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Price Escalation

Construction Projects

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The Formula for the major contracts, when expressed Mathematically shall be as follows:

F = 0.966 ( VV na ) Px ( I xc - I xb ) all inputs 100 I xb

FORMULA

F - Price adjustment for the period concerned

V - Current valuation of work done for the periodV 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.

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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,

VALUATION OF WORK FOR THE PERIOD

V = ( Vc + Mc ) - ( Vp + Mp)

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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.

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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.

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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.

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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 = ( Vc + Mc ) - ( Vp + Mp)

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Appli cable Current I ndices:

Claim 01 Claim 02 Claim 03 Final Claim

Case A Month 01 Month 02 Month 03 Month 06

Case A Month 01 Month 03 - Month 04

Month 01Month 02 Month 03 Month 04 Month 05 Month 06

Case A Claim 1 Claim 2 - - Claim 3 Final

Case B - Claim 1 Claim 2 - Final -

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THE END