PRICE ADJUSTMENT IN CONSTRUCTION & CONSULTANCY CONTRACT

By

Engr. M. Mazhar-ul-Islam
Convener PEC Act & Byelaws Committee

Terms Escalation, Price Adjustments & Increase / Decrease.

Meaning Adjustment of Contract Price for increase or decrease of prices of adjustable materials / services.
It is compensation and not extra benefit to Contractor.

Adjusted periodically during contract period.

Basic formula: Price Adjustment = Quantity x (current rate base rate). FIDIC formula: Pn=A+b Ln + c Mn + d En +
Lo Mo Eo

To be built in the Bidding Documents.

Bidders quote price on prevailing market rates.

Cost of basic construction materials fluctuate unpredictably in Pakistan. Unlimited cost increase not foreseeable & cannot be built in competitive bidding process. Contractors can execute work only at right costs. Legal contract not necessarily be executable unless conductive mechanism equitable to the parties are included.

Results of non-adjustments: Project delay, disputes, cancellation of contracts resulting more cost for the Employer. Exclusions: Variation Orders Claims Subsequent Legislation Measurement of Quantities

Standard Bidding Documents for Civil Works: Clause 70.1 of PCC. Standard Bidding Documents for E&M Works: Clause 47.1 of PCC. Standard Form of Bidding Documents (Smaller Contractor): Preamble. Standard Contract for Consultancy (Time Based): Clause 6.2(a) SC. Standard Procedure & Formula for Price Adjustments.

Below Rs 30 million contract (below C-5 Ceiling)not covered for Price Adjustment.

Procedure for Price Adjustments deemed to be notified.

Mistakes in formulating contract specific formula.

FORMULA FOR ESCALATION

Undertake rate analysis of rightly prepared BOQs

Consider all members of a family of escalatable items Consider 5% & more weightages as escalatable elements POL & labor shall always be considered even below 5% Maximum adjustable portion shall not exceed 65% and fixed portion not less than 35% Sum of all weightages plus fixed portion must be unity

Cost Element 1 (i)

Description 2 Fixed Portion

Weightage 3 0.350

Applicable Index 4

(ii)
(iii) (iv) (v) (vi) (vii) (viii)

Local Labor
Cement in bags Reinforcing Steel High Speed Diesel (HSD) Bricks Bitumen

PICC
PICC PICC PICC PICC PICC

Total

1.000
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Employers using this price adjustment provisions may add or delete any elements as deemed appropriate to the project.

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Indices for (ii) to (vii) are taken from FBS. The base cost indices or prices shall be those applying 28 days prior to the latest day for submission of bids. Current indices or prices shall be those applying 28 days prior to the last day of the billing period.

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Any fluctuation in the indices or prices of materials other than those given above shall not be subject to adjustment of the Contract Price.

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Fixed portion shown here is for typical road project, Employer to determine the weightage of Fixed Portion considering only those cost elements having cost impact of seven (7) revised to five (5) percent or more on his specific project.

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Pn = A + b Ln + c Mn + d En + Lo Mo Eo

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Pn is Price Adjustment Factor A is constant, representing the nonadjustable portion b, c, d, etc. are coefficients / weightages representing

portion of each cost element

Ln, Mn, En, etc. are the current cost indices of cost elements for month n Lo, Mo, Eo, etc. are base cost indices corresponding to

above cost elements

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Source of indices shall be those listed in Appendix-C as approved by Engineer. As the basis of Price adjustment, Contractor shall have submitted the tabulation of Weightages & Source of Indices if different than Appendix C.

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Base cost indices or prices shall be those prevailing on the day 28 days prior to the latest date of bid submission. Current indices or prices shall be those prevailing on the day 28 days prior to the last day of the period to which a particular monthly statement is related.

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If at any time, current indices are not available, provisional indices are determined by the Engineer will

be used subject to subsequent adjustments.

If an element is not used, ratio between base and current

rates should be considered unity

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Clause 43 GC: Time for Completion within Schedule or extended Schedule pursuant to Clause 44 GC.
Clause 44 GC: Extension of Time for Completion not for fault of Contractor. Clause 48GC: Taking over Certificate by the Engineer.

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Price adjustments admissible even for the extended completion period.

If extension due to Contractor's fault, PA will be using indices before or after the completion, favorable to the Employer. If extension pursuant to Clause 44 (No fault of Contractor), PA as usual is allowed.

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The Weightages of each of the cost factors shall be adjusted at any stage of the project, if it is found unreasonable, unbalanced or inapplicable in review of the Engineer.
Weightages change for Instruction under clause 51(v.o.). Such adjustments shall have to be agreed in such v.o.

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PRICE ADJUSTMENT IN CONSULTANCY CONTRACT

BY: Engr. M. Mazhar-ul Islam Convener PEC Act & Bye-laws Committee

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Applicable to Time Based assignment Contract only. Generally increase in cost for services. Exclusions:
Increase in ceiling Cost of Additional work

Subsequent Legislation for other provisions

Modification of Contract under Clause 2.5 SC

Payment to be adjusted under Clause 6.2(a) SC. Applicable for both Foreign & Local currency adjustments.

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Option 1

Billing rates for each person shall be adjusted in each July. First adjustment in July following submission of final proposal. Revision Elements:
Annual increment Increase due to promotion Salary revision to Clause 5.3 SC or otherwise

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Option 2
Using the formula: RI = RIo x II/IIo Where: RI is the adjusted billing rate RIo is the billing rate payable II is the combined consumer Price Index (CPI) General for Govt. employees IIo is CPI in July of the year Consultant submitted its proposal

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To be adjusted every 12 months using formula:

Rf = Rfo x If / Ifo Where:

Rf is adjusted remuneration Rfo is the remuneration payable If is the official salary index in foreign country for the first month for which adjustment is suppose to have effect Ifo is the official salary index for the monthly date of contract

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THANK YOU

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