Price Adjustment in Contract

The provision of Price Adjustment in the Contract is provided with an intention to take care of fluctuations of prices of materials, equipment and labor in the market. 

Most of the Contracts are equipped with provisions to deal with situations resulting in increase in costs of construction materials. FICIC MDB and FIDIC 1999 provide such, provisions under “Variations and Adjustment – Clause 13”. Sub Clause 13.7 and 13.8 under the same Clause; provide price adjustment provision under the title “Adjustment in Changes in Legislations” and “Adjustment in Changes in Cost”.

Similarly, the Procurement Act 2063 under clause 55.

The Procurement Act 2063 under clause 55 specifies that for a Contract that has a contract period of more than 15 months price adjustment may be applied. The Act however, does not make this provision mandatory and leaves it to the authorized Entity, at its discretion, to apply Price Adjustment provisions. However, the Conditions of Contract drafted by the PPMO office does have provision to deal with adjustment situations.

It should be noted that the Act also emphasizes that at National bidding level provisions need to be made in the Contract for any increase or decrease in the price of construction materials. In applying so, 10 % of the risks need to be borne by either party as per increase or decrease in price of construction materials.

PRICE ADJUSTMENT METHODS

1 Base rate/indices: Base rates are the price figures applicable from the day as specified in the Contract( Generally it shall be taken as 28 or 30 days prior to the latest date for submission of bid).

2 Current rate/indices: Current rates are the price figure applicable on the day as specified in the Contract (Generally it shall be taken as 28 or 30 days prior to the last day of the period to which a particular payment certificate is related).

The fact that 28 or 30 days are provided in the contract is for the purpose of preparation and data collection of the rates/indices that are to be submitted for the purpose of calculation of escalation or adjustment. Base rate does not change while current rate varies. Current rates are adjusted on the basis of change in cost of labor/material that affects the cost of execution of work.

The Index may be taken as: National Salary and wage rate index for Construction Labor, National Wholesale Price Index for Construction material and  National Wholesale Price Index for machinery and equipment published by Nepal Rastra Bank for the period under consideration.

3 Use of Adjustment Formula

The simplest formula can look like:

Price to be adjusted = P1 = P0 (Pc – 1)

and

Pc =Ac + Bc* Imc/Ioc

Where,

Pc = Price Adjustment factor,

Ac = co-efficient (non-adjustable) specified in the Contract Data (taken as 15% )

Bc = Adjustable portion specified in the Contract Data (taken as 85%)

Ioc = Base rate/indices submitted as specified in the Contract

Imc = Current rate/ indices submitted as specified in the Contract

Similarly, 

Adjustment factor,  Pn = A + B* Ln/Lo + C *En/Eo + D *Mn/Mo + .......

where,

“A” is a fixed coefficient, stated in the relevant table of adjustment data, representing the non-adjustable portion in contractual payments; taken as 15%.

“B”, “C”, “D”, … are coefficients representing the estimated proportion of each cost element related to the execution of the Works, as stated in the relevant table of adjustment data; such tabulated cost elements may be indicative of resources such as labour, equipment and materials;

“Ln”, “En”, “Mn”, … are the current cost indices or reference prices for period “n”, expressed in the relevant currency of payment, each of which is applicable to the relevant tabulated cost element on the date 49 days prior to the last day of the period (to which the particular Payment Certificate relates); and

“Lo”, “Eo”, “Mo”, … are the base cost indices or reference prices, expressed in the relevant currency of payment, each of which is applicable to the relevant tabulated cost element on the Base Date.