Price Escalation

Construction Projects

ADJUSTMENTS FOR CHANGES IN COST

The amounts computed from the formula given below in respect of the rise or fall in the cost of labour, materials, plant and other inputs to the works, shall be added or deducted from the payment to the Contractor if the Contract Price is subjected to adjustments due to fluctuation of prices and stated in Contract Data.

No other adjustment of the Contract Price on account of fluctuations of inputs shall be made, notwithstanding the fact that the Contractor has to pay additional amount under special circumstances.

FORMULA The Formula for the major contracts, when expressed Mathematically shall be as follows: 0.966 ( V V na ) 100

Px ( I xc - I xb ) I xb

all inputs

F - Price adjustment for the period concerned V - Current valuation of work done for the period V na - Value of non adjustable element or value of work not considered for price variation Px Input percentage of input named x I xc Current indices of input x I xb - Base indices of input x Input Percentage It means the percentage proportionate contribution of any input in terms of cost of the construction based on the prices prevailing on one month prior to submission of the Bid.

VALUATION OF WORK FOR THE PERIOD

The conditions of contract allows the contractor to submit monthly statements which should also include the 80% of the cost of materials delivered to the site for permanent works but are not incorporated in works. This is generally done by valuing the cumulative work done including the 80% of the cost of materials delivered to the site but has not been incorporated in permanent works and deducting the cumulative payments certified up to the previous bill

Hence,
V = ( V c + M c ) - ( V p + M p)

Three categories of items will be generally considered as non-adjustable element

Items in the BOQ for which the expenditure will be fixed and will be executed at early stages of the contract. Most of the Preliminary items fall under this category;

Provisional sum items; and

Extra works items for which the rates are agreed based on the prices prevailing at the time of execution of works or are priced at Day-work rates. However, if the extra works rates are agreed based on the prices prevailed at the time of bidding or based on contract rates then such extra works items shall not be identified as non-adjustable elements.

The net non-adjustable element for the current valuation is computed by deducting the cumulative nonadjustable element of the previous bill from the current cumulative non adjustable element.

Hence, if,

Vnac

Cumulative value of work certified under items specified as non-adjustable element up to the current bill Cumulative value of work certified under items specified as non-adjustable element up to the previous bill

Vnap

Then,

Vna

Vnac - Vnap

INPUT PERCENTAGES (Px)

The percentage cost contribution of major materials, plant and labour to the contract shall be listed in the bid document. It is suggested to exclude

the less cost significant items, in computing the input percentages, since
the combined effect of such items will be less than 10% of the total cost of inputs. Hence the total contribution of the major inputs will be considered as 90%. The computation of input proportions is based on the costing major input items required for the proposed construction. The cost will be calculated using the prices that prevailed at the time of bidding. The cost of major inputs will be considered as 90% of the total

cost. The total costs of all the inputs will be then derived by dividing the
cost of major inputs by 0.9. input proportion of a particular input will be computed as the ratio between the cost of the input and the cost of all inputs.

BASE INDICES ( Ixb )

Base Indices shall be indices for the input, prevailing for the calendar

month, one month prior to the date set for submission of Bid.

For Example,

if the bids were closed on any date of the month of September, the base indices applicable shall be the indices published for the month of August of the same year. If the relevant indices have been published at the

time of preperation of the bid document. The consultant may include same
in the space provided in the Contract Data Sheet.

ESTIMATING THE CUMULATIVE VALUE OF WORK DONE UP TO THE TIME OF VALUATION

The Conditions of Contract requires the contractor to submit monthly statements which will
include the cost of materials delivered to site for permanent works but have not incorporated for works. This is generally done by valuing the cumulative work done including the 80% of the cost of materials at site and deducting the corresponding cumulative work done up to the

previous bill certified.

Hence,

( V c + Mc ) -

( Vp + Mp)

CURRENT INDICES ( Ixc )

The current index of a particular input shall be the index published by

ICTAD for that input for the month applicable.

In the case of first interim bill, the current indices for the purpose of calculation of price adjustment shall be taken as the indices prevailing on first month after the commencement of the Contract. For any other interim claim or for the final claim the current indices shall be taken as the indices

prevailing for the calendar month, one month after the previous valuation
was done.

Applicable Current Indices :

Month 01 Case A Case B Claim 1 -

Month 02
Claim 2 Claim 1

Month 03
Claim 2

Month 04
-

Month 05
Claim 3 Final

Month 06
Final -

Claim 01 Case A Case A Month 01 Month 01

Claim 02 Month 02 Month 03

Claim 03 Month 03 -

Final Claim Month 06 Month 04

THE END