Scribd Logo
Upload

Welcome to Scribd!

  • 680 views

    Price Adjustment in Construction Contract

    Uploaded by

    Ram Prasad Awasthi
    Price adjustment clauses are intended to reduce financial risk for employers and contractors from rising input costs during long construction periods. They allow contractors to submit lower initial bids as they will be compensated for future cost increases. This reduces the risk of contractors losing money and defaulting on contracts. For employers, there are benefits of lower initial prices and less risk of projects being disrupted if contractors go bankrupt. A price adjustment formula is provided that calculates the adjustment amount based on the current and base prices of weighted materials like cement, steel, fuel etc. It specifies the data sources and timing for determining these prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Price Adjustment in Construction Contract

    Uploaded by

    Ram Prasad Awasthi
    680 views7 pages
    Price adjustment clauses are intended to reduce financial risk for employers and contractors from rising input costs during long construction periods. They allow contractors to submit lower initial bids as they will be compensated for future cost increases. This reduces the risk of contractors losing money and defaulting on contracts. For employers, there are benefits of lower initial prices and less risk of projects being disrupted if contractors go bankrupt. A price adjustment formula is provided that calculates the adjustment amount based on the current and base prices of weighted materials like cement, steel, fuel etc. It specifies the data sources and timing for determining these prices.

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Price adjustment clauses are intended to reduce financial risk for employers and contractors from rising input costs during long construction periods. They allow contractors to submit lower initial bids as they will be compensated for future cost increases. This reduces the risk of contractors losing money and defaulting on contracts. For employers, there are benefits of lower initial prices and less risk of projects being disrupted if contractors go bankrupt. A price adjustment formula is provided that calculates the adjustment amount based on the current and base prices of weighted materials like cement, steel, fuel etc. It specifies the data sources and timing for determining these prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    680 views7 pages

    Price Adjustment in Construction Contract

    Uploaded by

    Ram Prasad Awasthi
    Price adjustment clauses are intended to reduce financial risk for employers and contractors from rising input costs during long construction periods. They allow contractors to submit lower initial bids as they will be compensated for future cost increases. This reduces the risk of contractors losing money and defaulting on contracts. For employers, there are benefits of lower initial prices and less risk of projects being disrupted if contractors go bankrupt. A price adjustment formula is provided that calculates the adjustment amount based on the current and base prices of weighted materials like cement, steel, fuel etc. It specifies the data sources and timing for determining these prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 7
    At a glance
    Powered by AI
    The key takeaways are that price adjustment clauses are intended to reduce financial risk for employers and contractors if input costs rise or fall sharply during long construction periods. It also reduces the contractor's risk of losing money by adding a premium to the bid price and the employer's risk of contractors defaulting.

    The commonly known elements subject to price adjustment are cement, steel, unskilled labor, bricks, bitumen and fuel. These elements may be added, substituted or deleted as appropriate by assigning them weightages or coefficients.

    The parameters of price adjustment include the weightages of specified items, base date price which is 28 days prior to bid submission, current date price which is 28 days prior to execution month, and sources of prices.

    Price Adjustment in Construction Contract

    •Price adjustment clauses in construction contracts are intended to reduce


    the financial risk to an Employer and a Contractors if the input costs rise or
    fall sharply during construction when the contract period is long.
    •In theory, if a contractor knows at the bidding stage that payments for his
    work will be periodically indexed, he will have less of a need to add a
    premium to the bid price for possible cost increases during construction.
    •This reduces his risk of losing the contract by adding the premium.
    Adjustment provision in a contract also lowers the risk of contractors
    underestimating cost increases, and later experiencing financial difficulties
    and defaulting on their obligations.
    •An Employer , on the other hand, ideally can benefit from lower bid-prices,
    less likelihood of contractors going into bankruptcy mid stream of a project,
    and lower final Contract Price, especially when costs are declining.
    Commonly known elements subject to Price Adjustment
    (i) Cement;
    (ii) Steel;
    (iii) Labor Unskilled;
    (iv) Bricks; and
    (v) Bitumen.
    (vi) Fuel
    One may add, substitute or delete any element as deemed
    appropriate. They would then decide on the weightages or coefficients
    for the elements.
    There shall be no Price Adjustment for the elements which the
    Employer has either supplied free of cost or at fixed prices as well as
    for those elements for which an umbrella escalation cover is provided
    by the Government through an Executive Order or Statutory Regulatory
    Order (SRO).
    Parameters of Price Adjustment

    (i) Weightages of Specified Items


    (ii) Base Date Price: The base date price (or base date index) of any element shall be the price of the element
    which was prevalent twenty eight (28) days prior to the date of submission of the bid.
    (iii) Current Date Price: The current date price (or current date index) of any element shall be the price of the element which
    was prevalent twenty eight (28) days prior to the start of the execution month to which a particular monthly statement is
    related. The unit of time shall be a calendar month.
    (iv)Sources of Price
    Procedure:
    1. The billed amount of the Works for each calendar month will be obtained from the checked bills submitted by
    the Contractor. In case the billed amount is for more than one month, the amount of the bill shall be segregated
    for actual work done in each month.
    2. The Base Date Prices and the Current Date Prices shall be as per procedure B2 and B3 provided hereinbefore.
    3. The Source of Prices will be as per procedure B4 provided hereinbefore.
    4. The Price Adjustment in the billed amount will then be calculated for the month under consideration in
    accordance with Formula for Price Adjustment.

    5. Except labour and POL, if any other adjustable item(s) is not used in a particular billing period then the ratio
    of current date price and base date price for that particular adjustable item(s) shall be considered as one.
    Application of Price Adjustment
    When to Apply Price Adjustment
    This risk of price escalation is likely to arise
    (i) for goods contracts with long delivery periods;
    (ii) for works contracts with long completion periods;
    (iii) for major civil works contracts;
    (iv) for contracts that contain supplies or commodities whose prices
    fluctuate significantly over a short period;
    (v) for time-based consulting services, such as construction supervision
    services (see footnote 1); and
    (vi) due to any unusual circumstances in the market in question.
    When Not to Apply Price Adjustment
    Price adjustment provisions may not be necessary for
    (i) simple supply contracts (i.e., not involving components that are
    usually affected by escalating or fluctuating prices) with short delivery
    periods;
    (ii) the procurement of certain types of equipment where normal
    commercial practice requires bidders to submit firm prices regardless
    of the delivery time, which may be the case for
    (a) engineering, procurement, and construction contracting
    arrangements; and (b) fixed-price contracts that are common in projects financed by private sector financiers, who
    are generally reluctant to accept the risk of cost overruns, as it increases credit risk rating and reduces
    financial viability of the project; and
    (iii) contracts for the supply, installation, and construction of facilities wherein the value of the permanent works
    represents the major part of the estimated cost of the contract. All major equipment is usually supplied from fixed
    production lines; thus, an experienced manufacturer should be able to mitigate the risk of price fluctuations
    Parameters of Price Adjustment

    (i) Weightages of Specified Items


    (ii) Base Date Price: The base date price (or base date index) of any element shall be the price of the element
    which was prevalent twenty eight (28) days prior to the date of submission of the bid.
    (iii) Current Date Price: The current date price (or current date index) of any element shall be the price of the element which
    was prevalent twenty eight (28) days prior to the start of the execution month to which a particular monthly statement is
    related. The unit of time shall be a calendar month.
    (iv)Sources of Price
    Procedure:
    1. The billed amount of the Works for each calendar month will be obtained from the checked bills submitted by
    the Contractor. In case the billed amount is for more than one month, the amount of the bill shall be segregated
    for actual work done in each month.
    2. The Base Date Prices and the Current Date Prices shall be as per procedure B2 and B3 provided hereinbefore.
    3. The Source of Prices will be as per procedure B4 provided hereinbefore.
    4. The Price Adjustment in the billed amount will then be calculated for the month under consideration in
    accordance with Formula for Price Adjustment.

    5. Except labour and POL, if any other adjustable item(s) is not used in a particular billing period then the ratio
    of current date price and base date price for that particular adjustable item(s) shall be considered as one.
    Price Adjustment Formula
    1. Formula for Price Adjustment ( For Large Contract)
    The formula mentioned below is in its generalized form. The Employer/user shall at the time of preparation of their
    bidding/tender documents shall determine the proportions of A, b, c, d, ……….. by appropriate rate analysis following
    the procedure enumerated herein below:
    Formula for Price Adjustment:
    Pn = A + b Ln/Lo + c Mn/Mo + d En/Eo +................
    where,
    “Pn” is the Price Adjustment factor for the work carried out in the period “n”.
    “A” is a constant or the Non-Adjustable Portion of the Price Adjustment Factor to be specified in Appendix-C to Bid,
    representing the Non-Adjustable Portion of the Contract Price.
    “b, c, d.........” are Coefficients or weightages of the order of 0.xx (i.e., fractions having two significant digits) for each
    specified element of adjustment in the Contract. The sum of A, b, c, d, etc., shall be one.
    “Lo, Mo, Eo........” are the Base Date Indices for the specified (adjustable) elements.
    “Ln, Mn, En.......” are the Current Date Indices of the specified (adjustable) elements for the period “n”.
    If “P” is the amount payable (prior to adjustment) at the rates entered in the Price Schedule of the work carried out
    in period “n” then, Adjusted amount payable to the Contractor for the work carried out in the period “n” shall be
    equal to Pn*P..
    2. Base and Current Dates Prices
    The base date and Current date prices of the specified elements shall be obtained from the sources specified in the
    contract.
    3. Elements for Price Adjustment
    Specified Elements are subjected to Price Adjustment.
    Price Adjustment Formula
    Small Works
    MDB
    Harmonizedd
    Formula
    Pc= Ac +Bc(Imc/Ic)
    Pc is the adjustment factor for the portion of the contract price payable in a specific
    currency
    “c.”
    Ac and Bc are coefficients specified in the particular conditions of contract, representing
    the
    nonadjustable (usually 0.10 to 0.20) and adjustable portions, respectively, of the contract
    price
    payable in that specific currency “c.” Ac + Bc = 1.
    Imc is a consolidated index prevailing at the end of the month being invoiced and Ioc is the
    same consolidated index prevailing 28 days before bid opening for inputs payable; both in
    the
    specific currency “c.”

    You might also like