gains to be had on short-term projects. This comes full circle when you recognise that, were it not for the REA, the Irish contractor could bid competitively, win work, retain employment and contribute to, not drain, the State's coffers.

Examples such as the Department of Defence's awarding of the Finner Camp Project in Donegal to a Northern Irish contractor highlight the problem. The details of how this contractor was able to significantly undercut the local competition are not available but the decision not to award locally was met with exasperation given that this area of Donegal has suffered badly from unemployment and this project could perhaps have provided a ray of light. But the department's blinkered pursuit of a short-term "good deal" indicates it clearly missed the longer-term implications of its actions.

Let's be clear – this is not a sentimental appeal to 'buy Irish' just for the sake of it. It makes economic sense for the state to 'buy Irish' when it comes to public sector construction projects, provided the cost is competitive. With the restrictions of the REA removed, competitiveness would be restored at a stroke and the industry would be able to fight on all fronts to win its share of work. Or, we can retain the status quo, in which a basic labourer earns the equivalent of €40,000 a year, but no-one has a job.

Paul O'Donnell is operations manager at Hays Construction & Property. The views expressed here are his own