GYK Newsletter – Protecting Yourself by Price Adjustment Provisions

 

Welcome to the new issue of Grow Your Knowledge Newsletter where you get free, ready to use, actionable, clear information regarding FIDIC Contracts and Construction Claims.

 

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Today at a Glance;

 

➤   Term of the Week

➤   One Tweet

➤   Establishing an Effective Price Adjustment Mechanism

 

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TERM of the WEEK

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ONE TWEET

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Happy Thursday.

 

If you are suffering from the price fluctuations.

And, these fluctuations are having negative effects on your project.

That means something is missing. 

And probably the missing part is the Price Adjustment Mechanism.

 

At that point establishing an effective Price Adjustment Mechanism becomes critical.

To have an effective Price Adjustment Mechanism; 

 

First, the bidding documents and the contract should include;

➤ Clear

➤ Complete

provisions on price adjustments.

 

Second, you should properly manage the price adjustment process.

To do that successfully, you should have;

➤ Strong qualifications

➤ Specific experience

➤ Extensive verification process

 

Third, you should;

➤ Set out clear and objective

➤ Supervise properly

price adjustment formula and indexes.

 

Otherwise you will encounter the risk of;

➤ Manipulation

➤ Fraud

➤ Delayed payments

➤ Disputes

 

Properly used Price Adjustment Provisions;

➤ Improve fairness and transparency

➤ Increase efficiency, fitness for purpose

➤ Improve quality

 

Let’s elaborate the steps for calculation of the price adjustment amount.

Step #1:  Identify the Price Adjustment Formula

Step #2:  Use the Adjustment Data

Step #3:  Determine the Non-Adjustable Portion

Step #4:  Determine the Adjustable Portion

Step #5:  Calculate the Adjustment Multiplier

Step #6:  Calculate the Adjustment Amount

 

 

Step #1:  Identify the Price Adjustment Formula

Price Adjustment provisions contain formulas designed to protect the parties from price fluctuations.

By calculating the actual cost implications that will be incurred, price adjustment formulas enable contractors to provide more realistic pricing at the time of bidding.

For contracts with various sizes and components multiple price adjustment algorithms are used.

 

Pn = a + b (Ln / Lo) + c (En / Eo) + d (Mn / Mo) + …..

 

“Pn”; is the adjustment multiplier to be applied to the estimated contract value in the relevant currency of the work carried out in period “n”

“a”; is a fixed coefficient representing the non adjustable portion

“b”, “c”, “d”; are coefficients representing the adjustable portions

“Ln”, “En”, “Mn”; are the current cost indexes or reference prices for period “n”

“Lo”, “Eo”, “Mo”; are the base cost indexes or reference prices

 

 

Step #2:  Use the Adjustment Data

DESCRIPTION	SOURCE of INDEX	COEFFICIENTS
Non-Adjustable		0,15
F1	A	N1
F2	B	N2
F3	B	N3
F4	C	N4
F5	B	N5
F6	B	N6
F7	B	N7
F8	B	N8
TOTAL		1,00

 

 

 

Step #3:  Determine the Non-Adjustable Portion

( + ) Contingency

( + ) Overheads

( + ) Profit

( + ) Controllable Cost Elements

 

 

Step #4:  Determine the Adjustable Portion

( + ) Labour

( + ) Materials

( + ) Equipment

 

 

Step #5:  Calculate the Adjustment Multiplier

Items	Source of Index	Coefficients	Index		Adjustment Multiplier
			Base	Current
Non Adjustable		0,15	n/a	n/a	0,15
F1	A	N1	B1	C1	N1x(C1/B1)
F2	B	N2	B2	C2	N2x(C2/B2)
F3	B	N3	B3	C3	N3x(C3/B3)
F4	C	N4	B4	C4	N4x(C4/B4)
F5	B	N5	B5	C5	N5x(C5/B5)
F6	B	N6	B6	C6	N6x(C6/B6)
F7	B	N7	B7	C7	N7x(C7/B7)
F8	B	N8	B8	C8	N8x(C8/B8)
Total		1,000

 

 

Step #6: Calculate the Adjustment Amount

( + ) Total Estimated Value

( –  ) Value from Previous Period

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( + ) Effective Value of Work (EV)

( x ) Adjustment Multiplier (Pn)

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( + ) Adjusted Estimated Value (EV x Pn)

( –  ) Effective Value of Work (EV)

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( + ) ADJUSTED AMOUNT

 

See you next week.

P.S. As always, we hope you find this issue useful and we welcome any comments or feedback you may have.